enhancing policy and institutional support for industrial technology development in thailand

TECHNOPOLIS

Enhancing Policy and Institutional support forIndustrial Technology Development in Thailand

Volume 1The Overall Policy Framework and

The Development of the Industrial Innovation System

Erik Arnold, TechnopolisMartin Bell, SPRU

John Bessant, CENTRIMPeter Brimble, Brooker Group

December 2000

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Executive Summary

1. The Origins, Scope and Purposes of the Study

This is Volume I of a two-volume report on a study of the policy framework andinstitutional structure supporting industrial technology development in Thailand. Thestudy has been funded by the World Bank1. It has been carried out on behalf of theNational Science and Technology Development Agency of Thailand (NSTDA), withthe advice and support of a counterpart team of NSTDA staff.

The terms of reference for the project called for a study with two main components.A review of the structure and functioning of the whole array of government policyand institutions that are concerned with industrial technology development;A more detailed examination of the role of NSTDA within that overall structure, andof aspects of NSTDA strategy and management.

The results of the first of these components are provided in this first volume of thetwo-volume report. The results of the second are provided in Volume 2.

The terms of reference also called for a focus on industrial technology development.Consequently, this report neglects other areas of technology that are extremelyimportant for the country’s social and economic development - in particular, a widearray of technology development issues in the fields of agriculture, medicine, publichealth and other services.

The origins of the study lie in widespread concerns about the competitive weakness ofThai industry, and more specifically about the limited intensity of technologydevelopment in industry (the technologically ‘shallow’ path of industrial growth)which has contributed to that competitive weakness.

A central aim of the study has been to provide benchmarking comparisons ofinternational practice against which the experience of Thailand can be assessed.These benchmarks do not consist of indicators of ‘performance’ in technologydevelopment. These have been provided in several other studies. Instead the focushere is on benchmarking key features of the institutions, capabilities, managementpractices and government policies that underlie the technology development‘performance’ of industry.

These benchmarks have been derived from experience in both the industrialisingcountries in the East Asian region as well as countries in the industrialised world.Among the latter, the study draws heavily on experience in Europe, especially thesmaller, more agricultural and natural resource-based, or later-industrialisingcountries such the Scandinavian countries or Ireland.

2. Industrial Technology Development: Key Features of InternationalExperienceThe framework provided in recent years by analyses of ‘innovation systems’ (or‘technological learning systems’) is particularly useful for comparing institutional 1 Under a Policy and Human Resources Development grant made available by the Government of

Japan for administration by the World Bank.

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structures, capabilities and policy regimes in different countries. A small number ofkey features seem to characterise these systems in more dynamic and competitiveeconomies.• In industrialised countries business enterprises are the core of industrial

technology development systems. They themselves constitute both the ‘demandside’ and the ‘supply side’ for most of the technology used by industry. (Section1.2.1)

• A large part of the process of technology development does not involve R&D. Itis generated in an underlying structure of design and engineering activities.(Section1.2.2)

• Firms draw large proportions of the knowledge inputs to their own technologydevelopment from other firms. Those knowledge-centred interactions amongfirms are a critically important part of the whole technological learning andinnovation system. (Section 1.2.3)

• Among these knowledge flows between firms, flows of knowledge embodied inpeople are centrally important, reflecting the role of firms themselves as creators,and not just employers, of human capital. (Section 1.2.4)

• The more advanced industrialising countries in Asia have moved through afundamental transition during which this firm-centred structure of innovativeactivities and capabilities has been built up quite rapidly from a preceding phasewhen:

(a) Most scientific and technological capabilities were located in public institutes,

(b) Education and training institutes, rather than firms themselves, undertook mostof the development of technological skills and capabilities. (Section 1.3)

• The initial development of these firm-centred technological learning andinnovation systems in Asia, and their continuing development in the advancedindustrial countries, has been underpinned by a dual structure of public policy,incorporating two main components:

(a) Policy measures designed to strengthen the technological learning,technological capabilities and innovative activities of firms;

(b) Policy measures designed to strengthen and support the capabilities andresources of scientific, technological and training institutions that areintended to undertake activities on behalf of industrial firms. (Section1.2.5)

• Among the policy measures to support the technology development roles of firms,a substantial proportion are designed to strengthen and develop firms’ demand forimproved technology, not just their ability to acquire it or supply it. (Section 1.4)

• The local affiliates or joint venture partners of multinational companies (MNCs)can be powerful vehicles for strengthening local technological capabilities andinnovative activities, provided policies are pursued which actively engage themin playing these roles in the local economy. Increasingly, therefore, industrialpolicy regimes in many countries incorporate measures designed, not merely toattract foreign direct investment in the first place, but to influence:

(a) The extent and depth of MNC’s technology intensive activities during the longperiod after they have located locally, and

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(b) The extent to which these activities yield technological ‘spill-overs’ to localfirms and other organisations. (Section 1.5)

• These emphases in policy seem to be ‘going with the grain’ of trend changes inthe technological behaviour of MNCs. In both industrialised and someindustrialising economies the roles and strategies of MNC subsidiaries and JVpartners seem to be shifting towards a greater localisation of technologydevelopment activities, and there appears to be greater flexibility in the extent towhich they do so in particular locations.

3. The Industrial Technology Development System in ThailandExperience in Thailand over the last 20-30 years contrasts sharply with that of themore technologically advanced industrialising countries in Asia that have movedthrough a fundamental transition by building up firm-centred structures of innovativeactivities and capabilities from preceding phases when most scientific andtechnological capabilities were located in public institutes.

The development of this firm-centred structure of innovative capabilities andactivities in Thailand has lagged far behind the experience of these other Asiancountries - not just behind their current capabilities, but behind their earlierexperience when they had similar levels and structures of economic development tothose of contemporary Thailand. The magnitude of change now needed to ‘catch up’with those past levels can be illustrated by the case of comparison with Korea:• The current intensity of R&D performed by business enterprises in Thailand lags

around 10-15 years behind the level in Korea in the early 1980s when that countryhad a similar level of industrial and manufacturing development as contemporaryThailand.

• The intensity of business-performed R&D in Thailand would need to be increasedto around 20 times its present level in order to ‘catch up’ with the intensity inKorea at that corresponding earlier stage of industrial development. (Section 2.2)

At this stage, however, the most important thresholds of technological capability thatfirms need to cross are not concerned with formally organised R&D.• For most larger firms and a few SMEs, they are about building their design and

engineering capabilities as a basis for starting significant technology developmentactivities.

• Only for a few firms that have already built that level of capability is the relevantthreshold now about deepening it further to build up R&D capabilities andactivities.

• For the majority of SMEs, especially in more traditional industries, the mostimportant capability thresholds are concerned with increasing the efficiency withwhich existing technologies are acquired, used and operated. (Section 2.3)

There are signs that very early steps in the transition towards an enterprise-basedtechnology development system were being taken in the few years before the crisis,and these may have accelerated again in the last year or two. Market conditions andgreater awareness of the significance of the technological dimension ofcompetitiveness seem to be bringing a much larger number of firms towards

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investment in their own technology development capabilities and activities. (Section2.2.2)

However, the required scale and intensity of investment calls for a deep and pervasivelearning process in industry. This must occur at two levels:• At the level of individual firms, the majority will have to abandon deeply rooted

perspectives on technology that have dominated industrial investment behaviourfor 30-40 years, and they must learn about the costs, risks and returns involved ininvestment in types of technological activity and capability with which they havevery limited familiarity. (Section 2.3)

• At the level of groups of firms in industries, clusters and value chains, it will beimportant to develop much more significant collective effort and technologydevelopment interaction between firms in order to enhance competitiveness, andalso to increase the significance of those linked structures of industrial productionwithin the Thai economy. (Section 2.4)

As in other countries, but contrary to common perspectives in Thailand, the roles andstrategies of MNC subsidiaries seem to be shifting towards a greater localisation of‘deeper’ technological activities. They appear to be playing a more positivetechnology development role than in the past, and this appears to generate significantspill-overs to the rest of the economy. More important, however, there appears to bemuch greater flexibility in the technological behaviour of many MNC subsidiaries,and hence a rising potential role in strengthening local technology developmentactivities and capabilities. This flexibility seems evident in three areas:• in the potential scope for capability deepening and for strengthening technology

development activities in their own operations;• in the potential scope for linking those activities more strongly to local

institutions;• In the potential scope for increasing the significance of technological spill-overs

to the local economy. (Section 2.5)

However, in contrast to many other countries, there has been very little shift towardspolicy designed to exploit these opportunities. Policy with respect to inward FDI inThailand continues to concentrate very heavily on attracting investment in the firstplace, with very limited emphasis on seeking to influence either the technologicalbehaviour of affiliates thereafter, or the extent to which that behaviour generates spill-overs to local firms and other institutions.

While the huge overall shift in technological behaviour that is needed in industry inThailand must be driven primarily by change in locally owned firms of all sizes, thepotential role of MNCs in contributing to this shift seems very substantial. But thiswill not be realised without a significant change in policy towards FDI and MNCs.This in turn will require an underlying change in attitudes and perspectives. Whetherefforts to attract inward MNC investment are increased or reduced, perspectives onwhat happens after that initial investment will need to shift from:• toleration, often coupled with suspicion and resentment, to• pro-active exploitation of, and support for, the opportunities to strengthen

technological learning and deepen technology development.

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4 Policy: Strengthening Capability and Technology Development in IndustrialFirmsThere are strong grounds for believing that significant public interests are served bysubsidies for investment in technology and skill development by private enterprises inindustry. These grounds are concerned with:• the public benefits arising from increased diffusion of knowledge, skill and

experience – benefits arising as ‘externalities’ that would otherwise be muchsmaller because of ‘under-investment’ by firms in the face of ‘imperfect markets’;

• the public benefits that arise more specifically in industrialising countries fromassisting industry in making substantial shifts across structural discontinuities inbuilding up a body of technological capabilities in industrial firms –discontinuities where risks, market imperfections and under-investment areparticularly great. (Section 3.2)

There is also considerable evidence that, provided they are well designed forparticular circumstances, mechanisms to provide such subsidies have had animportant impact in many situations and, far more often than not, they have alsoconstituted an efficient use of public finance. Although the available evidence on thispoint is scarce for the particular experience of industrialising countries like Thailand,there is every reason to believe that mechanisms can be designed that will be effectiveand efficient in those circumstances also. (Sections 3.2.2 and 3.2.3 - mechanisms tosupport technology development in firms; Section3.3.2 – mechanisms to supporttraining and capability development in firms)

In practice, however, there are virtually no such mechanisms available yet inThailand. In this respect, Thailand again differs from several other countries in theregion, which have implemented a variety of innovative mechanisms for thesepurposes for many years. (Section 3.2.4 – mechanisms to support technologydevelopment; Section 3.3.1 - mechanisms to support training and capabilitydevelopment)

We therefore suggest that urgent consideration should be given to five courses ofaction.

The existing tax incentive for R&D should be reviewed to consider furtheramendments in its design and administration that would increase its effectiveness instimulating increased R&D by industrial and other firms. Among other issues, thisreview should explore (a) the need to continue operating the scheme on the basis offirms’ payments to approved ‘R&D organisations’, (b) the possibility of defining‘R&D’ in ways that come closer to meeting priorities at the current stage oftechnological development in Thai industry, and (c) the value of operating both theBOI and standard Ministry of Finance schemes in parallel.

A study should be undertaken to examine whether and how a simple and flexiblegrant-based subsidy mechanism could be put in place to stimulate firms to undertaketechnology development activities involving forms of design and engineering workthat would not meet the eligibility conditions of the R&D tax incentive system. Thismight be envisaged as a technology development ‘apprenticeship scheme’ which,focusing on encouraging firms to deepen the early stages of their technologydevelopment activities, would only be available to individual firms for a limited

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period of time or for a limited number of projects. Thereafter, firms would beexpected to ‘graduate’ to meet the eligibility conditions required by the (modified)R&D tax incentive scheme.

In parallel with that study, or perhaps in combination with it, another enquiry shouldexamine whether and how a flexible grant-based mechanism could be established inorder to assist firms invest in training and related capability building activitiesconcerned with strengthening their human resources for design, engineering andR&D. This enquiry would consider two slightly different kinds of activity as outlinedin the previous section – both (a) ‘straight’ training-related activities and (b)design/engineering projects with high levels of training/learning content. It wouldalso consider ways of assisting investment in such activities by both individual firmsand groups of enterprises with common interests. (Section 3.3.3)

These linked studies should give as much attention to measures designed to stimulatefirms’ demand for improved technology as to measures designed to strengthen theirability to acquire it or supply it. It should also give considerable attention to measuresthat would facilitate and support collective action in this area by groups of firms inparticular industries, clusters and value-chains. (Numerous examples of such schemesare summarised in Annex 2, and also reviewed more briefly in Section 1.4)

Consideration should be given to the organisational arrangements for administeringsuch schemes. In particular, consideration should be given to arrangements thatwould:• create a ‘one-stop-shop’ covering the range of financial incentives to support

advanced level training and learning, technology development at the design andengineering level, and more formally organised R&D;

• ensure close linkage between (a) activities and organisations providingconsultancy, advisory and similar services to industry, and (b) organisationsresponsible for promoting these kinds of financial support for firms.

At the same time, consideration should be given to ways in which public concernsabout the possible misuse of grant funds might be met – for instance by contractingprivate sector organisations to act as administrative and decision-makingintermediaries between private sector claimants and public sector funding.

Steps should be taken to move forward as fast as possible with defining andimplementing the details of a broad and comprehensive training support systemwithin the framework of the proposed Skill Development Fund. This is important inits own right, but is also important for helping to build a stronger structure oftechnology-using and assimilating skills to underpin the deepening of technologydevelopment capabilities. In defining these details considerable efforts should bemade to avoid the bureaucratic costs of inflexible and over-extended aspects ofschemes in other countries, while capturing those aspects of good practice andexperiment that seems to have contributed most to strengthening skills andcapabilities.

Cutting across these studies and developments of policy, it will be important to bearin mind that the problem on hand is not about assisting individual firms to achievetheir own private interests – though that will usually be a necessary means. Instead,

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the end at stake is about generating system-wide public benefits from both creatingand spreading knowledge, skills and experience. Consequently the key issue is notabout finding welfare mechanisms to support disadvantaged firms that ‘need’assistance – though that might be an added dimension. Instead the key perspective isabout finding ways to enhance investments made by firms to generate important areasof knowledge, skill and experience, and at the same time it is about finding ways tointensify the extent to which that knowledge, skill and experience spreads across andspills over into the rest of the industrial system.

5. Policy: Developing the Institutional Infrastructure to Support IndustrialTechnology DevelopmentThere has been very limited change over the last ten years in basic features of thestructure of institutions supporting industrial technology development in Thailand.These features include:• the functional diversity and specialisation between institutions• specialisation and diversity among government stakeholders in the institutional

structure• the effective involvement of private sector industrial stakeholders in the system• complementarity between university and industry R&D• people-centred modes of technology transfer from institutes to industry• other modes of technology linkage between the institutional infrastructure and

industry• the basic mechanism for financing technology development activities in public

institutions. (Sections 4.1 and 4.2)

In other countries there has been considerable innovation and evolution in these andother features of the institutional component of industrial technology developmentsystems. Consequently, there are quite wide gaps between aspects of the institutionalstructures that seem to be important in other countries and the arrangements now inplace in Thailand. We therefore suggest that quite urgent consideration should begiven to the following issues.

Institutional specialisation• There is an urgent need to push into a new phase of institutional development that

will create a structure of more clearly differentiated institutions that canconcentrate on playing more specialised roles within the overall system.

• In some areas, this will require clear decisions to separate functions andresponsibilities that are currently collected in single institutions like NSTDA. Itmay also be appropriate to integrate some functions that are now separated – forexample, the R&D funding roles of NRCT and the TRF. However, it seemsunlikely that centralised bureaucratic ‘rationalisation’ will achieve the structure ofvigorous specialised institutions that will be needed. To achieve this, it is alsolikely to be useful to foster competition between institutions. For example:

(a) If the NSTDA national Centres are to continue undertaking ‘basic’ and‘strategic’ types of research, considerable benefits will probably beachieved if they and Universities have to compete for public fundingprovided through a third-party organisation – perhaps a strengthened TRF,or a re-constituted NSTDA that acts as a policy and funding organisation;

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(b) similarly, in areas concerned with providing technology support forindustry, the relevant parts of NSTDA, TISTR, the MOI Institutes and theDSS could be required to compete for the funding to operate particularkinds of programme. The consequence would almost certainly be a self-organised process of rationalisation, specialisation and integration. Animportant basis for this competition would be the organisation of a ‘levelplaying field’, involving similar funding arrangements for all theorganisations and similar forms of organisational status.

Stakeholder involvement in shaping developments and priorities• The ‘economic’ agencies of government (and the Ministry of Industry in

particular) should take on direct responsibility for a much more substantialsegment of the array of policy and institutional support for industrial technologydevelopment. The design and development of that role might be built on the basisof a detailed analysis of the experience of organisations like the EconomicDevelopment Board in Singapore, MOCIE in Korea, and several similar agenciesin European countries like Ireland, the Netherlands and the UK.

• Industry groups and associations should be encouraged to increase their directinvolvement in shaping both the direction of institutional development and theorientation of strategies and programme priorities within institutes. However, thisshould not be limited to the established ‘representational’ bodies. Other groups,associations and ‘clusters’ should be supported in taking steps to develop suchtechnology-centred roles.

Complementarity in university and industry R&D• Steps should be taken to accelerate implementation of the planned project to

create a number ‘Centres of Excellence’ in R&D, involving collaboration betweenuniversities and industry in world class research and doctoral training?

Links between technology institutes and industrial firms• Incentives in universities and other institutions should be shifted to give greater

weight to people-centred forms of linkage with, and technology transfer to,industrial enterprises.

• Extensive studies should be undertaken to develop a much more systematicunderstanding of (a) the nature and scale of industry’s demands for different kindsof service product from supporting institutions, and (b) the factors that influencedifferences and changes in those patterns of demand.

Financial mechanisms to raise performance and achieve social objectives• Financing arrangements, competitive conditions and organisational re-structuring

should be developed and implemented in order to bring greater pressure to bear onthe operations of linkage-type technology institutes

• However, these new arrangements should incorporate mechanism to ensure thatthe achievement of social objectives and broad public goals is not undermined.

6. The Overall Government Strategy for Industrial Technology DevelopmentThe terms of reference for the study asked us to review the overall framework ofindustry-oriented science and technology policy, and to consider the need for change

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at a broad strategic level. The dominant conclusion from the study is that veryfundamental change is indeed required.

The scale of the country’s technology development organisations, technology trainingand education institutions, and technology policy institutions has changed over thelast 40-50 years; and the location of some of these within the bureaucratic structure ofgovernment has also changed. However, as illustrated in the following examples,there has been remarkably little change in the broad aims being sought and the meansbeing used to achieve them.

• The main vehicle for implementing government’s industrial technologydevelopment policy is the complex of institutes assembled under NSTDA.The design of that institutional package was put together in the late 1980s andhas changed little since then. Moreover, it is remarkable how closely the1980s rationale and roles of NSTDA compare with those put forward in thedesign for setting up the Applied Scientific Research Corporation of Thailandin the 1961. The main difference is in size and resources, not in fundamentalrole and purpose.

• The rationale and purposes of the new National Science and TechnologyPolicy Committee seem to echo very closely those put forward in proposals to setup the National Research Council of Thailand in 1959, and it is perhaps symbolicthat its location in the structure of government, the Office of the PrimeMinister, is exactly the same as the original location of the NRCT in the1960s.

• Apart from the array of little-used tax incentives and credit schemes, veryfew new types of policy vehicle or mechanism have been added to the rangethat was already present by the end of the 1960 – albeit in slightly differentshapes and sizes.

At a broader level of analysis, the overall balance in the orientation of industrialtechnology development policy has hardly changed at all over the last 40 years.

• On the one hand, the dominant orientation of policy and resource allocation forbuilding industrial technology development capabilities in the 1960s wasconcentrated on the capabilities and resources of scientific, technological andtraining institutions that were intended to undertake technological activities onbehalf of industrial firms. That remains the overwhelmingly dominant orientationof policy and resource allocation today.

• Conversely, policy measures and resource allocations designed to strengthen thetechnological learning, technological capabilities and innovative activities offirms themselves was in effect non-existent in the 1960s. They remain almostinvisible or ineffective today.

In short, Thailand has persisted with a ‘mono-structural’ framework centred largelyon public institutions as the vehicles for implementing industrial technologydevelopment policy. It has not developed a dual policy structure that gives similaremphasis to the role of firms themselves as the creators of technology and thegenerators of underlying skills and capabilities needed to do so.

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In persisting with this unbalanced mono-structural policy framework, Thailand hasdiffered from other countries in the region like Korea, Taiwan, Singapore and, to alesser extent, Malaysia. It has also differed from the approach followed in most of theindustrialised countries. We strongly suggest that radical change in this 40-year oldapproach is required.

In large part, that re-balancing requires a shift in the underlying ideas and ‘mentalmodels’ guiding the design and development of policy. In particular, models thatplace public institutions at the centre of the technology development process need tobe abandoned, along with images that identify such institutions as the ‘supply side’ oftechnology development or human capital formation. In their place, industrial firmsneed to be placed in the centre; and their crucial role as creators and suppliers, not just‘users’, of technology, skills and knowledge needs to be recognised.

In addition, however, institutional changes almost certainly need to reinforce changein ideas and mental models. We highlight, in particular, two directions of institutionalchange.• First, it is important to note that Thailand has been unusual in the extent to which

control over industrial technology development policy, and associated resourceallocation, has been concentrated in bodies that are closely identified with the‘scientific and technological community’ – primarily the Ministry of Science,Technology and the Environment, and NSTDA. We believe that it will beimportant for ‘economic’ ministries, primarily the Ministry of Industry, to take ona more direct responsibility for much larger parts of the array of policymechanisms and resource allocations designed to support industrial technologydevelopment. The design and development of that role might usefully draw on adetailed analysis of the experience of organisations like the EconomicDevelopment Board in Singapore, the Ministry of Commerce, Industry andEnergy in Korea, and several similar agencies in European countries like Ireland,the Netherlands and the UK.

• Second, greatly increased emphasis should be given to the role of industry groupsand associations – not just the formally organised and well-establishedrepresentational bodies, but a wide range of less formally organised groups andclusters of firms. These should be seen not simply as ‘clients’ to be served by thenew system of support and incentives to strengthen their technology developmentand capability building activities. They should be seen as stakeholders in thatsystem, and should be encouraged to increase their direct involvement in shapingthe direction of institutional development, the orientation of strategies, and thepriorities in programmes.

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Contents

Introduction xvi

1 Industrial Technology Development: Key Aspects ofInternational Experience 20

1.1 Industrial Technology Development: What are we Talking About?20

1.2 National Systems of Industrial Technology Development 241.2.1The Dominant Role of Industrial Enterprises 27

1.2.2The Importance of ‘Non-R&D’ 28

1.2.3Knowledge Flows Between Firms 31

1.2.4People Flows in Technology Development Systems 35

1.2.5Balanced structures of industrial technology policy 36

1.3 The Structural Transition of Technology Development Systems inIndustrialising Countries 36

1.4 The Demand for Technology Development: The Driver ofTransition 38

1.4.1Competitive Environments 39

1.4.2Firm-level Awareness of the Role of Technology Development 39

1.4.3Policy: Incentives and Support for Demand at the Firm-level 43

1.4.4The structure of Industrial Production 44

1.5 The Technological Role of TNC Subsidiaries 481.5.1The location of ‘technology-intensive’ activities in TNC subsidiaries 48

1.5.2Spill-overs of knowledge and skill 50

1.5.3Questions about policy and the Technological Role of TNCs 50

1.6 Ireland 1950 – 2000: A Case Study of the Interacting Evolution ofIndustrial and Technology Policy 53

1.6.1Thailand and Ireland: Some Commonalities and Differences 53

1.6.2The Evolution of Industry and Technology policy 54

1.6.3Support for Capability Development in Industry 57

1.6.4Policy Institutions: Changing Roles and Structures 58

1.7 Benchmarking Highlights for Thailand 62

2 The industrial technology development system in Thailand: thebusiness enterprise core 64

2.1 Introduction: The Structure of the Chapter 64

2.2 The Scale and Structure of the Thai System in its Regional Context64

2.2.1Thailand as a Regional Laggard in Industrial Technology Development 65

2.2.2A more Qualitative Picture – Emerging Structural Transition? 72

2.3 Key thresholds in the accumulation of technological capabilities 75

2.4 Technology Development and Industrial Structure: Links, Clustersand Value Chains 79

2.5 The Technological Role of TNC Subsidiaries in Thailand 822.5.1The extent and depth of technology-intensive activities in TNC subsidiaries 83

2.5.2The Extent and Significance of Knowledge ‘Spill-overs’ 86

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2.6 Some Questions about Policy 90

3 Policy: Incentives and support for firm based technologydevelopment 92

3.1 Introduction 92

3.2 Tax Incentives and Other Support for Technology Development 933.2.1The Rationale 94

3.2.2Diversity in the Design of Policy Mechanisms 97

3.2.3Impact and Effectiveness 98

3.2.4Tax Incentives and Subsidies: The System in Thailand 103

3.3 Incentives for Training and Capability Development 1083.3.1The Absence of Effective Mechanisms in Thailand 108

3.3.2Incentive systems in Other Countries in the Region 109

3.3.3Towards an Incentive System in Thailand 114

3.4 Broad Conclusions 119

4 Policy: developing technology institutions 1224.1 Industrial Technology Support Institutes: Aspects of International

Experience 1224.1.1The Importance of Diversity, Flexibility and Institutional Innovation 122

4.1.2Some Common Features of International Expereince 123

4.2 Development of the Institutional Infrastructure in Thailand 1334.2.1The evolution of the system 133

4.2.2The Institutional Structure: links with Industry 138

4.2.3The Institutional Structure: some general characteristics 140

4.3 Conclusions 1434.3.1Institutional specialisation 144

4.3.2Stakeholder involvement in shaping developments and priorities 144

4.3.3Complementarity in university and industry R&D 144

4.3.4Links between technology institutes and industrial firms 145

4.3.5Financial mechanisms to raise performance and achieve social objectives 145

5 Policy for industrial technology development – a fundamentalchange in strategy 146

5.1 The Need for Fundamental Change 146

5.2 The Strategic Orientation of Policy for Industrial TechnologyDevelopment 147

5.2.1Building capabilities: ‘dual-‘ and ‘mono-structural’ policy frameworks 147

5.2.2Stimulating innovation: demand- and supply-oriented policy frameworks 148

5.3 Policy Measures and Institutional Changes 1515.3.1Policy measures and approaches 151

5.3.2Institutional changes: Technology development and support institutes 152

5.3.3Institutional changes: Policy, funding and governance 153

Appendix A Terms of reference for consulting services 155A.1 Background and rationale 155

A.2 Objectives of consulting services 155

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A.3 Scope of work 156

A.4 Implementation arrangements 156

A.5 Qualification of consultant 156

A.6 REPORTING REQUIREMENT 156

A.7 OUTCOME OF CONSULTING SERVICES 156

Appendix B Policy mechanisms to support technology developmentand innovation 157

B.1 Introduction 157

B.2 Tax incentives 162

B.3 Grants and subsidies 167

Appendix C The Thailand research fund 190C.1 Background 190

C.2 TRF basic research funding 190

C.3 TRF R&D funding 191

C.4 Empowerment R&D 192

C.5 Issues 192

Appendix D References 193

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LIST OF EXHIBITS

SECTION 1

Exhibit 1 Technology Development and Acquisition

Exhibit 2 The Industrial Technology Development System: A Framework

Exhibit 3 Proportions of Gross Domestic Expenditure on R&D (GERD) that areFunded and Performed by Different Actors in OECD Countries –1995

Exhibit 4 The Importance of ‘Non-R&D’ in Technology Development

Exhibit 5 The Relative Importance of Different Sources of Technology for Innovationby Firms in the Veneto Region of Italy (1974-1984)

Exhibit 6 Firms as Dominant Sources of Technology

Exhibit 7 A Key Transition in the Structure of Industrial Technological Capabilities

Exhibit 8 Transition in the Structure of the Korean Technology Development SystemExhibit 9 Types of Firm-Level Demand for Technological Change

Exhibit 10 Different Modes of Support for Industrial Technology Development

Exhibit 11 Structural Transition in R&D: Ireland, 1977-1997

Exhibit 12 Key Policy Actions in Irish Industrial Development

Exhibit 13 Irish Company Support Portfolio, 1997

Exhibit 14 The Changing Structure of Irish Business and Innovation Support Institutions

SECTION 2

Exhibit 15 Competitiveness Rankings: Selected Technology Indicators for Thailand andOther S.E.Asian Countries

Exhibit 16 Thailand and Korea: Relative Development of Economic and TechnologicalStructures

Exhibit 17 Emerging Structural Transition in the Thai Industrial Innovation System ?

Exhibit 18 Key Thresholds in the Current Structure of Intra-firm TechnologicalCapabilities

SECTION 3

Exhibit 19 Basic Features of a Skill Development Subsidy Scheme

SECTION 4

Exhibit 20 The Research and Innovation System in the (Federal Republic of) GermanyExhibit 21 Main Steps in the Development of ‘Industry-Oriented’ S&T Institutions inThailand

SECTION 5Exhibit 22 Industrial Technology Development Policy in Thailand: AlternativeStrategies

APPENDIX B

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Exhibit 23 Number of Selected European Programmes Addressing Various Types ofCapability

Exhibit 24 Numbers of Different Types of mechanism to Support TechnologicalCapability Development in Selected European Countries

Exhibit 25 Variations in Tax and Grant Subsidy Mechanisms

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Introduction

The Study and the Report

This is Volume I of a two-volume report on a study of the policy framework andinstitutional structure supporting industrial technology development in Thailand. Thestudy has been funded by the World Bank2. It has been carried out on behalf of theNational Science and Technology Development Agency of Thailand (NSTDA), withthe advice and support of a counterpart team of NSTDA staff.

The terms of reference for the project are attached as Appendix 1. In summary, thesecalled for a study with two main components.

• A review of the structure and functioning of the whole array of government policyand institutions that are concerned with industrial technology development;

• A more detailed examination of the role of NSTDA within that overall structure,and of aspects of NSTDA strategy and management.

The results of the first of these components are provided in this first volume of thetwo-volume report. The results of the second are provided in Volume 2.

Both components of the study have concentrated on industrial technologydevelopment. In Volume 1 the implication is that the study neglects other areas oftechnology that are extremely important for the country’s social and economicdevelopment - in particular, a huge array of issues about technology development inthe fields of agriculture, medicine and public health.

The Context for the Study: The Competitive Weakness of Thai Industry

The context for this study is widespread concern in Thailand about the weaktechnological basis of the country’s industrial growth. It is argued in many circlesthat the rapid growth of industry in general, and of manufacturing in particular, duringthe 1980s and early 1990s was ‘technologically shallow’. There was rapid growth ofoutput, based on investment in increasingly technology-intensive fixed capital. Alsoincreasingly ‘advanced’ products were introduced in some industries (e.g. in theautomobile and electronics sectors). However underlying competitiveness was notadvancing as rapidly and, it is suggested, the limited intensity of technologydevelopment in industry (the technologically ‘shallow’ path of industrial growth) hascontributed to that.

Various indicators have drawn attention to this issue – in particular:

• a slow-down in total factor productivity growth during the early 1990s,3

2 Under a Policy and Human Resources Development grant made available by the Government of

Japan for administration by the World Bank.3 Tinakorn and Sussangkarn (1998) suggest that total factor productivity was negative in the 1991-

1995 period in industry in general and manufacturing more specifically. While the measurementand interpretation of total factor productivity growth is subject to considerable debate, this result

xvii

• the mid-1990s slow-down in exports, contributing to the crisis in 1997.

At the same time, the technologically shallow path of industrial growth is alsosuggested by the relatively slow rate of change in the structure of production andexports. Compared with other countries in the region, both production and exportshave remained relatively heavily concentrated in resource-based and labour-intensive/low-technology sectors, with slow expansion in ‘medium’ and ‘high-technology’ sectors. Just as important, more impressionistic evidence suggests thatmanufacturing has been slow to move upwards to higher value-added products withinexisting sectors, and to expand to higher value-added stages in particular value-chains.

Numerous factors in addition to the limited intensity of local technology developmenthave contributed to this pattern of growth – including weaknesses in the financialsector; trade policy and the limits it has created to intensity of competition; andvarious aspects of the regulatory regime for industry. While the relative importanceof these cannot easily be demonstrated, issues to do with technology are clearly animportant part of the picture. This study addresses only those issues

The Broad Approach in the Study: Benchmarking comparisons

At an early stage in the development of the project, it was agreed that one of the mostuseful things we might do was to outline aspects of international experience thatwould be particularly useful in Thailand, and that a good way of doing this would beto set up external experience as a ‘benchmark’ against which to set our observationsin Thailand. We have followed this approach in both parts of the study, drawing onexperience in both the more advanced industrialising countries in the East Asianregion as well as our knowledge of the industrialised world, especially in Europe.

The Purpose of the Reports

The project was designed from the start not to result simply in the production of areport. Instead, it was agreed that the final stage of the project should consist of twosteps. The first would consist of a series of workshops and discussions designed toexplore with different communities in Thailand the validity of our views and theapproaches that might be taken to move towards action where those views appeared tobe useful. Only then would there be a final report to summarise the key issues and theaction plans to address them.

The first step was undertaken early in September 2000, and involved both a largepublic workshop and a series of meetings with a wide range of smaller groups. Thediscussions and comments at that stage have had a significant influence in re-shapingthe contents of our two reports. We hope they also helped to stimulate interest in theconclusions from the study that are included in our two reports. This is because it isthe aim of the World Bank, NSTDA and the consultant team that these reports shouldnot be the end of the project, but a contribution to further debate and follow-up actionconcerned with strengthening the policy framework and institutional support forindustrial technology development in Thailand

does suggest that efficiency in using rapidly rising inputs of labour and especially capital was atleast not rising very fast.

xviii

This continuing debate is critically important. One of the most important broadconclusions from the study is that there is an urgent need to intensify action-orienteddebate about new approaches to policy, institutional development and institutionalmanagement to support technology development. We were surprised how oftenpeople in key influential positions did not recognise how far Thailand is behindinternational good practice in these areas, and hence how urgent the need is forinnovative action. Moreover, as reflected in the common request that we shouldprovide ready-made recommendations for instant adoption and implementation, thereseems to be a very limited basis of analysis and prior experience that will benecessary for creatively absorbing policy mechanisms, institutional arrangements ormanagement procedures that have been used elsewhere. Consequently much of whatwe offer in the two reports is concerned with strengthening that basis of analysis,understanding and experience.

The Structure of this Volume

In Section 1 we review key features of international experience in the overallorganisation of technology development activities. In particular we highlight the corecomponent of effective industrial technology development systems – the technologydevelopment activities of industrial firms. We pay special attention to the process bywhich this core component has emerged in industrialising countries, especially in theEast and South-East Asian region. In addition, the chapter includes an outline of theexperience of Ireland – an economy that predominantly agricultural until veryrecently, and which has built up a strong core of industrial technology developmentcapabilities in a context of very substantial inward investment by transnationalcorporations.

Then in Section 2 we set Thailand’s experience against that comparative framework.This suggests that the country is lagging far behind others in the region in developingthe core of an industrial innovation system that is located in the technologydevelopment activities and capabilities of industrial enterprises.

In Section 3 we turn to aspects of the policy framework within which industrial firmsundertake their technology development activities and build up their capabilities to doso. We focus on experience outside Thailand in two key areas of policy: theprovision of financial incentives and support for (i) firms’ technology developmentactivities themselves and (ii) firms’ training and skill development activities forcreating their underlying capabilities for technology development.

We examine policy systems in Thailand against that benchmark experience,indicating very large gaps between the two and suggesting directions in which policysystems might be developed. Illustrative examples of policy measures are reviewedin Appendix B.

In Section 4 we outline aspects of the structure of institutions supporting industrialtechnology development in a range of countries. Again we start by outlining keyfeatures of experience in other countries. Setting a brief review of Thailand’sexperience against that framework raises a number of questions about the need tomove ahead with quite radical further developments in the Thai structure, and also in

xix

the structure of governmental responsibility for supporting industrial technologydevelopment.

Having reviewed the overall framework of industry-oriented science and technologypolicy, in Section 5 we return to address the related component of the terms ofreference for the project that asked us to consider the need for change at a broadstrategic level. Our conclusion is that fundamental change is indeed required. Weemphasise that the overall strategic balance in policy is massively concentrated onbuilding up technology development capabilities in public institutes in order to tryand stimulate the supply of technology into innovation. That strategy needs to befundamentally re-balanced, giving much greater weight to stimulating the demand fortechnology development and to measures that seek to build up technologydevelopment capabilities in industrial firms.

That in turn requires the development of new policy approaches and measures, alongthe lines suggested in Section 3 and illustrated in Appendix B. At the same time,radical changes in the roles and structure of institutions will be needed, along the linessuggested in Section 4. These new organisational and institutional arrangements willbe needed both to design, develop and manage the new policy measures andapproaches in the first place; and then to undertake the new kinds of technologydevelopment and support activities.

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1 Industrial Technology Development: Key Aspects ofInternational Experience

This chapter reviews aspects of international experience in the process of industrialtechnology development. It concentrates on issues that are particularly important inconsidering questions about policy and institutional support for industrial technologydevelopment in Thailand. It begins, however, by clarifying what we mean byindustrial technology development.

1.1 Industrial Technology Development: What are we Talking About?

We highlighted in the Introduction that the limited intensity of ‘technologydevelopment’ has been widely seen as one of the main sources of the weakcompetitiveness of industry in Thailand. We also referred to the ‘technologicallyshallow’ path of industrial growth in Thailand as the origin of this currently limitedintensity of technology development.

However, it is evident from our discussions during the study that people in policy-making and policy-influencing positions in Thailand attach widely varyinginterpretations to these ideas. In particular, the limited intensity of technologydevelopment is often equated with the limited intensity of investment in R&D, or withlimited investment in adequately ‘advanced’ new processes and products based onimported technology. While both these kinds of investment are extremely important,they are not what we mean here by ‘technology development’. Nor are they the keyelements of the technological basis of industrial competitiveness in which Thailand ismost significantly lagging. Some clarification may therefore be useful.

Exhibit 1 summarises ten categories of technological activity that constitute the basesof industrial competitiveness in any economy – industrialised or industrialising.These fall into two broad groups. The common characteristic of one of these groups(categories 7-10) is that they involve the introduction of more advanced technologyembodied in fairly standard designs, specifications and machinery that have alreadybeen used elsewhere. This may involve investment in individual items of newmachinery, the introduction of new kinds of materials and components, investment incomplete new production plants, and the introduction of new products. Because theydraw on the re-use (or re-application) of existing technology, all these ways ofenhancing industrial competitiveness can be based on the acquisition of technologiesfrom other firms that use them or produce them. In industrialising economies likeThailand, the capabilities to produce and implement most of these forms oftechnology are located in more advanced industrial economies, though some types ofmachinery or product designs may be locally available, along with engineering andproject management capabilities required for implementation.

The other group of technological activities underlying industrial competitiveness(categories 1-6) involve technology ‘development’. Their common characteristic isthat the capabilities needed to generate and implement these kinds of technicalchange typically have to be located within the domestic economy. They can veryrarely be based simply on the acquisition of imported technology – though elements

21

of knowledge acquired from elsewhere will often be critically important inputs to theprocess of localised technology development.

Several of these types of technology development consist of a wide range ofincremental improvements and modifications to technology already in use (categories1-4). Some of these (categories 1 and 2) consist of activities that improve a firm’sown technology, with positive consequences for that individual firm’scompetitiveness. A large body of analysis across a wide range of industrialised andindustrialising countries has demonstrated the enormous importance of these sourcesof competitiveness. Of particular importance here, these studies suggest thatindustrial growth resting solely on technology acquisition without thesesupplementary forms of technology development misses out on a very large source ofenhanced productivity growth and other forms of competitiveness.

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Exhibit 1 Technology development and acquisition

THE TECHNOLOGICAL BASES OF INDUSTRIALCOMPETITVENESS

Location of technologicalcapabilities needed for

implementation in industrialisingeconomies

TECHNOLOGY DEVELOPMENT DomesticEconomy

OtherEconomies

• Continuous incremental, engineering-based improvementin production technology (both process technology andmethods of organising production), contributing toincreased competitiveness via higher productivity of bothlabour and capital, to greater efficiency in materials andenergy use, and to higher product quality;

þ• Continuous incremental improvement and diversification

in product specifications and designs to help maintainshares in existing markets and to capture new highervalue niches in both export and domestic markets;

þ• Continuous improvement in the logistics technologies

used to link different stages in value chains, involvingboth hardware (e.g. transport and computer-basedsystems) and organisational/management methods;

þ þ

• Design and (reverse) engineering activities that open upopportunities to source components, materials andequipment from local suppliers, or to diversify productsand markets – either by existing firms or via new spin-outstart-ups.

þ• Technology search (and perhaps research) needed to lay

the basis for effectively acquiring and absorbingadvanced technologies close to the international frontier, þ þ

• Technological research and development, plus theassociated design and engineering required to introducetechnologies that cannot be acquired (competitively) fromforeign sources, and for introducing new products andprocesses that permit competitive entry to domestic orforeign markets independently of foreign technologysources.

þ þ

TECHNOLOGY ACQUISITION• Investment in new technology that is embodied in

individual units of new machinery and equipment inexisting industrial plants

þ þ• The introduction of new materials and components

incorporating existing designs and specifications þ þ• Investment in new technology that is embodied in

complete new industrial production facilities: - assubstantial additions to, or replacement of, productioncapacity in existing plants; or as totally new plants

þ þ• The introduction of new product technology embodied in

existing designs and specifications þ þIncremental forms of technology development also include types of change that affectthe competitiveness of groups of firms in industries, value chains or clusters. Thesetypes of technical change (categories 3 and 4) are often especially important in the

23

context of industrialising countries. Some types (those in category 3) centre on thelogistics technologies linking firms in supply chains. In the currently fashionableworld of the ‘new economy’, these may involve variations on e-business technology.However, more widespread and probably more important are improvements in a hostof other ‘old economy’ communications and logistics technologies that affect thecompetitiveness of whole supply chains, and hence the competitiveness of individualfirms within them. Other types of technical change (those in category 4) affect otherfirms by laying the basis for new links to enlarge clusters and extend supply chains.They provide the technological basis for initiating new local supply links or new‘downstream’ stages of production.

In most situations, especially in industrialising economies, these first four types oftechnology development rarely involve formally organised R&D. More usually theyinvolve the use of existing underlying knowledge and elements of existingtechnology, together with the application of design and engineering capabilities tointegrate these with existing products, processes and materials already in use. In somecases the necessary underlying knowledge may not be available, requiring localisedR&D to support design and engineering. However, as summarised under categories 5and 6, R&D may be more important in two other types of situation.

First, as technological advance in local industry approaches the internationaltechnological frontier, it typically becomes increasingly difficult to obtain access toexisting technology on terms that permit competitive production. Also, introducingand absorbing such close-to-frontier technologies often becomes increasinglycomplex. In such situations, as illustrated by the Korean electronics industry in thelate 1980s, it may become necessary to undertake R&D (sometimes located in theindustrialised countries) as a basis for acquiring and absorbing technology. Such R&Dmay be necessary in order to assess alternative technologies and suppliers; it may benecessary to generate elements of underlying ‘tacit’ know-how that are required forcompetitive production but not provided by technology suppliers; or it may constitutea ‘threat’ which induces owners of the technology to enter into transfer arrangements.

Second, existing technologies may not be available to pursue some directions ofpotentially competitive production – or they may not be available on terms that permitcompetitive production. In such cases, local R&D may be the only possible way oflaying the basis for comprehensive engineering and design to produce the technologyin a competitively operational form.

So, when we refer to the limited intensity of technology development in industry inThailand, we refer to the limited intensity with which industrial firms pursue activitiesacross the whole spectrum in categories 1-6 in Exhibit 1. More specifically, we refermainly to the limited pursuit of activities in categories 1-4, since those in 5 and 6 arestill less important for the majority of industrial firms. When we refer to the‘technologically shallow’ growth path of industry we refer to the limited investmentby industry in the capabilities required to undertake those kinds of technologydevelopment.

Consequently, in using these terms we are referring to an imbalance in thetechnological basis of industrial growth: the significance of categories 1-6 (especially1-4) has been inadequate relative to categories 7-10. However, contrary to many

24

common views, this is not because reliance on categories 7-10 has been too great. Itis because investment in categories 1-6 has been far too small. The two groups ofactivities are rarely substitutes for each other. They are complements and, we argue,by failing to build up adequate capabilities to undertake activities like those incategories 1-6 (and especially 1-4), industry in Thailand has failed to invest in a verylarge part of the technological basis for competitiveness required to complement itsheavy reliance on categories 7-10.

1.2 National Systems of Industrial Technology Development

Frameworks for thinking about the process of industrial technology development havechanged considerably over the last ten years or so. Particularly important have beeninsights highlighting systemic features of the process. In outline, what this means issimply that emphasis has been given to:

• the fact that technology development typically involves a multiplicity oforganisational actors and activities, not just individual ‘innovating’ firms or otherorganisations, and not just R&D;

• the importance of a web of interactions and complementarities between thoseactivities and actors;

• the ways in which those actors and interactions are pervasively influenced byincentive systems, policy mechanisms and a range of other factors rooted in theorganisational, legal, economic and cultural contexts of technology development.

Understanding key features of these technology development systems, it is argued, isa pre-requisite for thinking usefully about policy, organisational development ormanagement concerned with any of the component parts. We find this argumentconvincing, especially in contrast to earlier partial perspectives which typicallyfocused on only quite narrowly defined activities (e.g. R&D) or only particular kindsof actor (e.g. universities, government R&D organisations, or individual firms).

Our review of technology development in Thailand is therefore set in the context of asimple model of a national industrial technology development system. The bare bonesof such a system are indicated in Exhibit 2. This has seven main components.

(i) Final foreign and domestic customers for industrial products;

(ii) The technology development capabilities and activities of industrial firms;

(iii) The capabilities and activities of ‘linkage organisations’ which help to connectfirms to other sources of knowledge, or help them apply existing knowledge intheir own specific circumstances;

(iv) A group of other institutions which are primarily concerned with generating newknowledge through research and/or with providing a range of education andtraining activities;

(v) Foreign sources of knowledge

(vi) Knowledge flows and other interactions between the various actors and activities

(vii)A set of incentives, policy measures and other aspects of the institutional contextfor technology development which influence all these capabilities, activities andknowledge flows.

25

Exhibit 2 The industrial technology development system: a framework

KnowledgeLinkage,

Transfer andDevelopmentOrganisations

Metrology andStandards

ForeignTechnology

Sources

INSTITUTIONAL CONTEXT

INDUSTRYCUSTOMERS LINKAGEOTHER KNOWLEDGE

SOURCES

Export

Domestic

Large TNC

LargeDomestic

SME

Start-Ups

ResearchInstitutes

Universities

VocationalTraining

Policy and Incentive Systems Financial and Funding Systems

Legal Frameworks Organisational Structures

26

Discussion of the structure and functioning of such ‘innovation systems’ oftenconcentrates on R&D as the main technology development activity; on R&D-performing institutions (on the right hand side of Exhibit 2) as the main actorsgenerating and supplying technology; on flows of knowledge and technology betweeninstitutions and firms as the most important transfer and diffusion channels in thesystem, and on efforts to develop those institutions as the most important focus forpolicy in industrialising countries.4 However, we believe these perspectives result infundamentally distorted pictures of the structure and functioning of innovationsystems. This is immensely important, because action-oriented approaches to policyare shaped by such models, and if the models are distorted, so also will policy andmanagement be distorted.5

In the remainder of this section, therefore, we pay particular attention to the followingcentrally important features of the system.

• The central role of industrial firms, not technology institutions (Section 1.2.1)

• The importance of ‘non-R&D’ capabilities and activities (Section 1.2.2)

• The significance of technology flows between firms (Section 1.2.3)

• The importance of people flows in the system (Section 1.2.4)

• The need for a balance in policy between those aspects concerned directly withstrengthening the technology development capabilities and activities of firms, andthose concerned with building and strengthening various kinds of technologydevelopment institute (Section 1.2.5).

We highlight these points with primary reference to the experience of more advancedindustrial countries. Then in Section 1.3 we review how key structural features of thesystem change during the process of industrialisation in more technologicallydynamic industrialising countries. Factors affecting the demand side of that transitionare reviewed in Section 1.4

In Section 1.5 we focus specifically on the role of one type of firm within this system,the subsidiary or joint-venture partner of transnational corporations. This is partlybecause such firms are becoming increasing important in shaping the evolution oftechnology development systems in many economies, including Thailand. But it isalso because conventional views about that role are becoming outdated in the light ofchanges over the last decade or so.

4 Several reports on aspects of science and technology policy in Thailand in recent years include

diagrams incorporating these perspectives on the national innovation system.5 For instance, the 1999 “Profile” of NSTDA suggests that policy and management in the organisation

rest on a model of the technology development system in which industrial firms are the technology-using ‘demand side’ and institutions like NSTDA and the universities are the technologicallycreative ‘supply side’: one of the components of the organisation’s mission is stated as: “Promotetripartite cooperation among the private sector (technology user), academic institutions (technologygenerator) and NSTDA (facilitator and technology co-generator).” (NSTDA, 1999, p.3, ouremphasis added). This mental model of the system virtually rules out approaches to policy ingeneral, and to management of the organisation in particular, which would aim to strengthen the roleof private sector industry as the primary ‘generator’ of technology and the prospective heart of thesupply side of the national innovation system.

27

Finally, in Section 1.6 we illustrate some of the issues outlined in the precedingsections by sketching a few key features of the recent history of the industrialtechnology development system in Ireland – a recently industrialising economy whichas recently as 20 years ago had many similar characteristics to Thailand.

1.2.1 The Dominant Role of Industrial Enterprises

As noted above, in some models of the technology development system industrialfirms are described as the ‘demand side’, relative to ‘supply’ that is provided bytechnology institutes and universities. This is very misleading because industrialfirms not only generate the demand for industrial technology, they account for a verylarge part of the ‘supply side’ as well. In countries where a significant scale ofindustrial technology development takes place, the vast majority of it is performed byindustrial firms. They supply much of the new technology they use themselves,especially the forms of new technology generated by activities in categories 1-6 inExhibit 1 earlier; and they also supply a very large proportion of the technology usedby other firms. In other words, most of the technology ‘generating’ capabilities in thesystem are located in the ‘Industry’ box towards the left of Exhibit 2, not in theinstitutes in the ‘Other Knowledge sources’ Box on the right.

This dominant role of industrial firms as technology suppliers is reflected in dataabout the distribution of R&D funding and performance in the more industrialisedeconomies of the OECD. As indicated in Exhibit 3, business enterprises account foraround 50-60% of the expenditure on R&D in North America, the European Unionand the Nordic countries. More striking is the fact that they perform a largerproportion of all R&D – around 60-70%. This difference arises because a significantpart of the R&D that is funded by governments is carried out by business enterprisesfor governments. This dominant role of firms as the performers of R&D is even morestriking in some countries – for instance, it is between 70 and 75% in countries asdiverse as Ireland, Korea, Sweden and the United States. Then, all those proportionsare higher again if one focuses only on the share of industrial R&D that is performedby business firms.

28

Exhibit 3 Proportions of gross domestic expenditure on R&D (GERD) that arefunded and performed by different actors in OECD countries – 1995

North America The EuropeanUnion

The NordicCountries

Proportion of GERD fundedby the Business Enterprisesector (%)

59.3 52.5 58.7

Proportion of GERDperformed by the BusinessEnterprise sector (%)

70.8 62.1 66.5

Proportion of GERDperformed by the HigherEducation sector (%)

15.6 20.8 22.6

Proportion of GERDperformed by the Governmentsector (%)

10.2 16.2 10.4

Source: OECD (1998) [ The performance of R&D by non-profit organisations is excluded here]

The converse of this picture is the relatively limited role played by other actors.Universities typically undertake only around 15-20 per cent of all R&D, and R&Dorganisations run by governments typically account for an even smaller proportion –around 10% in North America and the Nordic countries, and slightly over 15% in theEU. Again this would be much smaller if one focused only on industrial R&D,excluding for instance some of the large public mission-driven fields of technologydevelopment like agriculture or health.

1.2.2 The Importance of ‘Non-R&D’

We have already emphasised that a large contribution to technology development ismade by types of technical change that do not involve formally organised R&D at all– as in categories 1-4 in Exhibit 1. It is important, however, to stress two furtherpoints.• First, this is not just a feature of technology development systems in

industrialising economies. Numerous case studies have highlighted thesignificance of these kinds of technical change in the advanced industrialcountries. However, it is only quite recently that efforts have been made tocompile more aggregated data about these kinds of innovation and theirsignificance.

• Second, even in other kinds of technical change (e.g. those in categories 5-10 inExhibit 1), R&D activities are only a sub-set of the whole range of activitiesinvolved in technology development. Again, however, it is unfortunately only thissub-set that is measured and described in most compilations of data about nationalinnovation systems.6 In particular, a host of product design and process/production

6 In Thailand, as in other industrialising countries, compilations of aggregate national data about

technology development cover only the R&D sub-set of technology development activities.

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engineering activities are rarely measured and are not reflected in the statisticalinformation usually collected about R&D. 7 This imbalance in the informationcommonly used to inform policy making about technology development isimportant because the neglected engineering and design activities are not justminor adjuncts to R&D. On the contrary, they frequently account for a very largefraction of the total expenditure on technology development.

These points, especially the second, run counter to common perspectives that havebeen fostered by misleading, R&D-driven models of the innovation process. It maytherefore be helpful to use a concrete example to illustrate – see Exhibit 4. Thissummarises details of a case of innovation at the international technological frontier -in the paper industry in Sweden in this case. Only about 20 per cent of the total costsof technology development were incurred at the R&D level in the two collaboratingfirms. In contrast, 80 per cent of the costs were attributed to ‘non-R&D’ activities inproduction and engineering.

7 And these technological activities leave out important ‘non-technological’ activities such as market

research and financial management. These are not discussed here, but need to be taken into accountwhen considering any kind of policy support for ‘technology development’.

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Exhibit 4 The importance of ‘Non-R&D’ in technology development

The Sunds Thermopulp Process

A major advance in process technology for pulp-making for paper manufacturewas developed in the early 1990s by a Swedish company, Sunds Defribrator. Thenew technology, the Thermopulp process, yielded a substantial reduction inproduction costs, concentrated in the area of energy costs.

As with very many technology development projects in industry, this caseinvolved close collaboration between the company for which the technology wasembodied in its product (Sunds Defribrator, a supplier of process plant for thepaper industry) and another company which used the technology in its process(SCA-Ortviken, a manufacturer of light weight printing paper and newsprint).

As is also common in industrial technology development, the costs of varioustypes of design and engineering that are not recognised as R&D activitiesaccounted for a very large proportion of the total technology development costs.As shown below, R&D accounted for only about 20% of total costs, while non-R&D activities and resources accounted for nearly 80%, split evenly between theprocess user and producer.

Expenditure by Collaborating Companies*

(Million Swedish Kroner)

Plant Producer Plant UserSunds Defribrator(Manufacturer of

process equipment)**

SCA/Ortviken(Paper company) TOTAL

R&D Level 3 4 7 (21%)In Sunds R&D Lab In SCA Research Labs

Production/Line Level 14 12 26 (79%)In Division for

mechanical pulpingprojects

In the Ortviken pulpproduction unit

TOTAL 17 (51%) 16 (49%) 33 (100%)

* Excluding ‘hidden’ costs such as production losses during testing** Though a ‘producer’ in the context of this plant-level study, the company was a subsidiary ofUPM/Kymmene, a large Finnish pulp and paper company

Source: Laestedius (1998)

The 80 per cent non-R&D proportion in this case is probably quite high because ofthe particular characteristics of technology development in heavy process industrieslike paper, chemicals and steel. In other industries the non-R&D component isusually a smaller proportion than this. An illustration of this variability is provided inExhibit 5 which reproduces data from a study of the sources of technology consideredimportant for technology development by a sample of firms in the Veneto region ofItaly. Overall, the firms’ internal engineering, design and reverse engineeringactivities were reported relevant more than twice as often as their R&D activities (by64 per cent of firms compared to 26 per cent). However, this varied widely acrossdifferent kinds of industry. Not surprisingly, in ‘science-based’ industries, internal

31

R&D was reported as relevant by about half of the firms, with only about 34 per centidentifying engineering, design and reverse engineering. In contrast, in ‘traditional’industries the balance was more than reversed: about 80 per cent identifiedengineering, design and reverse engineering as relevant, while only 14 per centidentified R&D.

The importance of ‘non-R&D’ in technology development highlights theinappropriateness of narrowing technology policy down to just R&D policy. We willlater suggest that this is especially important in Thailand where, at the current stage ofindustrial development, ‘non-R&D policy’ may be much more important than ‘R&Dpolicy’ within any package of government measures to stimulate the contribution toindustry competitiveness made by technology development.

1.2.3 Knowledge Flows Between Firms

The dominant role of firms in industrial technology development is not only reflectedin the share of total R&D and engineering that they undertake themselves. It is alsoreflected in the fact that knowledge flows between firms dominate the overallstructure of knowledge flows in the technology development system. This is not justabout flows of knowledge embodied in the outputs from technology development byfirms – though, as noted above, a very large proportion of the newly developedtechnology used by industrial firms has been developed by other industrial firms. Justas significant is the fact that the knowledge inputs to technology development byfirms are also derived primarily from other firms.

This has been shown in studies covering a wide range of situations. For instance, asshown in Exhibit 5, Italian firms in the Veneto region in the 1974-84 period drewheavily on other firms as sources of inputs to their own innovation. This was partlyabout drawing inputs from suppliers of machinery and equipment – identified asrelevant by 80 per cent of the firms. But was also about intense knowledge flowsfrom firms’ suppliers and customers. Around half of the firms identified interactionswith each of these groups as relevant – though the importance of these varied betweendifferent types of industry.

A similar picture is demonstrated by the information from much more comprehensivesurveys of innovative activities in European industry. Data from a 1997 EC survey(Exhibit 6), for instance, indicates that clients and customers were considered veryimportant as sources of information for innovation by nearly half the reporting firms(48 per cent), only a little less important than in-house sources (identified by 51 percent of firms). Similar data has been generated in industrialising countries like Koreaand Taiwan, as well as in a 1997 World Bank study covering firms in a cross-sectionof OECD and industrialising countries.

These flows of knowledge take place in several forms – for instance, as codified dataand specifications needed to design improved and new products, as advice and ‘know-how’ used to develop changes in production processes and production organisation, oras knowledge embodied in product or machinery artefacts that is then extracted viareverse engineering to be used as an input to technology development. Frequentlythese knowledge flows span international boundaries. For example, customers in theindustrialised countries have played a massively important role as sources of

32

knowledge used by firms in the Asian electronics industry to develop and upgradetheir product and production technology. (Hobday, 1995).

33

Exhibit 5 The relative importance of different sources of technology for innovation by firms in the veneto region of Italy(1974-1984): Proportion of Firms (%) Identifying Sources as Relevant to Their Introduction of Innovations

INTERNALSOURCES

INTERACTIVESOURCES

EXTERNALSOURCES

Type ofIndustry

Entre-preneur

R&DLab

Engrng&

Design

ReverseEngrng

WithSuppliers

WithCustomers

Mcry.Suppliers

Univs &PublicInsts

ForeignPatents

TotalNumberof Firms

Science Based 17 50 17 17 33 17 50 17 17 (6)

Scale Intensive 15 54 46 15 23 69 77 15 15 (13)

Specialised suppliers 18 41 55 14 36 50 86 5 14 (22)

Traditional/ScaleIntensive 33 17 17 21 55 42 79 8 4 (24)

Traditional 40 14 62 18 44 56 82 2 6 (50)

TOTAL30 26 47 17 42 51 80 6 9 (115)

Source: Belussi (1992)

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Exhibit 6 Firms as dominant sources of technology

Sources of Information Considered Very Important forInnovation by Enterprises* in European Manufacturing Industry

Percentage ofInnovatingEnterprises

EnterprisesOwn EnterpriseSources within the Enterprise 51Other Enterprises in the Enterprise’s Group 26Other EnterprisesClients and Customers 48Suppliers of Equipment 19Competitors 18Consultancy Enterprises 4

‘Public’ Information SourcesFairs and Exhibitions 21Professional Conferences, Meetings, Journals 8Computer Based Information Networks 4Patent Disclosures 3

‘Infrastructure’ InstitutionsUniversities and Higher Education Institutions 5Government or Non-profit Research Institutes 3

* Refers to enterprises with more than 20 employees.

Source: European Community Innovation Survey, 1997 (re 1994-96)

In some cases, these knowledge-centred interactions between firms areorganisationally structured into various kinds of collaborative arrangement to developtechnology jointly. This was the case, for example, in the formation of ResearchAssociations in Japan in the 1950s - for instance by a group of seven firmsmanufacturing automobile radiators or a group of 20 manufacturers of suspensionparts. It was also the case in Japanese government-stimulated programmes in highertechnology fields in the 1970s where the aim had become less concerned withcatching up existing international technology and more with moving to theinternational frontier – for instance in semiconductor technology. Bilateralcollaboration between users and producers of process technologies are also common –as illustrated, for instance, by the case of the paper-making process developmentoutlined above in Exhibit 4.

It is also important to note that these knowledge flows not only run between existingfirms. They are often a very important source of the knowledge underlying newcompany start-ups, and in many situations such spin-outs from existing large firmsare much more important than the spin-offs from universities that have attracted muchmore publicity. This is evident in the industrialised countries, but it can also beimportant in industrialising economies. For instance, in the Malaysian electronicsindustry, one ongoing study has shown that nearly half of a sample of locally owned

35

firms that started up to supply the TNCs had originated as spin-outs from the TNCsthemselves, often with their active support and encouragement.8

As the significance of these various kinds of inter-firm knowledge flow has beenincreasingly recognised, policy in several countries has come to give greater attentionto measures designed specifically to support and stimulate such intra-industryknowledge diffusion, not just to stimulate the production of new technology by firms.

1.2.4 People Flows in Technology Development Systems

The overall significance of people as carriers of knowledge and skills betweencomponent parts of the technology development system needs little elaboration. Inparticular, the flow of people from education and training institutions to industrialfirms is well recognised as a critically important basis for the competitiveness ofindustry. However, policy issues about the development of education and traininginstitutions in Thailand are not addressed in this study.9

Two other important people flows in the system are often given much less attention,but are emphasised here and in subsequent parts of this report. First, flows ofknowledge and skill carried by people who move between firms are immenselyimportant. This reflects the fact that industrial firms are not just employers of skillsthat have been developed in education and training institutions. Many of them playvery important roles as creators of human capital, not just as users of it.Consequently, the movement of people between firms can be one of the mostimportant mechanisms for the diffusion of knowledge and skill. This is commonplacein the industrialised countries – often strikingly so in high-tech industries. It is alsocommon in industrialising countries, and with reference to fairly low-tech industries.For instance, a study of Korean exporting firms in the mid-1970s found thatexperience acquired by personnel through previous employment with other domesticor foreign firms was the most important source of their process technology.10 Wetherefore give particular attention to policy measures designed to strengthen the roleof firms as creators of skills and knowledge that can be expected to ‘spill over’ to thebenefit of other firms within particular industries or localities.

Second, it has become increasingly well recognised that one of the most importantroles played by R&D in public technology institutes is to contribute flows of peopleinto the industry-driven core of technology development systems. In many situations,this seems to have been much more important than the specific technologies that mayhave been transferred to industry as result of such R&D activities. We elaborate on

8 Results from an ongoing SPRU DPhil study by Norlela Ariffin at the Universiti Tenaga,

Malaysia.9 These issues have already been examined in several studies that have contributed to planned changes

in policy and institutional development in these areas. In addition, there are plans for a World Banksupported study running in parallel to this which will give much more attention to issues aboutindustrial skill development.

10 Westphal etc. The study showed, for instance, that previous employment was ranked as important orvery important as a source of technology by 24 per cent of the sampled firms. This was higher thanother sources of process technology and know-how often thought particularly important. Forinstance, licensing and technical assistance from foreign sources was ranked important or veryimportant by 16 per cent of the firms.

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this issue in Section 4 of this volume; and it is emphasised again in Volume 2,concerned with the specific case of NSTDA.

1.2.5 Balanced structures of industrial technology policy

We give considerable attention throughout this volume of the report to the policy andincentives component of the technology development system. At this stage weemphasise only one broad structural feature of that component: the balance betweentwo main emphases or thrusts of policy

• policy measures which seek to strengthen the capabilities and activities of firmsconcerned with undertaking their own technology development;

• policy measures which seek to strengthen support institutions in the system andincrease their effectiveness in undertaking scientific and technological activitieson behalf of industrial firms.

We examine the first element of such policy structures in Section 3, and reviewaspects of the second in Section 4. Then in Section 5 we turn to questions about thebalance between these two. Some countries have developed dual policy structures,with balanced commitments to both these emphases. Others have pursued veryimbalanced structures of policy, concentrating on building domestic technologyinstitutions outside industry and giving little emphasis to the accumulation of firm-based technology development activities and capabilities.

We suggest in Section 5 that Thailand falls into the second category, having followeda massively imbalanced approach to policy over the last 40 years or so. We give someattention to the possible consequences and causes of this. Highlighting the urgentneed for a major re-balancing of the overall approach to policy

1.3 The Structural Transition of Technology Development Systems inIndustrialising Countries

Most of the preceding comments about key characteristics of industrial technologydevelopment systems have centred on the experience of the more industrialisedOECD world. Quite obviously some of these features, especially the dominant role oftechnology development in firms, and the importance of knowledge flows betweenthem, are not present in technology development systems in early-stage industrialisingcountries where firms make much more limited contributions to technologydevelopment. This highlights the importance of a critical transition in the structure oftechnological capabilities and activities during the process of industrialisation.

Key features of this transition can be outlined in a highly simplified form withreference to Exhibit 7. This aggregates the complex structure of industrialtechnological capabilities into only four levels. These run ‘upwards’ from a broadbase of skills needed for routine operation of industrial technologies to a small apex ofR&D capabilities which, along with a broader tier of design and engineeringcapabilities, contribute to the development of new technologies.

The transition highlighted here occurs ‘half-way up’ this structure. It involves a shiftfrom (a) capabilities required for the routine operational assimilation, use and

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maintenance of industrial technologies to (b) capabilities required to engage creativelyin technology development. This is obviously a very blurred boundary. Importantcontributions to improving existing technologies are made by people with operating,craft and technician skills; while people with engineering skills often play a majorrole in the routine assimilation and maintenance of existing technologies.Nevertheless the broad distinction is important in highlighting the key transitionwhich firms and industries may pass through from ‘using’ to ‘creating’ technology.

Exhibit 7 A Key Transition in the Structure of Industrial Technology

R&D

DESIGN AND

ENGINEERING

TECHNICIAN ANDCRAFT SKILLS AND

CAPABILITIES

BASIC OPERATORSSKILLS AND CAPABILITIES

Technology

Development

and Creation

Technology Use,

Operation and

Maintenance

There are no systematic data describing this transition in industrialising countries, butvarious proxy measures can indicate at least some of the features – as illustrated inExhibit 8 for the case of Korea which passed through a particularly rapid transitionover about 25 years between 1970 and 1995. The central issue is not simply that totalnational technology development effort rapidly expanded, involving for instance:− the ratio of R&D expenditure to GNP rising rapidly from 0.4 to 2.7 per cent− the number of researchers per head of population rising almost 17-fold− international patenting (as reflected in the number of patents taken out in the US)

accelerating rapidly – increasing five-fold or more over five-year periods at thelater stage of the transition.

More significant is the point that the structure of these activities and capabilitiesradically changed with respect to their organisational location – the overall growth ofthese capabilities was very heavily concentrated in industrial firms. For instance:

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• private sector R&D increased much more rapidly than R&D in governmentinstitutes, and its proportion of the growing total rose from 12 to 73 per cent,

• correspondingly, the number of researchers in private sector enterprises increasednearly 60-fold, compared with only 6-fold in the case of government researchinstitutes,

• the proportion of international (US) patents taken out by firms (rather thangovernment agencies or individuals) increased from around 20 to 75 per cent.

Exhibit 8 Transition in the structure of the Korean technology developmentsystem

1970 1975 1980 1985 1990 1995

Total R&D Expenditure* 10.5 42.7 282.5 1,237.1 3.349.9 9,440.6Of which, shares (%) of:Universities 3.8 5.2 9.2 9.6 7.3 8.2

Govt. Research Institutes 84.8 65.8 37.0 29.7 21.8 18.7

Private Sector 12.4 28.8 28.8 60.7 70.9 73.1

R&D/GNP (%) 0.38 0.42 0.77 1.58 1.95 2.69

Researchers/10,000 population 1.7 2.9 4.8 10.1 16.4 28.6

No. of Corporate R&D centres 1 12 54 183 966 2,270

No. of Patents in the US** 3 13 8 41 225 1620

% of Korean US patents takenout by Korean firms**

21(1969-74)

20(1975-80)

29(1981-86)

54(1987-89)

76(1990-92)

* billion won** Source: Jae-Young Choung (1998)

Thus, through a transition phase of about 25 years, the Korean technologydevelopment system came to have a similar structure to that of the more industrialisedcountries described earlier. Slightly less dramatic transformations took place a littleearlier in Taiwan and a little later in Singapore. Equally striking have been thetransformations in some of the richer countries which have significantly deepenedtheir technology development activities in recent years. For instance, businessenterprises in Finland increased their share of total R&D from around 50% to almost70% as the role of technology development in the economy deepened between the1980s and the late 1990s, and Ireland demonstrates a broadly similar transition overthat period – see Section 1.6 below.

1.4 The Demand for Technology Development: The Driver of Transition

Transition towards an industry-centred structure of technology developmentcapabilities and activities does not take place automatically as time passes andindustry grows. Numerous industrialising countries have experienced industrialgrowth for quite long periods without any significant shift in this direction.Substantial demand for technology development at the level of individual firms isneeded, not simply the continuation of industrial growth, or even the existence of

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strong government policies to develop technological capabilities - as in India or Brazilfor instance.

Several factors appear to be important in stimulating this demand. Here we focus onfive: pressures and opportunities generated by competitive environments; firm-levelawareness of the role of technology development in competitiveness; policymechanisms to stimulate and support that awareness and response capability; changesin the structure of industrial production; and the role played by foreign directinvestment.

1.4.1 Competitive Environments

Very few firms invest in technology development simply for fun. Most do so becauseof the business incentives arising from pressures and opportunities arising in theirproduct and input markets. Also, other things being equal, the greater thoseincentives the more intensive the demand for technology development. Consequently,for instance, the pressures and opportunities arising from involvement in, or exposureto, international markets have typically been more important in stimulatingtechnology development efforts than pressures and opportunities arising only indomestic markets.11

This simple relationship is evident in the cases of the Asian industrialising economiesthat have made the most striking transitions towards industry-centred technologydevelopment systems: Korea, Taiwan and Singapore – though the ways in whichindustries have been exposed to international competition have varied between thesecountries, as have key features of the industrial enterprises that have driven thetransition.

1.4.2 Firm-level Awareness of the Role of Technology Development

Firms do not automatically respond in similar ways to the pressures and opportunitiesof competitive environments. Some respond rapidly and intensively, perhaps leadingthe way in developing technological responses to opportunities not yet seen by others.On the other hand, some respond slowly or perhaps not at all to similar opportunitiesor pressures. Much the same variation in the technological response to competitioncan be seen at more aggregated levels – specific industries in particular countries maydiffer in these ways, as may even whole industrial sectors in countries.

Lying behind such variation are differences in two types of awareness:• Differences in the degree to which firms are aware of the overall need to change• Differences in the degree to which they are aware of what to change and how to

go about the process

As illustrated in Exhibit 9, combinations of these two kinds of difference can be usedto distinguish between firms with different types of response capability, resulting indiffering patterns of demand for technological change and development. The four

11 In addition, firms’ involvement in international markets has often been important as a channel for

acquiring (via customers and suppliers) knowledge and information to support their technologydevelopment efforts.

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types shown are a considerable simplification, but they illustrate recognisablydifferent categories of demand

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Exhibit 9 Types of firm-level demand for technological change

High

Low

Awareness of the need to changeLow High

Type 1 Firms‘Don’t know that they don’t know’

Type 2 Firms‘Know they don’t know,

but don’t know what’

Type 3 Firms‘Know what, but not

always where and how’

Type 4 FirmsHigh capability andabsorptive capacity

Awarenessof What and Howto Change

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• Type 1: firms with low or zero demandThese firms do not realise or recognise the need for change to survive in what may bea hostile environment, and they do not know where or what they might improve. Assuch they are highly vulnerable to competitive forces - for example, if low costcompetitors enter the market, or if the market requires faster delivery or higherquality, they are often not able to pick up the signal or to respond fast. Even if theydo they may waste scarce resources by targeting the wrong kinds of improvement.

• Type 2: firms with latent but ineffective demandThese firms recognise the challenge of change and the need for continuousimprovement but they are unclear about how to go about the process in the mosteffective fashion. Their internal resources are limited and often lack key skills andexperience in technology or manufacturing management, while their externalnetworks are also poorly developed. Most technological change comes from theirsuppliers and from observing the behaviour of other firms in their sector. Typical ofthis group is the treatment of symptoms of problems rather than their root causes.

• Type 3: firms with active but constrained demandThese firms have a well-developed sense of the need for change and they also have astrategic approach to the process of continuous innovation. They have a clear idea ofpriorities in terms of what has to be done, and they have some internal capacity (intechnical and managerial skills) to implement relevant changes and even to generatetheir own adaptations and modifications. However, while they recognise the need forchange and also know what has to change, their limitation is sometimes in knowingwhere and how to get hold of relevant new technology.

• Type 4: firms with effective demandThese firms are well aware of the need to change and they understand the strategicdirections they should take to remain competitive within their sector. They havedeveloped internal resources to generate their own changes, and they also have a highdegree of absorptive capacity to take on new technologies from outside the firm.Their networks are extensive and well developed so that they are aware not only ofrelevant technological opportunities but also of where and how to access eitherelements of knowledge they need for their own change activities or complete‘packages’ of technology to integrate more or less ‘ready-made’ into their operations.

Overly simple emphases on increased competition as both a necessary and sufficientcondition to stimulate technology development in industry implicitly assume that allfirms are Type 4 firms, ready and able to respond efficiently to whatever the marketenvironment throws at them. The reality is that Type 4 firms are the minority in anyindustrial sector. In early-stage industrialising economies, they are (by definition) aneven smaller minority, and the bulk of firms are distributed around Types 1 and 2,with SMEs particularly heavily concentrated in the former. For them, a prior learningprocess is needed before they can generate effective demand for technological changeand then seek out and implement effective technological responses to increasedcompetition. They need to learn about the need for technological change and aboutthe kinds of change that might be relevant.

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So, while increasingly competitive environments in industrialising economies likeThailand are often a necessary condition for deepening industrial technologydevelopment, and while that may also induce the distribution of firms to shift‘upwards’ on the Type 1 to Type 4 spectrum, the process of transition on this basisalone may very be slow.

1.4.3 Policy: Incentives and Support for Demand at the Firm-level

Government policies have a large influence on the demand side of the technologydevelopment process. They do so in three main ways: (i) by shaping the competitivepressures and opportunities faced by firms, (ii) by manipulating the prices of theirinputs and outputs, and (iii) by implementing support programmes focused directly onstimulating effective demand at the firm level – in effect, by acting directly to shift thedistribution of firms upwards on the Type 1 to Type 4 spectrum.

1.4.3.1 Policy and competitive pressures

The role of government in influencing the competitive environment of industrial firmsis well recognised. In the context of industrialising countries, this role has been mostvisibly exercised via trade policy, with many countries like Thailand substantiallyreducing during the 1990s the extent to which tariffs and other trade barriers hadlimited competition in the previous three or four decades.12

1.4.3.2 Policy and relative prices

The role of policy in altering the prices of inputs and outputs is also well recognised –for example through changes in exchange rates that affect the relative prices ofimported and domestic goods, or through the structure of tariff rates which may affectthe relative prices of different kinds of imports. However, the influence of such priceeffects on the demand for technological change has been less commonly highlighted,and a brief comment might therefore be useful.

A change in the exchange rate, for instance downwards, may generate significanteffects on the demand for technological change in two ways. On the one hand, therising cost of previously imported inputs to production may stimulate a search foralternatives or for locally sourced substitutes. In the case of machinery, for instance,this may prompt new ideas in some firms about the possibility of reverse engineeringand collaboration in technology development with potential local suppliers. On theother hand, increasingly profitable opportunities in export market may prompt newthoughts about possible ways of achieving quality improvements that were previouslynot considered important – i.e. moving some firms at least from Type 1 to Type 2.

Similarly, changes in relative tariff rates may prompt consideration of technologicaldevelopments that were previously not thought of. For example, an increase in theratio between tariffs on capital goods and final goods might stimulate some firms to

12 Other policy constraints on competition have also been important. For example, licensing

regulations over entry and capacity expansion, control over access to credit, or controls over firmexit, have severely limited competition in some countries. Conversely, in some situations (as inKorea during the 1960s to 1980s) where such regulations were substantial along with protectionisttrade policies, governments have brought intense pressure to bear on firms through the terms ofregulation and the threat of increased competition.

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consider possibilities for locally sourcing their machinery, and hence to explore theneed to engage in technology development. Conversely, a decrease in the ratiobetween tariffs on capital goods and on the components and sub-systems needed tobuild them may have the opposite effect – for instance, stifling effective demand forreverse engineering needed to develop to locally sourced machinery.

In some situations, these various price effects may run in contrary and perverse ways.For instance, devaluation may open up opportunities to explore local sourcing ofengineering services and industrial machinery. However, at the same time reductionin the tariffs on machinery but not those on parts and sub-systems may dampen thedemand opened up by devaluation. As we shall suggest in the next chapter, thisperverse combination appears to be throttling the emergence of demand for somepotentially important directions of technology development in Thailand.

1.4.3.3 Policy and the direct stimulation of demand (and supply)

Over the last 10-20 years, governments in a growing number of countries have takenincreasingly diverse and intensive efforts to foster and stimulate the demand fortechnology development among industrial firms. In many cases these have evolvedfrom earlier schemes that focused more exclusively, and sometimes ineffectively, ontrying simply to ‘push’ technology into firms. At the same time, demand stimulationhas been combined with, or led into, measures that support firms in actually acquiringor developing the technology they want.

Exhibit 10 lists an array of such schemes and programmes, with examples drawnselectively from eight European and North American countries. While several ofthese schemes are designed primarily to support Type 3 or 4 firms where demand fortechnology development is already active and/or effective, many are focused muchmore intensively on stimulating demand in Type 1 or 2 firms where it is absent,limited or only latent.

Somewhat paradoxically, while the development of these kinds of mechanisms tostimulate and support the demand for technological change is only in its rudimentaryinfancy in Thailand, there has been considerable effort over the last thirty years todevelop industry-oriented R&D institutes and other schemes to try and supplytechnology to industry. This is one aspect of the imbalance in the dual structure oftechnology policy referred to earlier in Section 1.2.5. In Section 3 we therefore givemore detailed attention to these kinds of mechanism and programme designed directlyto support technology development and acquisition in firms.

1.4.4 The structure of Industrial Production

Across industry as a whole, sectors differ in the intensity of their technologydevelopment activities. For instance, in the industrialised countries the R&D-intensity of production in the pharmaceutical or aerospace industries is very muchgreater than it is in the footwear or steel industries. Consequently, at an aggregatelevel, the demand for technology will differ between economies with differingstructures of industrial production.

However, that kind of cross sectional observation of difference does not translateeasily into policy prescription to secure change over time. It has nevertheless been

45

quite common to believe that it does. For instance, a significant part of the argumentfor import substituting industrialisation in the 1950s and 1960s was that theconsequent change in the structure of production away from primary commodities andtowards manufactures would bring with it the innovative activities associated withmanufacturing in the industrialised countries. In practice it did no such thing.Manufacturing production was re-located, but it was not inextricably linked toinnovative activity, and the latter was very slow to follow.

The same hope was associated with Mark II views about import-substitution. Theseidentified particular types of manufacturing as much more innovation-intensive thanothers, especially the capital goods industries, and among those the machine toolindustry in particular. Again it was hoped that import substituting measures toaccelerate investment in such industries would quickly bring with them the depth ofinnovative activity that was associated with those sectors in the industrialised world.Again, however, it rarely did. Production of capital goods, and even machine tools,expanded in countries like Brazil, India or Mexico, but most of the innovative activityin those sectors stayed behind in the industrialised world.

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Exhibit 10 Different modes of support for industrial technology development

Significance of Mechanism forALTERNATIVE PURPOSES AND MECHANISMS

Type 1Firms

Type 2Firms

Type 3Firms

Type 4Firms

EXAMPLES OF PROGRAMMES/PROVISION

1. Outreach or ‘missionary’ services where firms are approached by fieldagents or counsellors to help them recognise and identify needs for change ***** ***

IRAP, Canada; MEP, USA, TEKES, FinlandSteinbeis Foundation, GermanyCIM Centres, Switzerland

2. Benchmarking and other measurement/comparison processes whichenable targeting of technology development ***** ***** **

New Brunswick Research and Productivity Council(RPC), CanadaIRAP, Canada

3. Assistance with strategic development process enabling firms to create aframework within which change will be located (c.f. ‘Competitivemanufacturing’, ‘making IT pay’

***** ***** **CIM Centres SwitzerlandNew Brunswick RPC, CanadaTEKES, Finland

4. Support for Technology Search – where problem is not clearly articulated***** ***** **** **

Real services centres – e.g. CITER, ItalyCanadian Technology Network

5. ‘Technology Signposting’ – facilitating access where problem is clearlyarticulated ** *** ***** *****

Canadian technology Network

6. Facilitating access to funding for specific projects***** ***** ***** *****

TEKES, Finland

7. Access to demonstration projects***** ***** *** *

Technology Diffusion programme, AustraliaCIM Centres, Switzerland

8. Support for technology transfer – short-term access/consultancy*** *** ***** *****

CIM Centres, SwitzerlandCanadian Technology Network

9. Support for long-term technology transfer – e.g. Teaching CompanyScheme ***** ***** ***

CIM Centres, SwitzerlandReal services centres – e.g. CITER, Italy

10. Access to specialist equipment on an occasional basis – e.g. specialist testcentres ** ** *** *****

Real services centres – e.g. CITER, ItalyFraunhofer Institutes, Germany

11. Facilitating expereince-sharing and learning – e.g. Industry Forum‘Masterclass’ ***** ***** ***

Quality Support Network, GermanyOttawa-Carleton Manufacturers Network

12. Assistance with training and development***** ***** *** *

Real services centres – e.g. CITER, Italy

13. Major technical project/contract research** *****

Fraunhofer Institutes, GermanyMaterials and Manufacturing Ontario, Canada

14. Network access – links to expertise via database, directory listings, etc.** *****

DMOZ Open Directory Project, USAManufacturers Information Net, USA

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Then again in the early 1980s, belief in the idea that change in the structure ofproduction would bring with it a deepening of innovative capability and activity re-emerged, focusing this time on the electronics industry and its high levels ofinnovation-intensity in the industrialised world. Efforts to accelerate the growth ofelectronics production via Mark III import substitution mechanisms (as in Brazil orIndia, for instance) once again resulted in the disconnection of production fromtechnology development and innovation. More export-oriented mechanisms toexpand electronics industries had mixed results. In some cases (as in Ireland orMalaysia, for instance), local technology development capabilities were graduallyadded to production capabilities, and slowly deepened. But this gradual re-connectionof production and innovative activity took very much longer to build up than had beenexpected. Also, it required considerable policy support and stimulus. In othersituations, there is little sign that this gradual re-connection has proceeded very far(e.g. in Mexico).

Now, once again, one hears the same hope that change in the structure of productionwill accelerate the technological transition of industrialising economies. The focusfor this hope has changed, however. No longer is the vehicle for transition simplyelectronics and information technology in general. It is particular parts of theelectronics or IT industries that are expected to do the trick. For example, since thewafer fabrication stage of electronics production is often closely associated withparticularly intensive innovative activity in the industrialised countries and in NICslike Korea and Taiwan, it is sometimes argued that entry into this stage of electronicsproduction will rapidly bring with it the associated innovative activity. Again,however, it needs to be borne in mind that, just as in the case of machine toolproduction of in the 1970s, the production of semi-conductor wafers in the 2000s isdisconnectable from the innovative activity with which it is associated in some othersituations. The two do not automatically go together. Similarly, the use andoperation of IT systems in the ‘new economy’ may be an extremely important changein production activities, and one that can make a substantial contribution to increasedcompetitiveness in some industries. But, as with the growth of the ‘new(manufacturing-based) economy’ of the industrialising world in the 1950s and 1960s,the growth of the ‘new (IT-based) economy’ of the 2000s will not automaticallycarry with it a deepening of innovative capabilities and activities in industrialisingeconomies like Thailand.

However, having emphasised the non-automaticity of the link between change in thestructure of industrial production and the deepening of technology developmentactivities, it is also important to bear in mind one important way in which the two maybe linked – via the rate of growth of production. Entry into industries that aregrowing fast in the international economy, opens greater opportunities for deepeninglocal technology development capabilities, and relatively new industries are typicallyalso relatively fast-growing. However, opportunities need to be turned into practicalrealities, and that takes the argument back to the preceding point about thesignificance of policy incentives and support mechanisms that are directedspecifically at the deepening of technology development capabilities in industrialfirms.

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1.5 The Technological Role of TNC Subsidiaries

The rapid acceleration of foreign direct investment by transnational companies(TNCs) over the last decade or so has pushed questions about the technological role ofTNC subsidiaries to the forefront of policy discussion about technology and industrialdevelopment.13 These questions centre on two broad issues: (a) the extent to whichTNCs undertake in their subsidiaries relatively knowledge-intensive and technology-creating activities rather than just routine technology-using operations; and (b) theextent to which knowledge and skills built up in those activities ‘spill over’ to otherfirms and local organisations in the host economy.14

1.5.1 The location of ‘technology-intensive’ activities in TNC subsidiaries

This issue is most commonly discussed in terms of R&D activities. The centralquestion is then about the extent to which TNC subsidiaries undertake this particularsub-component of overall technology development activity. Simple answers aredifficult to draw because the practice varies widely between different circumstances,and it can change substantially over time in given situations. In some circumstancesTNC subsidiaries may indeed contribute very little to the total technologydevelopment effort in a country, fitting quite closely the ‘screw-driver plant’ epithet.In others, however, they may be major actors – as illustrated by the very large R&Doperations of foreign pharmaceutical companies in the UK, the large development anddesign activities of US automobile companies in Europe or, conversely, the largebiotechnology R&D operations undertaken in the US by EU companies.

More generally, there is evidence that the R&D activities of TNCs are becoming morewidely dispersed among the OECD countries, and hence becoming an increasinglyimportant component of the technology development systems of many of thosecountries. As yet, however, only a quite small proportion of this dispersion of R&Dseems to be spreading into industrialising countries. Nevertheless, it is a significantcomponent of the total technology development system in some cases (e.g.Singapore), and in other countries (e.g. Brazil) it is becoming increasingly importantin the case of some companies (e.g. Fiat or Ford), though not in others even in thesame industry (e.g. Volkswagen).15

But again, the significance of this TNC role in national technology developmentsystems is only very partially reflected in data about the location of R&D activities.Although systematic information is lacking, fragments of evidence suggest that ‘non-

13 In some situations, this is not a new debate but a return to old issues that were extensively explored

in the 1950s and 1960s, both in the industrialised countries (especially in Europe) and in developingcountries (especially in Latin America).

14 A third issue is also commonly discussed: the extent to which increased competitive pressurearising from the presence of high-productivity TNC subsidiaries stimulates more intensified effortsby local firms to raise efficiency. Although this question does not necessarily involve issues aboutthe movement of knowledge and skill from TNC subsidiaries to local firms, it is sometimes alsodiscussed under the ‘spill-over’ heading.

15 Personal communication from Sergio Queiroz (University of Campinas, Brazil; and currently aVisiting Fellow at SPRU), reporting on the findings from a recent study of technology developmentactivities in the Brazilian automobile industry.

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R&D’ engineering activities contributing to technology development are much morewidely dispersed among subsidiaries of the TNCs than are their R&D activities.Moreover, as a matter of particular significance for this study, there is at least someevidence that this dispersed local development of ‘non-R&D’ technological activitiesdoes spread to industrialising countries where TNC subsidiaries typically build upquite substantial design and engineering capabilities to contribute to technologydevelopment. For instance, between 1969 and 1980 in Korea the subsidiaries of TNCslike Westinghouse, Unisys, Allied Signal, Chevron, Hoechst, and Fairchild accountedfor a substantial proportion of Korean patents taken out in the US. However, thesesubsidiaries typically had no formal R&D activities in Korea, and development of theinternationally novel technology was undertaken in their production engineering anddesign activities.16

However, we would again emphasise the variable significance of these technologydevelopment activities across different circumstances. In part this reflects differencesbetween companies in strategies for the international location of marketing,production and technology development. However, it is important to note threeinfluences on those strategic decisions about the location of technology development.

• Changing corporate strategies. It used to be the case that corporate strategiestypically rested on a basic presumption, seldom seriously questioned, that R&Dwas best located close to central operations in the TNCs’ home countries.Although some R&D activity was located elsewhere, this was relativelyinsignificant except for a few companies in a few locations. Over the last 10-20years however, this has changed quite substantially. Competitive pressures inincreasingly global markets have brought this presumption into question, andincreasing shares of corporate R&D and associated technology developmentactivities have been internationally dispersed to reflect cost and marketadvantages.17

• The local context of subsidiaries and joint ventures. An important factorinfluencing decisions in this new strategic environment is the availability ofrelevant skills and capabilities in particular locations. These are not just skills andcapabilities for production. They are more specifically skills and capabilities fortechnology development. Locations that have built up substantial reservoirs oftechnology development skills and experience, along with associated training andtechnology institutions and supportive technology policy systems, haveadvantages in attracting TNC technology development activity.

• Negotiation processes within the corporation. Decisions about the location oftechnology development activities within the dispersed operations of TNCs arenot simply the result of top-down, decision processes within monolithic corporatestructures. They are very often the result of negotiation processes betweendifferent parts of heterogeneous corporate structures, with subsidiaries makingclaims within those negotiations for resources and mandates to extend and deepentheir technology development roles and activities. In effect, a subsidiary inlocation X is involved in a constant process of competition for these resources and

16 Jae-Young Choung (1998) pp. 113-114.17 At the same time, there has also been concentration of some hitherto dispersed activities for the

same reasons, though greater concentration does not always involve concentration in homecountries.

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mandates with sister subsidiaries in locations Y and Z. Within that intra-corporatecompetition, advantages lie with the subsidiaries that can demonstrate not onlytheir own in-house capabilities. They also lie with those that can demonstratestrengths in their particular technological context – in the pool of available skills,the strengths of local institutions and the support provided by local policyregimes.

One implication of these issues is that the location of TNC technology developmentactivities is, at least in some degree, amenable to influence by policy regimes inparticular locations. It is doubtful if government efforts to influence specific,individual corporate decisions of this type will be effective. The process is muchmore incremental and diffuse than that. It seems to be much more the case that thecumulative weight of relatively small decisions by TNCs can be influenced by astable and pervasive policy regime that builds environments and ‘climates’ that areseen to be advantageous for technology development.

1.5.2 Spill-overs of knowledge and skill

Surprisingly little is known about the significance of the external benefits arising fromthe technology development activities of TNC subsidiaries. However, they seem tohave been important in some of the more industrialised countries like Ireland whereTNC subsidiaries appear to have played a major role in increasing, not just using, thepool of higher level skills and experience available to a rapidly expanding industrialsector.

This role also appears to have been important in several Asian industrialisingeconomies. For instance, a 1987 study in Taiwan examined the role of former TNCemployees in a sample of 161 firms. These ex-TNC personnel had evidently madesignificant contributions to strengthening management, product design and marketingcapabilities: 96 per cent of the surveyed firms considered this was so with respect tomanagerial technology; 85 per cent with respect to the improvement of productdesign; and 76 per cent with respect to marketing technology. (Hou and Gee, 1995, p.389). More recently in the Malaysian electronics industry, flows of people who hadacquired product design and process engineering experience in TNCs appear to havecontributed important knowledge inputs to technology development in supplier andother firms.18

1.5.3 Questions about policy and the Technological Role of TNCs

It seems increasingly important to see the role of industrial technology policy ashaving three components with respect to inward foreign investment:1 measures aiming to influence TNC decisions about the location of investment in

industrial and service operations;2 measures aiming to influence TNC decisions about the extent and ‘depth’ of

technology-intensive activities subsequently undertaken in and around thoseoperations;

18 Preliminary results from an ongoing SPRU DPhil study by Norlela Ariffin, Universiti Tenaga,

Malaysia.

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3 measures aiming to influence the extent to which knowledge and experiencearising from those activities subsequently ‘spill over’ to local firms and otherorganisations.

(i) The location of investmentMany countries have long had policy measures designed to address the first ofthese aims: attracting inward investment in production activities. Typically thesehave consisted of various tax incentives that reduce the costs of production(accelerated depreciation, exemption from tariffs on imported inputs, reduction incorporate income tax, etc.). Increasingly, however, issues to do with ‘technologypolicy’ (broadly defined) play an important role in determining the attractivenessof alternative locations. These issues are about such things as (i) the availabilityof high-level skills; (ii) the responsiveness of local technology institutes, trainingcentres and universities to the needs of inward investors; and (iii) the moregeneral ‘climate’ for the absorption of technology. It is striking, for instance, thatissues such as these play a large role in the composition of the increasinglyprominent and influential indicators of national ‘competitiveness’ compiled bybodies like the World Economic Forum.

(ii) The extent and ‘depth’ of technology- intensive activitiesMuch less attention has been given to policy measures designed to influence

the extent and ‘depth’ of technologically intensive activities undertaken insubsidiaries. In the past, policy-makers have tended to assume that this waslargely pre-determined by the strategies of TNC parents. Consequently, it wasthought, once decisions had been made about the location of investment inproduction facilities, the subsequent pattern of local technological activity wasalso determined. That pattern might change over time as subsidiaries ‘deepened’their technological capabilities, but the rate at which that happened was fixed bythe strategy of the individual TNC; and, since that was determined at corporateheadquarters, policies in particular countries would have little influence.

As we have suggested above, however, even if that was once an appropriateperspective, it probably no longer is. The rate at which subsidiaries and jointventures shift from the basic use and operation of given technologies to thedevelopment of new technology, as well as the rate at which they deepen thatcreative technology development activity, appear to be variables that can beshaped by local policy. The significance of this has not been widely appreciated,and the nature of effective policy measures has not been clearly identified.Nevertheless, the issue has come to play an increasingly important role in thepolicy regimes of ‘peripheral’ regions of Europe like Wales or Ireland, and inindustrialising countries like Singapore. As we shall highlight later, our owndiscussions with TNC subsidiaries in Thailand suggest that this should be givenconsiderable emphasis in the country’s technology policy regime.

(iii) Spill-overs’ to local firms and other organisationsEven less attention has been given to policy measures designed to address the lastof the three aims noted above: influencing the extent to which knowledge andexperience ‘spill over’ from TNC activities to local firms and other organisations.Again, there has been a tendency in the past to presume that this is just anotherfixed parameter in the system – given a particular scale of inward investment in

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an industry, the ‘spill-over’ effects will also be given. However, this seems to bemisleading. For a start, the spill-over effects depend on the scale and depth of thetechnological activities undertaken by the TNC subsidiary in the first place; and,as we have suggested, that seems to be highly variable. In addition, the extent towhich internally accumulated capabilities do actually spill-over into the externaleconomy also seems variable; and, as suggested by initiatives taken in Singaporefor instance, that variability may be influenced by policy. Again, our owndiscussions in Thailand suggest that this is an opportunity that could be exploitedby imaginative approaches to policy – an issue we will explore later.

If policy about inward FDI in host countries concentrates on only the first of thesethree issues, it addresses only about one-third of the overall task of extracting thegreatest possible technology-related benefit from TNC activities. In practice,however, it probably addresses only about one- quarter of the task because anotherissue seems to be increasingly important, especially in the S.E.Asian region: theduration of TNC location in host countries. The overall magnitude of technology-related spill-overs arising from inward FDI depends very heavily on how longparticular TNC operations remain in place generating whatever may be those localgains. In an era of increasingly footloose capital,19 simply attracting TNCs to startoperations in a host location may yield benefits for only as long as the initial incentivepackages (e.g. five-year tax holidays) remain in force. How long those operations stayin the host economy will depend on a host of other factors influencing the extent towhich they become ‘embedded’ into a local structure of suppliers, customers andknowledge/skill networks. Aspects of industrial technology policy have an importantinfluence on all aspects of that ‘embeddedness’.

Finally, it is important to consider the broad perspective within which policy isdeveloped and implemented. In an era when decision making in TNC organisationswas much more centralised in headquarters, and when the main issue for host-countrypolicy was seen as one about attracting initial investment on terms that offered thegreatest benefit at the least cost, it may have been appropriate to approach policywithin a ‘host country versus TNC’ perspective. We have suggested, however, thatsuch a perspective may now be much less effective. In an era when decision-makingabout the roles and functions of TNC subsidiaries is much more decentralised within -and negotiated across - the global corporate structure, and when the focus of policyencompasses issues about increasing both the embeddedness of local subsidiaries andthe knowledge/skill spill-overs they generate through their lifetime, a totally differentapproach to policy-making and implementation is likely to be appropriate. A broadperspective that sees policy as a vehicle for providing host country support forsubsidiaries in negotiating their positions in global corporate structures will probablybe much more effective than one which remains rooted in the conflict-centredperspectives of the 1960s.20

19 The northerly migration of large parts of the disk drive industry from Singapore via Penang to

Thailand illustrates the potentially transient nature of at least some types of inward FDI.20 This obviously does not imply that underlying differences of interest do not exist between TNCs

and host country governments. It is a point about the means that are likely to be effective insecuring the interest of the latter over the longer term.

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1.6 Ireland 1950 – 2000: A Case Study of the Interacting Evolution ofIndustrial and Technology Policy

1.6.1 Thailand and Ireland: Some Commonalities and Differences

This section briefly reviews the inter-linked roles of industry policy and technologypolicy in the dramatic transition of the Irish economy since 1950. We believe the caseof Ireland may be particularly illuminating in debate about these areas of policy inThailand. Some of the ‘starting conditions’ in Ireland in the 1940s - 1950s and inThailand in the 1950s - 1960s were remarkably similar; and some of the steps takensince then also have common features. However, there are also many differences inthe way these two areas of policy have evolved over the fifty years, and we suggestthat this combination of similarity and difference should shed interesting light on theissues that now need to be urgently addressed in Thailand.

Fifty years ago, Ireland (like a number of other countries on the European periphery –Norway, Finland, Portugal, Greece – and also like Thailand) had still barely enteredthe manufacturing age. Income per head was very low, and the economy wasdominated by the primary sectors, especially agriculture and fishing. Like Thailand inthe 1950s and 1960s, Ireland pursued an Infant Industry policy from the 1930s to the1960s, in the expectation that import substituting industrial growth would beencouraged. In the absence of industrial ‘motors’ such as large export-orientedmanufacturers, however, the policy mainly enabled the continued fragmentation of theeconomy in small, inefficient productive units, leading to high domestic prices andlittle growth – a situation realised in Thailand by the 1970s.

From that unpromising start, Irish income per head has moved from being among thelowest in Europe 50 years ago to the EU average today, with much of the gap beingclosed in the past 20 years. In other words, like Thailand, Ireland in its phase of post-import substituting policy has followed a path of very rapid growth. This has beenlargely export-oriented; it has also involved very substantial inward investment byTNCs, especially US multinationals, and this necessarily means that the fortunes ofthe Irish economy are increasingly linked to those of the US economy – a situationshared by Thailand, though with the Japanese economy also playing a similar role.21

At the same time, however, and this is one area where difference between the twocountries is striking, the Irish growth path has also been characterised by a majortransition in the structure of its technology development system. Having beenrelatively small and located largely in public institutions, technology developmentactivities and capabilities grew rapidly and became substantially rooted within thegrowing body of industrial enterprises.

Bearing in mind that R&D is only the tip of the technology development iceberg,aspects of this transition are indicated in Exhibit 11. In 1997, R&D expenditure wasequivalent to only 0.77 per cent of GDP, and only one third of R&D was performed

21 The Japanese economy actually plays a dual role. In some product markets it acts as an

intermediary between the Thai and US economies; in others it acts independently as an influenceon the Thai economy.

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by business enterprises. The other two-thirds was undertaken in public institutions –nearly 50 percent in government organisations and about 15 per cent in universities.

Exhibit 11 Structural transition in R&D: Ireland, 1977-1997

Total R&D R&D Performed R&D by Foreign ManufacturingExpenditure by Business Affiliates as a R&D as a

(GERD) Enterprises as a Proportion of All Proportion of allas a Proportion Proportion of Manufacturing Business

of GDP GERD R&D Enterprise R&D

(%) (%) (%) (%)

1977 0.77 32.2

1981 0.75 43.6

1984 0.77 49.3 63.1 95.0

1989 0.84 58.3 93.0

1993 1.18 62.3 68.0 86.9

1997 1.41 69.4 86.8

Ratio1997/1977

1.8 2.15

Source: OECD, Main Science and Technology Indicators (various years)

Twenty years later in 1997, the R&D/GDP ratio was almost twice as large, and almost70 per cent of it was performed by business enterprises. The share performed inHigher education institutions had increased a little to nearly 20 per cent, and the shareperformed by government organisations had dwindled to 7 per cent.

This structural transition had not occurred despite the large role of inward foreigninvestment and the technological behaviour of TNCs. It occurred largely because ofthat inward investment and TNC behaviour. Already in the early 1980s, foreignaffiliates of TNCs accounted for nearly two-thirds of all manufacturing R&D (andthat manufacturing R&D accounted for almost all business enterprise R&D). By theearly 1990s foreign affiliates accounted for a slightly larger proportion of the rapidlygrowing amount of all manufacturing R&D (and manufacturing R&D still accountedfor nearly 90 per cent of all business enterprise R&D).

1.6.2 The Evolution of Industry and Technology policy

The successes of economic and industrial development policy in Ireland make senseagainst the background of National Innovation Systems thinking. The governmentundertook multiple actions in parallel in the domains of both ‘industrial’ and‘technology’ policy, and its was the interaction between these two paths of policywhich played a large part in enabling the economy to restructure.

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Legislative changes began to be made as early as 1958, which were to form the basisfor abandoning the Infant Industry approach, though it took time for the policy systemto accept the needed change to export-led growth. By the late 1960s, it was clear thatthe import substitution approach had failed. During the 1970s and 1980s, Irelandinvested massively in inward investment, providing subsidised factory premises (viaIDA, the Industrial Development Authority, and Shannon Development), trainingworkers (via FÁS, the national training agency) and – above all – by grantingextended tax holidays.

Ireland chose to enter the European Common Market (precursor to today’s EuropeanUnion) in 1973, at the same time as the UK. (Given UK entry and the very close linksbetween the UK and Irish economies, Ireland had little effective choice but to join aswell.) Tariffs were already coming down, as Infant Industry policies were beingabandoned, but joining the Common Market meant that Ireland’s remaining tariffbarriers had to be dismantled with respect to other member states. It also placedIreland within Europe’s tariff barriers, and this – coupled with Ireland’s low wagesand English-language advantage – was to prove helpful in the new phase of industrialpolicy, which focused on inward investment. The accident of timing meant that theinward investment attracted had a high electrical and electronics content (since thesewere the growth industries of the period) as well as pharmaceuticals and that many ofthe multinationals attracted were American. (The sizeable number of the Irish-American population was probably also a helpful ‘soft’ factor.)

While initially the factories attracted to Ireland were very much ‘screwdriver plants’,these companies and industries became increasingly open both to local supply and –over a longer period – to higher value-added activity in the Irish plant. Supplierdevelopment programmes funded by the IDA were one factor in helping embed theforeign firms in the local economy. However, a series of educational andtechnological policies have played at least as important a part – creating the levels ofknowledge and capability needed in both the multinational and the local companies’work forces.

In common with other countries, Ireland expanded its higher education system fromthe 1960s, though with a strong focus on first degrees. Postgraduate training had littlepriority in Ireland before the late 1990s. Regional Technical Colleges (now calledInstitutes of Technology) were established in several of the larger towns in the late1960s, to supply the crucial craft and technician level skills in technology andbusiness needed for economic development. Unlike the universities, which have astrong liberal arts tradition as well as working in science and technology, theTechnical Colleges did not provide arts and humanities training, focusing sharply on‘economically useful’ skills. Two of the colleges were later up-rated to universities,as the demand for graduate-level technical and business skills grew, forming Limerickand Dublin City Universities.

Once the beginnings of a multinational electronics industry were in place, theNational Microelectronics Research Centre was established at University College,Cork. Leaning heavily on EU funding – as did most technical research in Ireland atthe time – NMRC has grown tenfold from its original 20 staff and provides a usefulpart of the research and training infrastructure serving the electronics multinationalsand – increasingly – the indigenous companies in the same field. NMRC does not, to

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any meaningful extent, transfer inventions to industry for commercialisation. (Nor,indeed, does any other part of the research system). It does now do comparativelybasic research – for example for Intel.

During the 1980s, the amount of EU funding available for university and companyresearch grew dramatically as the Union set up its Framework Programmes. Thisprovided incentives for reorientation of university efforts towards industrially relevantissues. (The Framework Programmes are primarily instruments of industry policy,not science policy).

From the end of the 1980s, a number of ‘Programmes in Advanced Technology’(PATs) were set up. These are generally described as ‘technology transfer’programmes, but only BioResearch Ireland can be said to fulfil this function in thetraditional sense of transferring knowledge from the research sector directly intocommercial production. BioResearch has had some successes with biotechnology testkits and similar small-scale innovations. The Advanced Manufacturing TechnologyPAT has in practice functioned as a problem-solving support service to both local andmultinational plant in Ireland, tackling questions such as logistics, choice ofmanufacturing technology, and so on. In many cases, it has strengthened the positionof Irish managers in the multinational plant, helping them achieve and demonstratehigh levels of performance in competition with their companies’ plant in othercountries. Other PATs have provided a mixture of more academically based problemsolving and training. In the case of the telecommunications PAT there was littlepretence that the programme was other than an extended postgradiuate trainingprogramme, to satisfy the huge demand for software and telecommunicationsengineers that arose in the 1990s as these industries took off in Ireland.

Irish spending on scientific research was minimal up to the late 1990s. Excludingmedicine, the total available for project and postgraduate grants (that is, the equivalentof the US National Science Foundation funding) to the entire university system in1996 was under £I 5 million. (About US$ 7.5m, or 100m Baht.) From 2000, a £2.2billion investment programme has been launched to strengthen Ireland’s scientificbase. Much of the investment is going into IT and biotechnology, which wereprioritised in the national Technology Foresight exercise. Investment is focused in afashion perceived to improve the enterprise environment and to be industriallyrelevant. While the linkages with industry will often be indirect – not least, throughthe transfer of manpower over time – this is not ‘science for its own sake’ but sciencewith an economic purpose.

Exhibit 12 tracks the approximate timing of the events outlined in this shortdescription.

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Exhibit 12 Key policy actions in Irish industrial development

1950s 1960s 1970s 1980s 1990s

Infant Industry Policy

Common Market/EUmembership

Major FDI focus

Expansion of technical& business education

Expansion of universityeducation

IIRS etc support tocompany capabilities

‘PAT’ ‘technologytransfer’ programmes

Investment in science

Direct foreign investment continues to be a major and valued component of the Irisheconomy, even if the desired rapid growth in the indigenous sector has now begun.Promoting FDI was, nonetheless, massively expensive. There are few official figures,and a considerable degree of secrecy, about the overall cost to the state per sustainednew job as a result of the FDI policy. By 1990, the national debt was as big asIreland’s GDP while unemployment remained in the 10 – 20% range, which isextremely high by European standards. Personal tax rates were (and are still) highcompared with the UK, and wages were lower. The main economic payback todevelopment policies has come during the 1990s, as the economy has grown rapidly.GDP per head in Ireland is now higher than in the UK (at purchasing power parities).

The Culliton Committee produced a landmark report in 1992, which marked a shift(which was already well established) in the official view of FDI. While themultinationals would remain significant, it was seen as increasingly important tofocus on the development of indigenous industry as the motor for further economicdevelopment.

1.6.3 Support for Capability Development in Industry

The policies for technology and science outlined above would have made no sense inthe absence of a parallel set of activities dedicated to raising the more routinetechnical and business skills of industry. In the late 1960s, the Institute for IndustrialResearch and Standards grew rapidly to some 400 people. It provided not onlyneeded standards and metrology infrastructure and certification but also a growingrange of technical services to industry. These included testing, analysis, consultancy,information, advice and formal training. IIRS served both local and multinational

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companies. The range of services was gradually expanded, and by the late 1980s itincluded a number of ‘soft’ programmes (such as quality, technology audits,manufacturing consultancy and human resource development). As European Unionstructural funds22 became available from 1989, so it was possible to expand theseservices and to fund the increased emphasis on technology transfer and servicesreferred to earlier. (It is perhaps noteworthy that the current expansion of science isbeing funded from national resources, reflecting the much greater relevance of scienceafter a period of economic and industrial catching up).

Exhibit 13 shows the portfolio of company supports provided by the state in Irelandin 1997. It reflects the broad development strategy described above, and encompassesvarious kinds of start-up supports, business advice, training and mentorship,technology supports and other kinds of support to learning.

The state makes this portfolio accessible through regional offices, where ‘clientexecutives’ are responsible for monitoring a list of potential customers, for selectingthose that want to grow and have apparent potential to do so, and for helping themexploit the support system in order to achieve growth. Different supports cater forcompanies at different stages of development.

1.6.4 Policy Institutions: Changing Roles and Structures

The institutional history of Ireland’s industrial and innovation policy has involved aseries of reorganisations (Exhibit 14). In the 1960s, the Institute for IndustrialResearch and Standards (IIRS) was the state’s main agency in industrial technology,working with standards and various industrial extension services. The National Boardfor Science and Technology (NBST) worked in parallel with research and sciencefunding. The two were merged in 1988, as it became clear that research andinnovation needed to be tackled together in order to affect economic development.The merged organisation was called Eolas (‘knowledge’ in Gaelic), and offered awide range of capability- and knowledge-building support to industry, as well asproviding the small amount of ‘dual support’ funding for university research thatIreland invested in those years.

In parallel, the Industrial Development Authority (IDA) was working with foreigninvestors, offering factory sites, training packages and so on and marketing Ireland asan attractive location (not least, in the context of the long tax holidays offered toinward investors). The IDA also had responsibility for the economic development ofindigenous industry, offering factories, grants, loans and various ‘soft’ supports suchas the supplier development programmes, which network inward investors to localsuppliers.

The growing realisation in European industrial development policy that innovationwas a central process and that it could not be treated in isolation from business meantthat by the early 1990s, EOLAS and the IDA’s activities were beginning to overlap.For example, EOLAS ran a manufacturing consultancy service offering subsidisedhelp to companies based in Ireland. At the same time, the IDA operated a ‘World

22 These are essentially financial transfers from the richer parts of the Union to the poorer regions, and

are intended to establish infrastructures and services necessary for economic and industrialdevelopment

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Class Manufacturing’ programme, using foreign consultants to transfer in goodmanufacturing practice. In 1994, the IDA was split in two. The part of IDA whichfocused on indigenous industry was merged with EOLAS, to form Forbairt. Thistherefore became a ‘full service’ provider of research, innovation and economicdevelopment support. Today’s IDA – renamed the Industrial Development Agency -handles inward investment and is strongly focused on international activities. A newagency – Forfás – was created to do strategy and evaluation work.

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Exhibit 13 Irish Government: Company support portfolio, 1997

Start up and expansionEnterprise preparationEnterprise developmentFeasibility grants

Management capabilityCompany developmentCapability buildingMentorManagement development grants

Marketing/NetworkingNational linkageSupplier developmentConstruction linkageMembership schemesInnovation Relay Centre (IRC)

TechnologyTechstart/TechmanInventions serviceTechnology Transfer and PartnershipR&D grantsMINT

Programmes in Advanced TechnologyAMT IrelandBioResearch IrelandMaterials IrelandOptronics IrelandPower electronicsSoftwareTeltec Ireland

OperationsWorld Class ManufacturingNational Technology AuditQuality managementRetex grants

Stand Alone Grants/EquityCapital grantsEmployment grantsTraining grantsEquity

ClientExecutive

Irish BasedCompanies

Diagnostics anddevelopmenttrajectories

‘Owns’ the clientfirm

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Exhibit 14 The changing structure of Irish business and innovation support institutions

FÁS IndustrialTraining Authority

IIRS Institute forIndustrial Researchand Standards

NBST NationalBoard for Scienceand Technology

EolasResearch andindustrial extension

Forbairt

ForfásPlanning andevaluation

Bord an TrachtalaIrish Trade Board

IDA IndustrialDevelopmentAuthority

IDA IndustrialDevelopment Agency

Enterprise Ireland

FÁS IndustrialTraining Authority

1988 1994 1998

Services toindigenous

industry

Services to inward investors

Services toindustry

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In 1998, Enterprise Ireland was created. This involved merging Forbairt with BordAn Trachtala, the Irish Trade Board, and with the small part of FÁS (the IndustrialTraining Authority) that had provided in-company training to the employed. Theremainder of FÁS continues to do its historical job of addressing structuralunemployment by providing training to the unemployed. This was something of a‘tidying up’ reform. The architects of the 1994 changes had originally envisagedincluding the trade board in Forbairt, in order to link company capabilities tointernational markets, but were frustrated in their aims.

1.7 Benchmarking Highlights for Thailand

The main messages to carry forward from this chapter are quite simple.

• In industrialised countries business enterprises are the core of industrialtechnology development systems. They themselves constitute the ‘supply side’for most of the technology used by industry.

• A large part of the process of technology development does not involve R&D. Itis generated in an underlying structure of design and engineering activities.

• Firms draw large proportions of the knowledge inputs to their own technologydevelopment from other firms. Those knowledge-centred interactions amongfirms are a critically important part of the whole system.

• Several of the more technologically advanced industrialising countries, especiallyin Asia, have moved through a fundamental transition during which this firm-centred structure of innovative activities and capabilities has been built up quiterapidly from a preceding phase when most scientific and technological capabilitieswere located in public institutes.

In addition, the experience of Ireland provides a country-specific set of benchmarksagainst which to set the review of Thai experience in subsequent chapters. Keyfeatures of the parallel Irish experience are as follows.• Creating indigenous company capabilities in technology and business at

intermediate (technician) levels is a vital prerequisite to enable companies tomove on to higher levels of development.

• Willingness to devote resources to company-based programmes is necessary inorder to develop technological and business capabilities in industry.

• Multinationals provide an excellent means to transfer in technological andmanagerial capabilities, provided policies are pursued which actively engage themin the local economy. Nationals working in local MNC plant need support inraising their performance, so as further to embed the company in the localeconomy and infrastructure.

• Policies which create technological manpower, but which do not then trap thoseresources in the public sector research system, enable the industrial system torecruit key skills to help build their technology development activities. Therehave been limited opportunities in postgraduate and research training in Irelanduntil the recent past.

• Scientific research and training is important once the economy reaches the level ofsophistication required to use large amounts of scientific manpower, but may beless necessary at earlier stages of development.

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• ‘Technology transfer’ activities are fundamentally about technological learning inindustrial enterprises, not about finding inventions in the research system andtrying to commercialise them.

• The institutional structure for delivering support for technological learning andcapability development in industry needs to evolve over time to take account ofchanging circumstances, as well as growing experience in developing andimplementing policy.

• Emphasis in the substance and aims of policy also needs to evolve in order tomeet differing priority needs at different stages in the process of growth andstructural transition.

• Evolution in both policy and policy institutions appears to be effective ifmechanisms to implement the specifically ‘technological’ aspects of policy areintegrated with mechanisms dealing with broader business and economic aspects,with the whole ‘package’ being shaped and guided by changing economicpriorities and strategies.

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2 The industrial technology development system in Thailand:the business enterprise core

2.1 Introduction: The Structure of the Chapter

This is the first of three chapters that review aspects of the industrial technologydevelopment system in Thailand. It concentrates on what we identified in theprevious chapter as the core of the system –i.e. the part that is located in industrialenterprises and the innovation-centred interactions between them (see Exhibit 2). Inparticular, it addresses the following issues:• the overall scale and structure of the system, emphasising how the evolution of

both these features appears to lag behind the patterns developed in othereconomies in the region (Section 2.2);

• the capabilities already built up, and the nature of the capability accumulation‘thresholds’ now being faced, suggesting that these are not in the area of R&Dcapabilities that attracts most policy attention (Section 2.3);

• the patterns of collaborative technology development and knowledge flowbetween firms in industry clusters and value chains, suggesting that thesedimensions of the system are potentially much more important than has beenrecognised except by a few academic and industrial groups (Section 2.4);

• the role played within the technology development system by TNC subsidiarieslocated in Thailand, arguing that this is both much greater than commonlysuggested and potentially much more flexible than commonly assumed (Section2.5).

2.2 The Scale and Structure of the Thai System in its Regional Context

Available information permits only a very partial assessment of the scale and structureof industry-oriented technology development capabilities and activities in Thailand..It appears that in the mid-1990s agricultural R&D accounted for the largest proportionof total R&D (around 50 per cent), and health-related R&D accounted for about 15-20percent. R&D that was specifically identified as being concerned with ‘industrialdevelopment’ accounted for only about 8 per cent, but this excluded R&D concernedwith the energy, transport and telecommunications industries. So, perhaps around 15-20 per cent of total R&D might be described as ‘industry-oriented’.

But then, as we stressed in the previous chapter, data about R&D provides a basis fordescribing only the tip of the technology development iceberg. As yet, there havebeen no systematic surveys of a broader range of technology development activitiesand capabilities along the lines, say, of the EU ‘Innovation Surveys’ and other similarsurveys based on approaches like those outlined in the Oslo Manual. Consequently inthis section we rely very heavily on data about R&D, complemented where possibleby slightly broader types of information. We do so in two slightly different ways.

First, drawing primarily on available statistical information, we will highlight inSection 2.2.1 features of the R&D component of the technology development systemin Thailand. This picture will suggests not only that this component lags substantially

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behind the contemporary position of other countries in the region. More strikingly,the size and structure of the technology development system in Thailand in the early1990s appeared to be lagging behind other countries like Korea many years earlierwhen they were at similar stages of economic development.

Second, in Section 2.2.2 we will draw on more qualitative information from a varietyof sources, including our own study, in order to throw a little more light on recentchanges in the country’s industrial technology development capabilities. This morequalitative section suggests that, despite its low current level, industrial technologydevelopment in the country may be starting to accelerate into the early stages of thestructural transition discussed in the previous section of this chapter.

In an international competitive environment where success depends increasinglyheavily on innovative activity and its underlying knowledge base, the massivelylagging scale and limted structural change in the country’s R&D system calls forurgent, radical and very large-scale change. Without that change, industry will beable to play almost no role in raising income levels and living standards in thecountry. Indeed, falling real incomes for large parts of the population may be a morelikely outcome.

The uncertain signs of incipient change in the basic features of the technologydevelopment system provide a basis for only a small amount of greater optimism inthis gloomy picture. Even if these changes are actually taking place, they are doing soat a very low level. At the same time, they are doing so in a context where the limitedintensity of technology development reflects a pattern of behaviour that has beendeeply embedded in Thai industry over several decades. This is likely to change onlyvery slowly. Consequently, while the signs of change may encourage one to thinkthat new policy initiatives might be able to ‘work with the grain’ of emerging change,they also suggest that minor tinkering with policy for only a year or two will probablyachieve little.

2.2.1 Thailand as a Regional Laggard in Industrial Technology Development

Although systematic information about technology development in Thailand isconcerned only with the R&D component of the system, it helps to identify severalimportant features of the lagging position of the country in the region. This picture ismatched by information about scientific and technological education and training.Most of these points are well-known and need little elaboration here. Key features areas follows.

• During the 1980s and early 1990s, overall expenditure on R&D increased (atcurrent prices), but it grew more slowly than the economy in general, andconsequently steadily declined as a proportion of GDP – falling from 0.21 per centin 1987 to 0.12 per cent in 1996.23 In this respect Thailand followed a path thatwas significantly different from that in several other countries in the region whereR&D expenditure was a rising proportion of GDP.

• The proportion of total R&D performed in business enterprises was very low –around 10 per cent in 1996. As noted earlier, this is far below the levels that are

23 Preliminary data suggest that it may have continued to decline (to about 0.1%) in 1997.

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typical in the industrialised countries; but it is also only about one-sixth of thelevel in Singapore or Taiwan and only about one-fifth of the level in Malaysia.

• In the mid 1990s, the level of enrolments (per head of population) in tertiaryeducation in natural sciences, mathematics, computing and engineering wasslightly lower than in Indonesia, substantially less than half the level in Singaporeor the Philippines and about one-fifth of the level in Taiwan.

This is a gloomy picture. Over many years the government in Thailand has givenmuch less priority to investment in technology development capabilities thangovernments in other countries in the region. At the same time the proportion ofR&D funded and performed by business enterprises, a key indicator of structuraltransition in the technology development system in industrialising countries, stillappears at the bottom of the range.

It is not surprising, therefore, that Thailand has steadily fallen down the scale ofindicators of international competitiveness. For instance, the country has fallen inranking from 14 in 1996 to 30 in 1999 in the annual Global Competitiveness Reportsproduced by the World Economic Forum. These rankings rest mainly on subjectivebusiness perceptions compiled from surveys, but it is striking how closely they seemto match more objective data when the latter are available.

Thailand has slid down the rankings especially significantly with respect to the kindsof indicators that reflect technology-related dimensions of competitiveness.Particularly striking is not just the fact that the country now ranks close to last onthese indicators among nearly 50 countries, but also that the values of its scores aresubstantially below those of ‘competitor’ countries in the region. Exhibit 15 shows,for a selection of indicators, Thailand’s scores relative to those of Singapore, togetherwith equivalent indicators for Malaysia and the Philippines. The country’s scores arebelow those of Singapore in all cases, very substantially so with respect to indicatorsconcerned with such things as R&D expenditure by government and business, mathsand science education, the quality of research institutions, and collaboration betweenuniversities and industry. Thailand’s scores are also substantially lower than thosefor Malaysia in these areas, though roughly similar to those for the Philippines.

Although they are illuminating, especially when differences are very large, onedifficulty about such cross-country comparisons for similar years is that they do nottake account of broad economic differences that might ‘explain’ some part of thedifference. For instance, R&D expenditure as a proportion of GDP tends to rise withGDP per head (at least up to quite high levels), and so does the proportion of R&Dperformed by business enterprises. Also, the structure of the economy (e.g. therelative importance of industry in general or of manufacturing in particular) has amajor influence on both these ratios. Consequently, one does not know how much ofany inter-country differences in simple contemporary cross-country comparisonsmight be ‘expected’ on account of differences in such economic characteristics, andhow much constitutes lagging or leading performance relative to such expectations.

So, as one example, common comparisons between current R&D indicators forThailand and Korea are not very helpful. They take no account, for instance, of thefact that GDP per head is much higher in Korea, nor of the fact that industry andmanufacturing currently constitute a significantly larger share of GDP in Korea than

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in Thailand.24 It may therefore be illuminating to try and take account of such issues.This is attempted in Exhibit 16.

24 They also take no account of the fact that the very high levels of R&D funded and performed by

business in Korea in the early 1990s may have reflected the ‘high point’ of the specificorganisational and financing structures of the chaebol that contributed to the financial crisis in thatcountry in the late 1990s.

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Exhibit 15 Competitiveness rankings: Selected Technology Indicators forThailand and Other S.E.Asian Countries

Unit Thailand Malaysia Philippines SingaporeIndicator [Score Relative to Singapore - percentage] Score

10. Commitment to R&D Spending Bus.Per 50 80 49 100 (5.23)

1. Technological Sophistication Bus.Per 61 77 54 100 (5.65)

11. Private Sector Spending on R&D Bus.Per 63 75 64 100 (4.59)

2. Average Years of Schooling Bus.Per 66 87 91 100 (6.03)

4. Maths and Science Education Bus.Per 67 78 61 100 (6.48)

12. Research Collaboration Bus.Per 67 78 66 100 (4.98)

9. Research Institutions Bus.Per 68 81 71 100 (4.8)

7. Total Quality Management Bus.Per 71 84 84 100 (5.35)

5. Staff Training Bus.Per 73 90 90 100 (5.45)

8. Scientists and Engineers Bus.Per 76 81 82 100 (5.62)

14. Technology Transfer from FDI Bus.Per 78 93 86 100 (6.22)

3. Secondary School net Enrolment % 79 86 110 100 (72)

13. Absorption of New Technology Bus.Per 82 94 80 100 (5.53)

6. Management Education Bus.Per 90 88 108 100 (5.45)

Source: Global Competitiveness Reports, World Economic Forum

Bus.Per.: Business perceptions on a scale of 1 (strongly disagree) to 7 (strongly agree)

1. Overall, your country is a world leader in technology

2. The average number of years of schooling is sufficient to support highly competitive companies

3. Net enrolment rate in %

4. The school system in your country excels in math and basic science education

5. Staff training is heavily emphasized

6. Management education is locally available in first class business schools

7. Total quality management is strictly applied

8. Scientists and engineers are prevalent and of high quality

9. Scientific research institutions are truly world class

10. Substantial public resources are committed to non-military R&D spending

11. The business sector spends heavily on R&D

12. Research collaboration is very close between universities and industry

13. Companies are aggressive in absorbing new technology

14. Foreign direct investment is an important source for technology transfer

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The top half of this table compares economic indicators for Korea and Thailand overthe period from 1967-71 to 1992-96. It also shows (by the shaded areas) the timeperiods in Korean experience when that country exhibited similar economiccharacteristics to those of Thailand in the period immediately before the mid-1990scrisis. So for instance, Thailand’s average GDP per capita over the 1992-96 periodwas similar to the level in Korea in the late 1970s. Manufacturing value added perhead in early-1990s Thailand is similar to the level in Korea around 1981-82, as is theshare of industry in GDP; while the share of manufacturing in GDP is similar to thatin Korea as late as the mid-1980s.

So, in terms of these economic characteristics, Thailand in the mid-1990s was laggingKorea by around 10-15 years. One might therefore ‘reasonably expect’ that keyfeatures of its technology development system would have lagged behind those inKorea by a roughly similar 10-15 year period.

However, that is not the case. The lower part of the table in Exhibit 16 comparesselected technology development indicators for the two countries, again indicating inthe shaded area the periods in Korean experience that correspond roughly to mid-1990s Thailand. For instance, R&D as a proportion of GDP in Thailand in the pre-crisis period was similar to the level in Korea in the late 1960s, as was the share oftotal R&D funded by business enterprises. The number of researchers per head ofpopulation in 1996 Thailand was similar to the level in Korea in the early 1970s, aswas the level of international patenting (patents taken out in the US per head or perunit of manufacturing value added).

In other words, compared to Korea, technology development in Thailand by around1996 appears to have been doubly lagging. One part of the lag, perhaps around 15years, might be ‘reasonably expected’ because of the difference in economic level andstructure. Another part, perhaps a further 10-15 years, constitutes an additional lagbehind the level and structure of technology development activity that Korea hadalready reached by the early 1980s.

It is important to emphasise the scale of the effort that would have to be made just tocatch up with where Korea was some 15 years ago - i.e. to close the gap between1996 Thailand and early 1980s Korea. To achieve this would require somethingalong the following lines:

• total R&D expenditure would need to be increased five-fold in order to reach anequivalent proportion of GDP (up from 0.12 to around 0.6 per cent);

• business-funded R&D would need to be increased more than twenty-fold inorder to reach an equivalent proportion of that higher level of total R&Dexpenditure (up from about 11 per cent to 45 per cent);25

25 We believe that recent surveys underestimate the current level of business R&D expenditure.

However, even if the underestimation is very large, an enormous increase in the current levelwould be needed to ‘catch up’ with early 1980s Korea.

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• the number of researchers would need to increase about four-fold to reach anequivalent level (up from 2.1 per 10,000 population to around 8.0);

• international patenting would need to increase around six-fold to reach anequivalent level (up from 0.33 per million population to around 2.0).

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Exhibit 16 Thailand and Korea: Relative Development of Economic and Technological Structures

ECONOMIC DEVELOPMENT INDICATORS 1967-71 1972-76 1977-81 1982-86 1987-91 1992-96

Korea GDP * per capita 892.2 1,324.9 Thailand1992-96

1,930.2 2,527.3 3,861.2 5,284.6

Manufacturing value added * per capita 96.3 208.7 414.3 Thailand1992-96

683.1 1,216.9 1,679.9

Manufacturing value added * (% of GDP) 10.6 15.6 21.4 26.8 Thailand1992-96

31.5 31.7

Industry value added ** (% of GDP) 27.6 32.3 38.8 Thailand1992-96

41.1 43.5 43.3

Thailand GDP * per capita 457.4 547.1 694.7 827.1 1,172.8 1,687.7Manufacturing value added * per capita 73.9 111.7 157.5 188.1 308.5 507.1Manufacturing value added * (% of GDP) 16.1 20.4 22.7 22.7 26.1 30.0Industry value added ** (% of GDP) 25.4 26.8 29.6 31.4 36.0 39.1

TECHNOLOGY DEVELOPMENT INDICATORS 1970 1975 1980 1985 1990 1995

KOREA - R&D EXPENDITURE AND PERSONNELTotal R&D as a proportion of GNP (%) Thailand

19960.38 0.42 0.77 1.58 1.95 2.69

Business enterprise R&D as % of total Thailand1996

12.4 28.80 28.80 60.70 70.90 73.10

Researchers *** per 10,000 population 1.7 Thailand1996

2.9 4.8 10.1 16.4 28.6

KOREA - PATENTS IN THE US 1967-71 1972-76 1977-81 1982-86 1987-91 1992-96Totals 5-year periods 5 39 49 157 970 49145-year total/million population at end period 0.15 Thailand

1992-961.09 1.27 3.81 22.42 107.89

Per hundred million Manuf. VA end period * 0.001 Thailand1992-96

0.39 0.25 0.44 1.60 5.58

THAILAND - R&D EXPENDITURE AND PERSONNEL 1987 1991 1996Total R&D as a proportion of GNP (%) 0.21 0.16 0.12Business enterprise R&D as % of total 6.8 5 10.8Researchers *** per 10,000 population 0.16 0.17 2.14

THAILAND - PATENTS IN THE US 1967-71 1972-76 1977-81 1982-86 1987-91 1992-96Totals 5-year periods 1 4 6 7 11 205-year total/million population at end period 0.09 0.13 0.13 0.19 0.33Per hundred million Manuf. VA end period * 0.07 0.07 0.07 0.05 0.06

* Estimated in terms of Constant 1987 US$ ** Estimated in terms of current US$ *** Excluding technicians and support staff

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The magnitude of these changes have got nothing to do with ‘catching up’ the mainfeatures of the technology development system in contemporary Korea. They areintended to illustrate the effort that would be needed to get technology development inThailand broadly into line with what it was in Korea around 15-20 years ago26 whenthat country had a roughly similar level and structure of economic and industrialdevelopment to contemporary Thailand.

2.2.2 A more Qualitative Picture – Emerging Structural Transition?

There is nothing new in the general message of the conclusions drawn above. As longago as the 1970s, one of the authors of this report, together with other colleagues,highlighted the fact that rapid growth of industrial production was not being matchedby any significant deepening of technology development capabilities in industry.Investment was being made in new production facilities, routine technology operatingcapabilities were being accumulated, and output was consequently growing; but eventhe most rudimentary forms of improvement in process and product technology wererare or absent altogether.27

A long trail of subsequent studies noted similar points in various situations. Someemphasised limited technological capabilities and efficiency improvement in selectedprocess industries (e.g. Chantramonklasri, 1986). Others highlighted the morepervasive incidence of relatively low total factor productivity growth (e.g. Brimble,1987, or Tinakorn and Sussangkarn, 1998). Some focused on particular industrialsectors (e.g. Mukdapitak, 19?), while others were much more pervasive (e.g. TDRI,1992)

Ten years ago, one of the most authoritative and comprehensive contributions to thisstream of analysis (Dahlman and Brimble, 1990), drew heavily on several of thesestudies, especially the major TDRI analysis. It concluded:

“…given Thailand’s present level of economic development and its desire tocontinue rapid growth based on greater internationalization and competitiveness ….The country needs to strengthen considerably its technological capability in industry.While most firms in the modern sector have reasonably adequate capability tooperate their existing technology, they are weak in searching for, acquiring andadapting foreign technology. They are even weaker in developing their owntechnology. Local R&D efforts are minimal in the private sector.…..” (Dahlman andBrimble, 1990, p.41)

It is now ten years on from that study, and in suggesting above that Thailand’stechnology development system is probably lagging about 10-15 years behind thesystem that had already been built up in Korea around 15-20 years ago, we have donelittle more than continue to the present a long line of similar commentary on the verylimited development of technological capabilities in Thailand.

However, some steps may have been taken in the last few years to deepentechnological capabilities and activities in Thai industrial firms, and perhaps to lay an

26 If we presume that, because of the late-1990s crisis, there has been little positive change in the

technology development system in Thailand since 1997, what was needed in around 1996 remainswhat is needed now.

27 For an industry case study illustrating this pattern see Bell et al. (1982)

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initial basis for the kind of structural transition we highlighted in the previous chapter.Various fragments of ‘evidence’ contribute to this view.

A study of a small group of 25 firms noted interesting recent developments (TDRI,1998, pp. 38-45). The firms had been selected because they were already undertakingor likely to undertake some form of R&D. Particularly interesting were the reasonsgiven by firms in different groups for their recent moves in this direction.• Several large conglomerates had fairly recently increased their R&D activities.

The reasons for this varied between the firms, but common themes were (a) theneed to respond to competitive pressures from imported products or (b) tomaintain leading competitive positions in export markets.

• A number of smaller companies, especially in the agricultural sector, hadincreased their technology development efforts by collaboration with universityR&D groups. Pressure from increasing competition was driving these firms toengage in technology development as a means of staying ahead in existingmarkets or seizing new market segments.

• Several sub-contracting suppliers to larger firms in the automobile and electronicsindustries had recently strengthened their efforts to modify product designs andimprove production efficiency. Pressure from customers, combined with agrowing range of potential local competitors, was an important stimulus to movesin this direction, as was the aim to move into export markets in some cases.

• Finally, a small group of firms consisted of entrepreneurial new start-upbusinesses. These were heavily dependent on their own design, engineering ordevelopment activities. In most cases, the entrepreneurs were building on strongR&D backgrounds they had previously developed while studying or workingabroad.

The striking feature of these anecdotes is the extent to which changes in generaleconomic conditions had played a role in stimulating the intensification of technologydevelopment efforts. In particular, increasing competition in both domestic andforeign markets seems to have been a pervasively important stimulus, though notusually a sole explanation. As these changed conditions have become more pervasiveand stronger in recent years, one might expect this stimulus to operate on anincreasingly widespread basis. At the same time, the emergence of a group of smallstart-up entrepreneurs deriving expertise from overseas study and employment mayreflect the start of a process that has made important contributions to the structuraltransformation of technology development systems in other Asian countries.

A 1999 report by personnel from the National Research Council of Canada examinedaspects of NSTDA’s operations and industrial context. (Rideout and Allen, 1999).The authors focused heavily on the food processing industry and drew a sharpcontrast between (i) their own observations in a small number of medium sized firmsand (ii) the ‘conventional wisdom’ they had encountered about the very limitedtechnological (and other) capabilities of SMEs. They noted that:

“The four food and/or beverage processing companies that were visited had betweenthem more qualified food scientists and engineers than the entire SME sector ofCanada’s Newfoundland fishing industry…… These Thai companies were all quitesuccessful, competing in highly competitive domestic and international markets, had

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well-defined growth strategies and were all undertaking some level of in-housetechnology and/or product development.” (p.17)

Again, as in the TDRI study, emphasis was placed on competitive pressure as astimulus to increased technology development effort – at least by some of the firms inthe industry. In the case of two firms, the initial consequence of increasedcompetition had been the imminent risk of financial collapse. However, this hadprompted a similar response in both cases. The firms appointed people with highlevels of industrial technical and managerial experience and gave them responsibilityfor production operations.

“Without major acquisitions of ‘new technologies’ and ‘state of the art’ processingfacilities, both companies were turned around and are now national leaders in theirindustries. This was achieved by improving operations through mechanisms such asproductivity and efficiency and labour/management relations. They also recognisedsignificant reductions in costs of production and hence the competitive positioning oftheir product lines. After these major advances had been made, the companiesinitiated programs of technology development to further refine their productionprocesses.” (p.17)

This illustrates well the common process by which firms progressively deepen theircapabilities. Technology development capabilities follow, and are necessarily builtupon, underlying layers of more basic capabilities for efficient use and operation oftechnologies.

Clearly there were weaknesses in these firms’ capabilities, but the authors’ believedthese could be “..resolved relatively quickly through strengthening professionaldevelopment programmes for researchers, engineers and technologists within theSME sector.” (p.19) In other words, this is a story illustrating that at least some firmsin the industry already had the basic technological and managerial capabilitiesrequired to generate a positive response to competitive pressure and crisis – but therewas a need to strengthen those underlying capabilities through programmes centredon higher level personnel in firms themselves.

During our own study we encountered further fragments of information contributingto our view that underlying conditions may be changing, perhaps quite rapidly. Forinstance, in discussions with manufacturing firms, managers commonly emphasisedrecent steps to intensify their companies’ technology development efforts. This wasevident in several of the small number of local SMEs we visited, but it was also veryevident in several TNC subsidiaries – as we elaborated later in Section 2.5.

Discussions with representatives of business and industry associations, and with localconsultants familiar with a range of companies and industries, suggested that our ownobservations in these few firms reflected more general experience. They alsoconfirmed an increase in general concerns about strengthening technologydevelopment efforts in industry. The threats to business posed by the crisis haddriven some firms to greater caution, and had forced others to retrench on previouslevels of technology development effort. However, a more common response,reinforced by recent or expected increases in international competition, had been toattach greater importance to the ‘technological’ aspects of competitiveness.

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These fragments of descriptive information helped to shape our interpretation of someof the details in the available statistical information. As illustrated in Exhibit 17,some of the indicators of industrial technology development effort turned sharplyupwards in the few years immediately preceding the crisis in 1997 – albeit from verylow levels in the early 1990s. In particular:• the level of R&D performed by business enterprises doubled between 1993 and

1996;28

• the number of enterprises recorded in the R&D survey as performing R&D trebledover the same period;

• the level of international patenting (as reflected in Thai patents taken out in theUS) nearly trebled between 1989-1993 and 1994-1998.

One might easily dismiss these changes over only a few years as randomperturbations to the more or less constant, low-level path followed from the 1980s tothe early 1990s. On the other hand, a more optimistic interpretation of the figuresmight be justified by the qualitative information outlined above, particularly thefrequent reference to the influence of changed economic conditions on firms’technological behaviour. Such an optimistic view would suggest that these figuresmay indicate the first steps in a set of new trends. From this perspective, the role ofthe economic crisis may have been two-edged. On the one hand, in the short term itmay have disrupted the ‘new trends’ emerging in the mid 1990s. On the other hand, itmay have reinforced some of the underlying pressures and stimuli affecting firms’technological behaviour that had been building up in the mid 1990s.

Exhibit 17 Emerging structural transition in the thai industrial innovationsystem ?

1987 1989 1991 1993 1995 1996Expenditure on R&D Performed byBusiness Enterprises (Million Baht) 182 161 197 291 375 596

As a Proportion of Total R&D (%) 6.8 5.5 5.0 6.6 7.3 10.8

Number of Enterprises Recorded asperforming R&D 46 187

1989 – 1993 1994 - 1998Number of US Patent Applicationsoriginating in Thailand

14 48

2.3 Key thresholds in the accumulation of technological capabilities

Despite these signs of change, it is important to recognise that the pervasively shallowtechnological development of Thai industry is deeply embedded in long-standingpatterns of behaviour in firms. Market conditions and other factors may be shifting inways that call for new capabilities and new kinds of technology developmentactivities, but for the majority of firms this is a ‘new world’ in which they have little

28 And, as noted earlier, the available survey data probably provide a substantial underestimation ofthe level in the more recent years.

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or no experience. It is not a situation in which they can simply make rational‘decisions’ about investing in more of this or that at the margin. It is a situation inwhich they have to learn about new kinds of activity while facing uncertainties andrisks. This then is a situation where policy measures may help to support andstimulate new kinds of behaviour and new kinds of investment.

However, the development of policy in this area will need to take account of two keyissues.

• First, as we outlined in Section 1, most of the problem to be addressed is almostcertainly a problem about limited demand, not one about inadequate supply.Referring back to Exhibit 9, only a small number of firms are likely to be ‘Type3’ firms where managers already know the kinds of knowledge and capabilitiesthey need, but not where and how to acquire them. These are the kinds of firmwhich, as described immediately above, are already responding to newcompetitive conditions by strengthening their technological and other capabilities.The majority of firms, however, belong to Type 1, perhaps with a considerablenumber beginning to move into Type 2. Policy response to this demand profilewill be almost totally ineffective if, on the presumption that all firms are in theType 4 category, it concentrates on improving technology supply.

• Second, policy measures need to centre on the key thresholds actually faced byThai firms as they move towards deepening their technological capabilities. Ifthey are to be effective, policy measures in this area need to focus on the relevantstages of accumulation that firms are currently entering. For instance, if few firmshave already built up strong design and engineering capabilities as a base formoving towards more formally organised R&D, measures to stimulate demandfor, and investment in R&D are likely to have little impact. Similarly, if firmshave not built a base of capabilities for efficient acquisition and assimilation oftechnology, measures to stimulate deeper design and engineering activities willhave limited impact.

Our views on the key current thresholds are summarised in Exhibit 18. The mainpoints are as follows.• The most important threshold for most large TNC subsidiaries, many large

domestic firms and some higher-technology SMEs (mainly MEs) is locatedaround the lower boundary of the ‘design and engineering’ level. As we haveemphasised, this is the area where firms in these categories are facing issues aboutinvestment in new kinds of capability and in unfamiliar types of technologydevelopment activity.

• The entry to more formally organised R&D and the further deepening of thatactivity is an important threshold for only a small minority of these firms.

• For a very large number of SMEs, especially those at the ‘S’ end of the spectrumin many of the more traditional labour-intensive and resource-based industries,neither of these thresholds is important. For the majority, strengtheningtechnology development capabilities is not a priority because the key issue isabout building up more basic operational capabilities, together with the craft andtechnician capabilities for efficient acquisition, assimilation and incrementalupgrading of fairly standard technology.

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• Only for a small number of SMEs (usually towards the ‘M’ end of the spectrum)is the design/engineering threshold important.

These are obviously very broad comments, and in practice the ‘locations’ of suchthresholds will vary across the specific characteristics of different industries.Identification of these critical thresholds in greater detail will be an important basisfor policy and institutional

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Exhibit 18 Key Thresholds in the Current Structure of Intra-FirmTechnological Capabilities

R&D

TECHNOLOGYUPGRADING&REVERSE

ENGINEERING

TECHNOLOGYACQUISITION AND

ASSIMILATION

TECHNOLOGY USEAND OPERATION

R&D

TECHNOLOGYUPGRADING&REVERSE

ENGINEERING

TECHNOLOGYACQUISITION AND

ASSIMILATION

TECHNOLOGY USEAND OPERATION

A Most Large TNCSubsidiaries

Some SMEsMany Large

Domestic Firms

B Most SMEs

RESEARCH AND TECHNOLOGY DEVELOPMENT

Occasionally present, but scale usually limited.

Depleted by crisis in some cases. Strengthened by pressures inmany

DESIGN AND ENGINEERING

Capabilities limited, but growing. When present they often play alimited technology development role, but that is probably changing

TECHNICIAN AND CRAFT SKILLS AND CAPABILITIES

Usually present, often the focus for intensive

training efforts. Selected key skills sometimes weak.

BASIC OPERATING SKILLS AND

CAPABILITIES

Present, often strong and regularly upgraded

Minor Current

Threshold

RESEARCH AND TECHNOLOGY DEVELOPMENT

Very rarely present

DESIGN AND ENGINEERING

Capabilities rarely present, though emerging in some firms

TECHNICIAN AND CRAFT SKILLS AND CAPABILITIES

Strong skills sometimes present, though key skills often

absent or weak

BASIC OPERATING SKILLS AND

CAPABILITIES

Often weak, with limited and irregular upgrading

Main Current

Threshold

Minor Current

Threshold

Main Current

Threshold

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support for technology development. Such policy initiatives may help to acceleratechanges already being contemplated, and may assist firms in embedding newbehaviours and habits into their ongoing activities. But very rarely will policyinitiatives stimulate firms to leapfrog across gaps in their progressive and cumulativedeepening of technological capabilities and activities.

2.4 Technology Development and Industrial Structure: Links, Clustersand Value Chains

As noted earlier, one of the most important issues emphasised by the ‘innovationsystem’ perspective is the fact that innovative activity is not simply undertaken byindividual firms. Instead a substantial proportion of it emerges from interactionbetween firms, and much of this emerges from interaction between firms that arelinked as suppliers and customers at different stages along value chains. Suchinnovation-centred interaction may be facilitated by the geographical clustering offirms, where collaboration between competing firms at the same stages of valuechains may reinforce collaboration between suppliers and customers at differentstages. However, geographical clustering and collaboration between competitors iscertainly not a pre-requisite for effective innovation-centred interaction betweenfirms. Indeed, some of the most effective interactions of this type occur across theconsiderable distances separating customers in the advanced industrial economies andsuppliers in industrialising countries like Thailand.

These innovation-centred interactions are not simply a matter of individual firmsbuying-in changes that are already embodied in the products of other firms – e.g. inthe form of improved machinery, tooling, materials or components. While purchasingsuch ‘ready-made’ technical change is important, so also are three other kinds oftechnology development process.

(i) Active collaboration in technology developmentThis is the type of interactive process that has been given most emphasis in‘innovation systems’ analysis of experience in the industrialised countries.Numerous examples have been identified to show how active collaborationbetween the ‘users’ and ‘producers’ of technologies is a common basis forinnovation. Some would go beyond that and argue that it is a necessary basisfor successful innovation in industrial technologies. Consequently, the analysisof innovation has given less attention in recent years to the individual firm as themost relevant actor. Instead, much greater emphasis has been given to varioustypes of collective actor: networks, clusters, value chains, inter-firm alliances,and so forth.

This emphasis has spilled over into more action-oriented views aboutmanagement and policy. Individual firms, it is emphasised, should enhance theireffectiveness in innovation by improving the management of their knowledge-centred interactions with other firms, and not just their own internal innovationcapabilities. Similarly, governments should give less emphasis to policymeasures directed at individual firms and develop more effective ways ofstimulating and facilitating innovation-centred interaction and collaborationamong groups of firms.

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(ii) Capability-strengthening knowledge flows between firmsActive collaboration between firms that results in some form of ‘joint’technology development can be distinguished from inter-firm knowledge flowsthat enhance the capabilities of individual firms for undertaking ‘their own’technology development. This distinction is obviously a blurred boundarylocated part-way along a spectrum running from (a) formally organised, activecollaboration in technology development to (b) purely informal, passive, or eveninvoluntary, mechanisms by which knowledge may move between firms in waysthat strengthen the innovative capabilities of individual ‘recipient’ firms.Blurred as it is, this distinction is valuable in helping to highlight alternatives toformally planned collaboration in the joint development of technology – thekind of technology-centred interaction between firms that is often exclusivelyemphasised in much of the academic literature. Instead, draws attention to arange of other kinds of knowledge-centred interaction between firms thatenhance overall technology development efforts in the ‘system’ as a whole.

These knowledge flows may take a wide variety of forms. They may beembodied in people moving from one firm to another. They may consist simplyof detailed information about the specifications of components or materials usedby current or potential customers, so providing the focus for independent designand engineering efforts to develop products with those specifications.Alternatively, the flow of information might be supplemented by a richer flowof knowledge and advice about how to develop the technology in order toachieve the necessary specifications. In some cases that may even becomplemented by a flow of people bringing with them more tacit elements ofknow-how to contribute more directly to the technology development process.29

(iii) Technology development and the creation of new linksMost of the ‘innovation system’ analysis has so far drawn on the experience ofthe advanced industrial countries. Consequently, most of the understandingabout innovation-centred interactions between firms has been derived from‘mature’ industrial economies in which two necessary structural conditions forinnovation-centred interaction already exist. First, quite strong user-producer(customer-supplier) links are typically present already as channels throughwhich technology development interactions may operate. Second, the individualfirms are already likely to have built up their own technology-developmentcapabilities to be able to contribute to, and benefit from, such interactions.

However, in industrialising countries, those conditions may be weak or absent -especially in countries like Thailand that have experienced fairly long periods ofimport-substituting industrialisation. First, customer-supplier links within thedomestic economy are likely to be weak, with intra-economy value chains oftenbeing short and fragmented. Second, even where such links are fairly dense,perhaps with quite extended value-chains, intra firm technology developmentcapabilities are likely to be weak, so limiting or even precluding significantinnovation-centred interaction.

29 Several studies have highlighted the importance of these kinds of knowledge flow between

customers in advanced country markets and suppliers in industrialising countries. Hobday (1995),for instance, has stressed their significance in the long process of technological upgrading in theelectronics industries of Singapore, Taiwan and Korea between the 1970s and early 1990s.

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In such situations the implications for policy are not simply about facilitatingtechnology-centred interactions within structures that already exist – theorientation of much policy advice in advanced industrial countries. Such effortsare important, especially with respect to interactions between local supplierfirms and ‘technology-rich’ customers, either within the domestic economy or inexport markets. But just as important are policy measures to facilitate thecreation of underlying structures that permit the emergence of interactivetechnology development in the first place. Such measures may have to bedesigned in two phases. First, they may need to concentrate on helping to buildup the technology development capabilities of individual firms – necessarypreconditions for effective technology-centred interactions. Then building on theaccumulation of those capabilities, policy measures may support then use ofthose capabilities in technology development activities designed to help tocreate new customer-supplier links in the economy. Referring back to the listExhibit 1 in the previous chapter, these are likely to involve the third and fourthtypes of technology development activity:

• Continuous improvement in the logistics technologies used to link different stagesin value chains, involving both hardware (e.g. transport and computer-basedsystems) and organisational/management methods;

• Design and (reverse) engineering activities that open up opportunities to sourcecomponents, materials and equipment from local suppliers, or to diversifyproducts and markets – either by existing firms or via new spin-out start-ups.

There is little systematic information about the significance of these types oftechnology development process in Thai industry. Fragmentary comment byobservers of industry, and by some of the active participants in it, suggest that theyare weak or non-existent: formally organised collaboration in technologydevelopment is thought to be very rare, while innovation-centred flows of knowledgebetween firms are thought to consist of infrequent trickles at most. The truncatedstructure of value chains in large parts of industry are often identified as both causeand consequence of this pattern: with limited customer-supplier links, there is a weakbasis for technology-development interactions; and with limited innovativecapabilities in firms, there is a weak basis using technology development to extendthose links.

If this picture is a reasonably accurate reflection of reality, it points to the importanceof policy measures like those under section (iii) above – phased combinations ofmeasures to help intra-firm capability accumulation and measures to support andfacilitate inter-firm collaboration in technology development. Such initiatives wouldbe likely to receive active support among at least some industry groups. For instance,one group of industrialists has highlighted the importance of strengthening technologydevelopment collaboration in existing natural resource-based industry ‘clusters’ –suggesting the cassava starch industry as a prime candidate.30 Two qualificationsshould be added, however.

30 The Cluster4Competitiveness Group is a group of industrialists and academics seeking to enhance

awareness of the role of cluster-based development. The case of the cassava industry has been

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First, it is important to disentangle two different components in this perspective onpolicy. One is concerned with the technology-centred issues discussed here. Theother is more concerned with using measures involving trade policy, investmentincentives, and even public investment funding to alter the structure of industrialproduction in ways that would increase intra-economy linkages.31 While wewholeheartedly endorse the first, we have very great reservations about the second –but, with one exception, exploring those reservations would take us beyond the scopeof this study. The exception is that, as noted earlier, existing aspects of trade policy(residual elements of earlier efforts to design a ‘promotional’ tariff structure) actuallyappear to be counter-productive in that they act as disincentives to technologydevelopment efforts designed to create new ‘backward links’ to domestic productionof machinery and tooling. Removing such counter-productive distortions seems to bea much more important than trying to design new trade and investment policymechanisms to induce directions of structural change in industrial production thatindustrialists themselves are unwilling to take on their own.

The second qualification is that it is not clear that the observations summarised abovedo indeed constitute a wholly accurate reflection of reality. In particular, thesignificance of inter-firm flows of knowledge from ‘technology-rich’ firms to supportthe accumulation technology development capabilities in others may be greater than iscommonly recognised. This is likely to be so with respect to flows of knowledgebetween customers in the advanced industrial countries and suppliers in Thailand, andconsideration should be given to developing policy measures to support firms makingmore effective use of these channels. It also appears to be the case with respect to therole of subsidiaries of TNCs operating in Thailand – an issue we explore in moredetail below.

2.5 The Technological Role of TNC Subsidiaries in Thailand

In the previous chapter we suggested that policy with respect to technology-relatedaspects of inward foreign direct investment (FDI) should take account of three issues:(i) initial investment in production facilities, (ii) the extent and depth of technology-intensive activities subsequently undertaken, and (iii) the extent to which the‘internal’ activities of subsidiaries and joint venture partners resulted in ‘spill-overs’of knowledge and expertise, yielding benefits for other firms and organisations. Inthis section we offer an exploration of the second and third of these issues.

developed in a presentation by Dr Sutham Vanichseni (Chulalongkorn University), TapiocaCluster: Vision and Development Strategy, 7 September, 2000. Other groups have started toexplore collaborative initiatives centred on the food-processing industry, with particular emphasison export-oriented supply chains.

31 These views have been expressed with respect to the development of stronger clusters and valuechains centred on both local natural resources (as in the cassava industry case) and export orientedassembly industries (as in the proposals to invest in an electronic wafer fabrication facility‘upstream’ of the existing stages of electronics industry production in the country).

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2.5.1 The extent and depth of technology-intensive activities in TNC subsidiaries

A pervasive and long-standing view in Thailand is that the subsidiaries and jointventures created by FDI engage in very limited training at levels above the most basicoperating skills.They also undertake little or no technology development, consequently investing littlein building the capabilities for such activities.

The existence of complaints about these issues was noted in the comprehensive studyby Dahlman and Brimble (1990), and evidence has been generated in several studies(e.g. Kaosa-Ard, 1992). Comments about these limitations also occurred frequentlyduring our own study in discussions with policy makers in government, with scientistsin universities and research institutes, and even with some local businessmen. Verycommonly such comments were linked to explanations along the lines: TNCsubsidiaries don’t engage in technology development activities because their parentcompanies do all their R&D in their home countries.

We believe such views no longer provide an appropriate or useful perspective. First,although it may once have been accurate, the behaviour of TNC subsidiaries no longerseems to conform to this stereotype. Substantial change appears to have taken placeover the last decade or so, and perhaps especially in the last few years. Second, thecommonly presumed ‘explanation’ rests on a view of the structure of technologicalcapabilities and activities that is misleadingly oversimplified. In effect, this modelsuggests there is nothing in the middle of the ‘iceberg’ structures of capability wehave used in diagrams earlier in this chapter. There is just (a) a basic level oftechnology-using operational capabilities and activities and (b) the R&D tip of theiceberg. From this perspective, a neat distinction can be drawn: the first activity andlevel of capability is located in Thailand; the second is located elsewhere.

As we have stressed in this chapter, that two-level picture leaves out a very large partof the story, and it ignores the complex process of cumulative capability deepeningthat builds on the first level and lays a basis for the second. Our discussions withsenior managers in a number of subsidiaries and joint ventures suggests that thiscumulative process has been under way for some time and has probably accelerated inrecent years. The following comments illustrate what seems to be a common patternof changing behaviour.

“We are in the middle of a fundamental change. We need to shift into much moreautomated production to remain competitive, and that will require substantialengineering activity that has not been needed before. At the same time we aremaking a major transition in the way we organise design operations in the company.We are strengthening that activity here in Thailand, and have brought in a team tobuild up the necessary capability among our local people.” An electronics company

“The company is going through a phase of substantial decentralisation. As part ofthat, we want to move part of the design stage here in Thailand. We are trying toempower the Thai operation, and right now we have our Thai engineers going backand forth between here and headquarters getting to grips with the design process.Once we move design over here, we will be able to start thinking about locallysourcing parts, though that will require higher quality suppliers than we have foundso far” An electronics company

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“We are altering the way we organise engineering and R&D in the globalcompany. Things are becoming much more decentralised. So, for instance,we will be starting our own R&D this year. This will concentrate inmechanical design, and we hope to have our own completely independentdesign operation in this area in about five years.” A company in theautomobile industry

To support these kinds of change, subsidiaries are quite rapidly altering the skillstructure of their workforce. In the electronics industry, a common pattern involved areduction in total employment that was concentrated in direct production workers,plus an increase in the number of technicians and engineers. The Japanese electronicscompany noted above, for instance, had increased its local engineering staff from 150to 260 between 1997 and 1999. Another larger company in the electronics industryhad increased its engineering employees from 500 to 2000 over the last three years,and it was aiming to increase its technical and professional employees from 38 percent of the total to about 65 per cent within the next few years

In all these cases, the increase in technology development activities and the growingemployment of engineers was being supported by intensified training efforts. A greatdeal of this involved training and experience acquisition in design, engineering andR&D operations elsewhere in the company, often at headquarters sites. But effortswere also being made to intensify local training. While some of this was needed toprovide more advanced and specialised skills than could be expected from universitygraduates, much of it was required to compensate for what the firms considered to bethe weak skill levels of graduates from the local universities and vocational schools.Some of the training was provided in-house in a variety of ways, but severalcompanies were exploring arrangements to secure advanced technical training fromlocal institutes. As a senior manager in one electronics company explained:

“In Thailand in the past we were just a production base for the corporation. But thechanging global context is leading to local empowerment and that leads us to have tostrengthen our human resources in advanced areas of technology. Education andtraining are becoming much more important and we are trying to develop muchcloser interaction with local universities and institutes.”

In seeking external sources of training, most of the companies were trying to movebeyond earlier initiatives that had helped strengthen local training at the craft andtechnician level. 32 A few firms have made substantial steps in this direction, asillustrated by the case of Toyota Motor Thailand (TMT). As described in a recentstudy, the company has developed links with both Chulalongkorn and Thamasatuniversities.

[The] Link with Chulalongkorn’s engineering department [has provided] bothinstructors and courses for engineering students since 1990. In 1994, TMT alsohelped re-establish the Auto-engineering degree programme with the provision of

32 These had included, for instance, the Ayuthaya Technical Training Center (ATTC). This is a joint

venture between the Hi-Tech Industrial Estate and the King Mongkut Institute of Technology NorthBangkok. It was set up in 1992 with considerable assistance in the form of training equipment andtechnology from a number of Japanese companies led by Canon Ltd. In a subsequent developmentsupported by the Mitutoyo Corporation, a precision instrument and metrology centre was added tothe ATTC facility. These and other training initiatives involving TNC subsidiaries, mainly at thevocational level, are reviewed in Brimble et al., 1999.

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monetary support and instructors from both TMT and the parent firm in japan.Nearly 600 students have participated in these programmes under the tutelage of 34Toyota-provided instructors.

[The link] with Thammasat University [is] still in its nascent stage …TMT hasrecently signed an MOU to support the development of an Industrial EngineeringDepartment focusing primarily on the area of automotive engineering.” (Brimble etal., 1999, p. A-18)

However, for many of the companies we met, securing more advanced levels oftraining from local universities was presenting difficulties. For instance, theelectronics company that was noted above as strengthening its automation engineeringand design capability indicated that:

“We still have to send most of our engineers for training in Japan – for instance wehave seven people on a two-year course just now. We have tried to find courses atlocal universities, but they don’t have the ability to provide the advanced specialistskills we need.”

Another company was also exploring the availability of local training in areas ofmechatronics and automation engineering. Some progress had been made in a fewcases but, as the company’s Human Resources Director explained:

“The schooling system in the universities is outdated. Parts of the curriculum aretwenty years old. I have been back to see what they do and compared it with what Idid. Little has changed.”

In other cases, the companies reported frustration that was more to do with anapparent lack of organisation and interest on the part of local institutions. Managersprovided anecdotes about non-response to their telephone and other messages touniversities, about discussions that never led anywhere even though the universitydepartment appeared to have the ability to provide what was needed, or about longdelays in moving ahead with courses and programmes when plans had apparentlybeen made.33 We were not able to explore the other side of these problems in theuniversities and technical institutes. However, based on this one-sided view, ourstrong impression is that limited responses to the TNCs’ emerging demand for higherlevel training are slowing down these companies’ efforts to deepen their technologicalcapabilities and activities – partly by raising the cost of those efforts because of theneed to draw so heavily on overseas training.

These and other constraints on the ability of TNC subsidiaries to strengthen theirtechnology development capabilities are especially important because of the way inwhich local capabilities interact with corporate strategy in a cumulative process ofdeepening local technology development activities. This interaction can be illustratedby the words of a senior manager of the subsidiary company in the automobileindustry that was about to start R&D operations in Thailand.

“Two things come together here. The first is a big change at the centre of thecompany. In the past everything was centralised and we would never have beenallowed to do R&D here in Thailand. But now the company strategy is todecentralise much more responsibility to subsidiaries, The second thing is the level

33 Brimble et al. (1999) also provide anecdotes about projects that failed to get started despite the

provision of equipment and the waiting demand for training provision.

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of our own engineering ability we have built up here in Thailand. We have nowproved ourselves to headquarters. We have shown that we can do what is needed,and now we can benefit from the change in central strategy”

A senior manager of one of the electronics companies illustrated a similar interaction.

“Our company is giving much more independence to its subsidiaries in the region,and we now even compete between ourselves. At the same time, we have shown weare strong enough to do this [undertake automation engineering] ourselves here inThailand. HQ policy will now support us in this step. But to move on to take thenext step we will have to show again that we can do it better than our sister companyin the Philippines.”

These comments suggest the existence of a virtuous circle in the increasinglyglobalised operations of TNCs. Demonstrated strength of the capabilities ofsubsidiaries can be leveraged through intra-corporate negotiation processes into newmandates to deepen those capabilities further.34 If local policy and institutionalsupport can help companies demonstrate the strength of their capabilities, it maythereby accelerate the working of the virtuous circle. Conversely though, limitedsupport combined with constraints on company efforts to deepen their capabilitieswill leave local subsidiaries at a disadvantage in the intra-corporate bargainingprocess. Indeed, in the extreme, limited support for capability development maysimply result in the departure of subsidiaries altogether from Thailand – as suggestedby the speculations of one senior manager.

“The only way you are going to keep us here in the longer term is by helping us builda strong foothold in the local situation. If we are linked into strong networks of highquality training and education, with similarly strong networks of high qualitysuppliers of things we use, then there will be major advantages in staying here. But atpresent our only significant foothold in Thailand is our package of BOI investmentprivileges.35 For all practical purposes we are stuck in a box, insulated inside thefour walls of the plant here. If that remains the case when our tax privileges run out,we might as well move the box somewhere else where we can get a new package oftax breaks.”

The extent to which that would matter depends in part on the magnitude of spill-oversgenerated during the period of location in Thailand

2.5.2 The Extent and Significance of Knowledge ‘Spill-overs’

We are not aware of any systematic information about the extent to which knowledgeand skills built up in TNC subsidiaries in Thailand have spilled over to the benefit ofother firms and organisations. However, a few fragments of information suggest thatthis effect is far from trivial. For instance, a recent study of the broader impacts ofFDI in Thailand (Brimble et al., 1999) includes several descriptions of ways in whichTNC subsidiaries have contributed equipment and know-how to local training

34 There are obviously questions about how far this cumulative process will run. Issues about strategic

centralisation almost certainly come to bear at some stage in the deepening of capabilities insubsidiary companies. However, it is unlikely that this stage will be encountered until well up intothe R&D tip of the iceberg. It is not likely therefore to be a significant constraint on manycompanies in Thailand for some considerable time.

35 This refers to the tax exemption privileges provided by the Board of Investment to companies thatinvest in particular kinds of industries and/or locations in Thailand.

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facilities like the Ayuthaya Technical Training Centre which have provided skilledemployees to large numbers of firms other than the TNC contributors. In our owndiscussions with Human Resource Managers in TNC subsidiaries we also encounteredexplanations of the contributions made by their own technicians and engineers to theprogrammes of vocational training institutes – explanations that were echoed indiscussions with the managers of such institutes who attached considerable value tothe contributions made.

In addition, there was common reference to the very high turnover of trainedtechnician and engineering employees in the years preceding the crisis. Oneelectronics company reported that turnover among this group had reached 50 per centin 1997. We do not know the extent to which this high level of mobility reflectedsimply a labour ‘poaching’ circulatory system among the TNC subsidiariesthemselves. However, it seems likely that turnover rates of this magnitude wouldhave involved significant ‘leakage’ from the TNC sector to other firms andorganisations.

It is probably much too soon to expect the recent phase of capability deepening intodesign and engineering activities to have generated significant ‘spill-overs’.However, because TNC subsidiaries may play a particularly important role in buildingup these capabilities in the country, we discussed with human resource managers theextent to which their own training and related activities in this area might beaugmented in ways that could yield larger spill-over effects. We were explicitlypursuing the point raised earlier: that the magnitude of spill-overs may not simply bea constant that simply ‘happens’; it may be significantly variable, perhaps subject toinfluence by particular kinds of policy and institutional support.

Three kinds of potential flexibility seemed to be important.

(i) Increasing spill-overs by expanding in-house trainingThe higher level training activities of TNCs often draw on rare, high quality resourcesto generate levels and types of skill and experience that cannot easily be matched byexternal training organisations. In principle, therefore, they constitute an extremelyvaluable resource for an economy that is moving through the kind of capabilitytransition that must be made in Thailand over the next 10-20 years. However, notsurprisingly, the TNCs normally tailor the scale of these activities to meet only theirown needs, allowing some margin for wastage and labour mobility. We thereforeexplored the extent to which, given appropriate compensation for the costs involved,they might be willing to expand these schemes with the explicit objective of meetingmore than their own needs and deliberately planning to generate spill-overs.

The potential significance of this kind of flexibility has already been illustrated in thestudy of FDI impacts by Brimble and colleagues. The case concerned the training ofhigh precision toolmakers for the electronics industry – a key capability that is veryscarce in Thailand, but needed to support product design and process engineering.The study noted the willingness of one company, KR Precision (KRP) to play anindustry-wide role in this field. The company has a strong toolroom which makes andrepairs tooling for its own operations. This is largely staffed by highly skilled andexperienced Indian toolmakers, most of whom are graduates of a four-year trainingprogramme in India. They have trained a number of Thai, but:

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“…many of them leave after two years to the tooling activities of the auto sector –which require much lower levels of precision. [The toolroom head] prepared aproposal … which he submitted to KRP management to set up a Toolmaker TrainingCenter at KRP, to train 8 persons per year. The general response was positive …The proposal …would doubtless serve the hard disk drive industry very well in termsof supplying the toolmakers that they cannot yet find in Thailand.

KRP would be very responsive to the possibility of growing the training capacity ofKRP into a national programme. However, to date there has been no real publicsector program through which such an initiative could be undertaken, and KRP feelsthat it cannot really justify extending the programme beyond its present level as thatwould fall far outside its core activities.” (Brimble et al., 1999, p.A-18-19)

In our own discussions with human resource managers, we enquired about theirresponse to a hypothetical scheme by which public funding would meet theircompany’s additional costs in providing training in design and engineering areas fortwice as many people as it needed itself. Responses ranged across a range frompositive to sceptical.

“Yes, if such a scheme could be simply administered by people who knew theindustry, and provided the full additional costs could be covered, we would certainlybe willing to increase the numbers we move through some of our higher levelprogrammes.” An electronics company

“That’s an interesting possibility. We might not be able to go as far as doubling thenumbers but we could probably push them up. Much would depend on the details ofthe scheme, but we would be prepared to look at those.” An electronics company

“Frankly, even if the additional costs were covered, we would not be very keen ontraining people who we knew would then leave taking our proprietary know howwith them. This might be OK if it was somehow tied up with our suppliers, but howwould you prevent leakage to our competitors? Even after only 2-3 years training, anengineer could leave with very valuable know how.” A company in the automobileindustry

(ii) Increasing Spill-overs through collective training schemesAlthough most of the companies were trying to develop their own advanced trainingschemes, they also suggested that a significant role could be played by developingcollaborative training programmes in areas of advanced design and engineering.These could draw on equipment and know-how provided by the companies. Theymight be organised in the style of the Ayuthaya Technical Training Centre (ATTC),with links to local universities as the main training providers, though severalmanagers stressed that in these more advanced areas the companies themselves mighthave to play a large part in running the programmes, and expertise would often haveto be brought in from overseas.36

In most cases the companies stressed two points about such schemes. First, theywould usually require considerable ‘entrepreneurial’ effort to get started, especiallywith projects involving firms that are not used to co-operation. They would also

36 One emerging example of such a project involving most of these elements is the programme of

advanced training being developed by leading firms in the local disk drive industry in collaborationwith the Asian Institute of Technology and the International Disk Drive Equipment and MaterialsAssociation (IDEMA).

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usually involve up-front costs in terms of planning, curriculum development andperhaps strengthening of the expertise of potential training providers. While thecompanies could provide inputs to support such start-up activities, a more formallyorganised ‘project facilitator’ was important, together with modest funding to meetinitial costs in a flexible way. Second, in the manner of the ATTC, once up andrunning such schemes could be open to a range of companies, acting as importantmechanisms for introducing new knowledge and skills through clusters of associatedfirms.

(iii) Pilot engineering projects and spin out ‘incubators’Almost all the companies stressed the weakness of local supplier firms for specialisedtypes of equipment and tooling. This was seriously inhibiting the positive effects ofthe devaluation of the baht.37 Most of the companies, especially in the electronicsindustry, also emphasised that this problem would almost certainly become moreserious as they intensified their investment in automation. They indicated that theywere becoming increasingly engaged in designing and even producing some items in-house, but stressed that this was not their preferred mode of operation. They wouldmuch sooner be able to draw on a strong network of high quality suppliers ofengineering, equipment and tooling.

While training their engineers in aspects of automation engineering would obviouslyhelp to strengthen capabilities in these areas, it would not on its own do much to leadtowards the emergence of a supplier industry. However, a senior manager in one ofthe electronics companies illustrated one way in which companies in the industrymight help to move things a step further in that direction.

“I would be very happy to support and encourage some of our bright young engineersto work up the design and production know-how to supply items we and others in theindustry will need in the future This would involve a mixture of training, assistancewith prototype development and testing, and support with the entry into productionstart-up. In these ways, we could help to incubate small engineering start-upenterprises through at least their first steps. But there are currently two practicalproblems about this. First, the costs and risks would go beyond what we couldjustify as part of our own business operations, and the available external schemes forfinancial support for new ventures are far too inflexible, complicated andbureaucratic to be any use with this kind of thing. Second, any new venture tryingthis route would have to import components and sub-systems and pay import dutieson those. They would never be able to compete with foreign suppliers to local firmswhich had BOI privileges and could import equivalent built up equipment free ofimport taxes.”

In other words, beyond any constraints concerned with skills and know-how,inadequate financial support mechanisms for technology development combined withexisting policy-based incentive systems appeared to be working to hinder theemergence of an important type of supplier firm needed to support the ongoingdeepening of local design and engineering activities.

37 This point was also highlighted in other discussions that focused more on local Thai firms in other

industries.

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2.6 Some Questions about Policy

The main messages to carry forward from this chapter are quite simple.• Experience in Thailand contrasts quite sharply with that of the more

technologically advanced industrialising countries in Asia that have movedthrough a fundamental transition during which firm-centred structures ofinnovative activities and capabilities have been built up quite rapidly from apreceding phase when most scientific and technological capabilities were locatedin public institutes. The development of this structure in Thailand seems to havelagged far behind the experience of these other Asian countries.

• This lag is not just a matter of falling behind these other countries’ currentindustrial technological capabilities. It is an issue about lagging behind the pastexperience of those countries when they had similar levels and structures ofeconomic development to those of contemporary Thailand.

• The magnitude of change now needed to ‘catch up’ with those past levels can beillustrated by the case of comparison with Korea. The current intensity of R&Dperformed by business enterprises in Thailand lags around 10-15 years behind thelevel in Korea in the early 1980s when that country had a similar level ofindustrial and manufacturing development as contemporary Thailand. Theintensity of business-performed R&D in Thailand would need to be increased toaround 20 times its present level in order to ‘catch up’ with the intensity inKorea at the corresponding stage of industrial development.

• At this stage, however, the most important thresholds of technological capabilitythat firms need to cross are not concerned with formally organised R&D. Formost larger firms and a few SMEs, they are about building their design andengineering capabilities as a basis for starting significant technology developmentactivities. Only for a few firms that have already built that level of capability isthe relevant threshold now about deepening it further to build up R&D capabilitiesand activities. For the majority of SMEs, especially in more traditional industries,the most important capability thresholds are concerned with increasing theefficiency with which existing technologies are acquired, used and operated.

• There are signs that very early steps in the transition towards an enterprise-basedtechnology development system were being taken in the few years before thecrisis, and those may have accelerated again in the last year or two. Underlyingmarket conditions, and greater awareness of the significance of the technologicaldimension of competitiveness, seem to be bringing a much larger number of firmstowards investment in their own technology development capabilities andactivities.

• However, the required scale and intensity of investment calls for a huge andpervasive learning process in industry. Many firms will have to abandon deeplyrooted perspectives on technology that have dominated industrial investmentbehaviour for 30-40 years, and they must learn about the costs, risks and returnsinvolved in investment in types of technological activity and capability withwhich they have very limited familiarity.

• Beyond that, it will be important to develop much more significant technologydevelopment interaction between firms in order to enhance the competitiveness ofexisting clusters and value chains, and also to increase the extent and scope ofthose linked structures of industrial production operating within the Thaieconomy.

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• While the large and pervasive shift in industry’s technological behaviour must bedriven primarily by change in locally owned firms of all sizes, it will also beuseful to abandon common views about the limited technological role of TNCs inThailand. In both industrialised and some industrialising economies the roles andstrategies of TNC subsidiaries seem to be shifting towards a greater localisation oftechnology development activities, and there appears to be greater flexibility inthe extent to which they do so in particular locations.

• This appears to be happening in Thailand as well and, contrary to commonperspectives, TNC subsidiaries are now playing a positive technologydevelopment role, and this appears to generate significant spill-overs to the rest ofthe economy. Beyond that, as many subsidiaries and joint ventures in Thailand aredeepening their technology development activities, there seems to be significantpotential for linking this process much more strongly to local institutions and forincreasing the spill-overs generated within the local economy.

A single basic question arises from this review: what accounts for the fact thatindustry-oriented technology policy in Thailand over the last 40 years or so has leftthe core of the country’s industrial technology development system lagging so farbehind other rapidly industrialising countries in the region, and how should theselimitations be changed?

This can usefully be separated into two sets of questions about policy.

1 To what extent do existing policy measures in Thailand provide a set of incentivesand support mechanisms to reinforce industrial firms’ efforts to deepen theirtechnology development activities and to cross the thresholds of capabilitydevelopment they currently face? More specifically, are those even adequate totackle the challenge of catching up with the past capabilities of other countries inthe region when their levels and structures of economic development were similarto those in contemporary Thailand?

2 To what extent are other S&T organisations and institutions aligned to supportand contribute to this technology deepening process in industry?

We address the first of these questions in the next chapter – Section 3. The second isexamined in outline in Section 4, and an overview of the broad approaches to policy isprovided in Section 5, with an emphasis on measures that might be taken to redressthe current imbalance and…..

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3 Policy: Incentives and support for firm based technologydevelopment

3.1 Introduction

The most important incentives for technology development by industry are thosewhich stem from the market conditions faced by firms. However, throughout theindustrialised world and in many industrialising countries it has long been commonfor governments to reinforce these market incentives with policy measures to offsetweakness and ‘failure’ in the effectiveness with which markets stimulate firms’investment in knowledge.

Some of these policy interventions consist of legal mechanisms to increase incentivesfor investing in the creation of new knowledge – e.g. setting up or reinforcing varioustypes of protection for intellectual property rights. Others take the form of financialincentives (subsidies) and/or various kinds of publicly funded services designed tostimulate firms to make greater investments in knowledge than they would otherwisemake.

In this chapter we concentrate on the second of these categories, focusing on twobroad classes of mechanism: (a) tax incentives, grants and other measures tostimulate and facilitate investment in technology development (usually described as‘R&D’ incentives); and (b) tax incentives and grants to stimulate investment inknowledge via training and other forms of skill development.

First, however, we highlight the importance of incentives that stem from the marketconditions faced by firms. These fall into two broad categories: ‘competitivepressures’ and ‘market opportunities’. It has been common to argue that both of thesewere restricted over many years in Thailand by a wide array of policy measures. Inparticular, the importance of constraints stemming from high levels of trade protectionhave long been noted 38 – for example in the World Bank’s study on TechnologyStrategy and Policy for Industrial Competitiveness carried out ten years ago:

“Protection in Thailand has remained high despite the increased efforts to promoteexports, and has not forced domestic enterprises to face foreign competition or

38 We would argue that it was not so much the protectionist trade policy regime per se that was the

key issue. Instead it was more the manner in which trade and industrial policies wereimplemented. First, the management of entry into protected industries was not made conditionalon performance, including technological performance (as it was in Japan and Korea). Second, asin so many industrialising countries, but not all, trade policy was not manipulated to achievecompetitiveness by systematically reducing protection in particular industries after relativelyshort infancy periods, so forcing firms to face international competition at relatively early stages.Third, there were neither pressures from, nor support by, government to stimulate firms to investin developing their own technology development capabilities. In principle therefore, the tradeand industrial policy regime per se was not an inherent constraint on building competitiveindustry in Thailand. It operated that way in practice because Thai governments, likegovernments in many countries, were incapable of managing a protectionist regime inconstructive ways during the 1950s to early 1990s, and could only operate it as a regime thatstimulated rent seeking business behaviour.

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increase productivity and efficiency. Continued protection of the Thai economy has,therefore supported the predominant domestic orientation of companies and haslimited the efforts to increase technological capability.” (Dahlman and Brimble,1990, p. 9)

Since then, trade liberalisation has significantly reduced those constraints and, assuggested by the anecdotes cited in the previous chapter, this has almost certainlycontributed to the pressures that have pushed at least some firms towards deepeningtheir technological capabilities and activities. It is less evident that new marketopportunities have had the same positive effects. In particular, even in domesticmarkets, firms have been very slow to exploit opportunities to supply moretechnologically demanding goods and services to the expanding automobile andelectronic industries.

Despite further measures to increase liberalisation in the aftermath of the crisis, therewere some selective steps backwards towards greater protection; and protection levelsremain quite high for some industries (see e.g. World Trade Organisation, 1999).However, further liberalisation will be implemented over the next few years as part ofThailand’s participation in global and regional agreements to reduce trade barriers.These next phases are likely to cut more deeply into the protection currently availableto several key areas of industry such as automobiles, food processing and textiles. Forthis to result in positive outcomes for incomes and employment, pervasive and majorincreases in competitiveness will be required. A significant component of those willhave to depend heavily on investment by firms in deepening their technologicalcapabilities and activities. It is therefore important that incentive mechanisms tostimulate such investment are at least as effective as they are in other competitorcountries. Given the country’s ‘backlog’ in catching up and the magnitude of thelearning effort required, it is probably important that they are more effective than that.

3.2 Tax Incentives and Other Support for Technology Development

In several discussions during our study, we encountered considerable uncertaintyabout the basic principle of using public funds to stimulate and support the technologydevelopment activities of private industrial firms. It was commonly suggested to usthat, while this might perhaps be appropriate as a measure to benefit disadvantagedsmall firms, other firms “did not need it”. In effect, there seems to be a common viewthat public expenditure should only serve a ‘welfare’ role. It is thought legitimate tosupport ‘the deserving poor’ among firms, but not to enhance the knowledge baseunderlying the competitive strength of other firms, regardless of the public benefitsthat might flow from doing so. This was surprising for two reasons.• First, such views paid no attention to the principles or practices in this area that

are common across industrialised and other industrialising countries whereindustrial technology policy measures are primarily used to enhance industrialcompetitiveness, and only secondarily (if at all) to meet social welfare objectives.

• Second, those comments usually involved a fairly fundamental internalcontradiction: the sceptical views about using public funds to support technologydevelopment (say, R&D) performed by private industrial firms were usuallyaccompanied by quite positive views about using public funds to support R&Dperformed by government organisations for industry. In effect, there seems to be afairly common view that public expenditure on R&D undertaken by the public

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sector is a ‘good thing’ while public expenditure to support the same kind of R&Dundertaken by the private sector is ‘a bad thing’.

These perspectives are a fundamental obstacle to the development of policy measuresdesigned to strengthen technology development activities in enterprises – measuresthat have been accepted as legitimate and pursued in many other countries. It maytherefore be useful to review the rationale for this type of policy. We do this inSection 3.2.1 below. We then comment on the diversity of mechanisms that havebeen designed in other countries to meet differing policy aims in particularcircumstances (section 3.2.2), providing examples in Appendix A. We comment onaspects of the impact and efficiency of these approaches in other countries in Section3.2.3, including comment on the limited constraints that seem to be imposed in thisarea by the WTO agreement on subsidies. Finally we review the approaches taken inThailand in Section 3.3.4.

3.2.1 The Rationale

It may be appropriate to start with a very simple point. The most widely acceptedrationale for public funding of civil industrial technology development by privatefirms has almost nothing to do with providing benefits for individual firms. It isabout securing benefits for society at large. Because most of the mechanisms forachieving that objective operate by encouraging firms to do what they would not do inthe absence of public funding, they will usually also result in benefits for individualfirms, but that is not the primary aim and does not provide (much of) the rationale forpolicy.

The starting point for the most commonly accepted rationale for policy of this type isa set of economic arguments about the inability of market mechanism to ensure thatinvestment by firms in creating or acquiring knowledge will be effective in generatingthe full potential benefits for society. There are two somewhat different kinds ofreason for this ‘market failure’. One is about ‘externalities’ and the second is aboutother kinds of ‘market imperfection’.

Externalities and the appropriation of returnsPart of the argument under this heading stems from views about the peculiareconomic properties of knowledge. In particular, it is a ‘non-rival’ good. In otherwords, having been created or acquired by one person, it can be acquired and used byanother without depriving the first person of the ability to continue using it. That canbe contrasted with commodities and artefacts (like bricks, for instance) which can beused productively by one person or another, but not by both.

One can of course sell a brick to someone else and capture in the price a reasonablereflection of its economic value, but that highlights another peculiarity of knowledge.It is usually quite difficult to sell it in a way that allows the creator to capture itseconomic value. In the first place, for instance, one may have to disclose, and hence‘give away’, elements of the knowledge in order to describe for potential buyers whatis on offer. Then there are numerous other ways in which knowledge may ‘leak out’from its original creators and ‘spill over’ into uses and applications elsewhere. Inother words, knowledge created by one actor may be used quite widely in societyyielding benefits to other actors that are additional to the benefits captured by the

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original creator. Beyond that, if spill-overs are significant and competition is intense,a substantial part of the benefits from new technology may be captured by consumersin the form of lower prices and/or higher qualities rather than by the originaltechnology creator in the form of higher profits. That of course is a benefit to society,but it involves a reduction in the gains that can be appropriated by the originalinnovator.

In short, there are strong grounds for believing that, in principle, the gains accruing tosociety at large as a result of industry-performed technology development may belarger than the gains accruing only to the original creator of the technology.Numerous studies have suggested that, in practice, the value of such ‘externalities’can be very substantial and the social rate of return on R&D investment is often verymuch greater than the private rate. The implication is that, if private decisions aboutinvestment in R&D could somehow take account of these future additional benefits tosociety, the scale of investment would be greater and the benefits to societycorrespondingly greater also. In that sense, it is suggested, private firms operatingunder market conditions will ‘under-invest’ in technology development relative to thelevel that would be socially desirable. A role for government is therefore to stimulatehigher levels of investment up to the point where the marginal cost equals themarginal social return.39

Other market imperfectionsOn its own, the externalities part of the rationale for government measures to reduceunder-investment presumes that firms are already taking decisions about investmentin technology development in ways that are fully effective in capturing the privatereturns. In particular, the presumption is that managers will be able to estimate quiteclearly their future returns to technology development, that they know the marginalcosts of successive increments to R&D expenditure designed to generate thosereturns. Moreover, the presumption is that there are no imperfections in capitalmarkets that would make R&D investment more expensive than other kinds ofinvestment with similar returns.

These are fairly implausible conditions. The returns to technology development areoften highly uncertain, as are its costs. Faced with these uncertainties, firms err on theside of caution and invest less than they would if they had perfect knowledge andforesight. It is also often argued that there are imperfections in capital markets, aswell as other factors, that operate to further reduce the investment by firms intechnology development below the level that would be privately efficient. Thus, it isargued, the gap between the actual level of investment in technology development andthe level that would be socially desirable is wider than just the gap between privatelyefficient and socially desirable levels.

In summary then, arguments and evidence about externalities and other marketimperfections support a widely accepted view that private firms operating in marketconditions will typically invest less in knowledge creation and technologydevelopment than would be desirable from the point of view of society as a whole.40

39 For a simple review of the more formal economics underlying this argument see Hall (1996a).

40 This, of course, leaves open the question about how much more would be socially desirable, and itraises questions about the possibility of policy failure in stimulating ‘too much’ R&D.

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The arguments summarised above have been developed almost exclusively in thecontext of the industrialised countries where technology development has become awell-established activity. In industrialising countries where that is not the case, thereis another line of argument centred around the issue of technological ‘learning’.

Learning to develop technology in industrialising economies.In industrialised countries, many of the decision-makers in firms have alreadyaccumulated large amounts of experience in managing and undertaking technologydevelopment activities. This provides some basis for assessing future returns andcosts in a way which should result in decisions that arrive somewhere in the sameball-park as the point at which marginal cost and revenue are equalised – as requiredfor privately efficient decision-making. At the same time, the resources forundertaking technology development are fairly readily available. In particular,personnel with the relevant skills and experience are available, either alreadyemployed in the decision-making firms or hireable in the labour market at reasonablypredictable costs.

Few of these conditions are likely to hold in industrialising countries with low levelsof firm-based technology development. They are likely to hold even less inindustrialising economies like Thailand where industry is, as we have suggestedearlier, at the threshold of starting to engage in significant firm-based technologydevelopment.

In these circumstances, very few managers will have experience of technologydevelopment, and even fewer will have the basis of experience required to estimatereturns and costs with a reasonable probability of arriving even in the same ball-parkas the point required for privately efficient decisions. Moreover, the skills andexperience for carrying out technology development will be in limited supply, and thecosts of engaging in the activity may have to include the unpredictable costs oftraining and/or learning-by-doing technology development in order to create thecapability in the first place. Then, in a very ‘thin’ labour market for such skills, theprobability of outward labour mobility is high, so rendering any venture into the areadoubly risky to a greater extent than usual: firms may not only ‘lose’ to others thetechnology output from their investment, they may lose a major component of theirinput as well – their initial investment in creating the required skills, knowledge andexperience.

In effect, there will be major constraints on the ‘demand’ side, as discussed in Section1. A large proportion of firms is likely to combine relatively low levels of awarenessof the need to change the technological basis of their activities with low levels ofawareness of what to change and how to go about doing so. With reference to Table1.9 and the subsequent discussion, the majority of firms, even larger firms, is likely tofall into the Type 1 and Type 2 categories – with ‘low or zero demand’ for technologydevelopment, or with ‘latent but ineffective demand’.

In this context, firms face a more complex process of technological learning thanwould be the case where more active and effective demand already exists. They needto learn about the need for technological change and about the kinds of change thatmight be relevant before they are likely to make fully effective investments in

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technology development and in building up the underlying capabilities to implementit. In other words, the learning problem is not just about firms finding andimplementing appropriate technological responses to ‘market signals’. It is muchdeeper than that. They need to learn that investment in technology developmentconstitutes an effective response to such signals; and then they need to learn the morespecific kinds of knowledge and skill required to make such responses. Only thenwill there exist the basis for ‘the market’ to work at all – with or withoutimperfections.

Beyond that, the issue is not simply about individual firms. In this context of limitedawareness and demand, decisions by any one firm to invest in technologydevelopment and in accumulating the capabilities to carry it out may be inhibited bythe fact that the comparable decisions of other firms are similarly inhibited. In thissituation of mutually reinforcing under-investment, industry may be locked into avery slowly changing low–level equilibrium.

In that kind of context, one might talk about the existence of more substantial marketimperfections than exist in the developed country context, and hence about the greaterjustification for public policy measures designed to bring private decision-makingcloser to what would be socially desirable. However, there is probably not muchpoint in pursuing that line of discussion. For all practical purposes, there is no marketto have imperfections! The job on hand is to create it, not to reduce marginalimperfections in the way it works.

Consequently, in the context of industrialising countries like Thailand, it may beappropriate for the policy maker to step out of the analytical framework concernedwith marginal deviations from perfectly operating markets – a framework inheritedfrom the industrialised world. What may be needed is a structural approach thatrecognises the long-term need to create a completely new body of skills, knowledgeand other capabilities in industrial firms, and above all a completely new body ofexperience. That may be the main lesson to draw from the approaches to policy inthis field that were taken during the 1970-1990 period in Korea and Singapore. Indifferent ways in these totally different types of industrialising country, policy restedon fundamental long-term commitments to the creation of substantial technologydevelopment capabilities in industry – not just to the efficient allocation and use ofthose resources once they had become available.

3.2.2 Diversity in the Design of Policy Mechanisms

Despite its limitations in the context of industrialising countries, we will return to the‘market failure’ framework in this section because it helps to highlight the importanceof variation in the detailed design of practical mechanisms for using public funds tosupport private technology development. But first one must bear in mind that it is notonly markets that may fail to ensure socially desirable investment in technologydevelopment by private firms.

The fact that markets typically do fail in this way does not lead inevitably to anargument that governments can organise things in ways that will correct theinefficiency. It is quite possible for government action to make things worse. Muchdepends on matching the detailed design of policy mechanisms to the characteristics

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of particular circumstances. Without that, ‘government failure’ may be as destructiveas ‘market failure’. This can be illustrated by noting two of several ways in whichgovernment failure may arise.

First, it is fairly evident that the gap between actual and socially desirable levels ofinvestment in technology development will vary quite widely between differentcircumstances (Hall, 1996a). In principle, policy measures should be differentiatedbetween these circumstances in order to match marginal cost to marginal social returnacross the spectrum. In practice, that is not feasible in any detail, and policy‘corrections’ of market failure will themselves inevitably be imperfect.

Nevertheless, it is possible to develop specific aspects of policy mechanisms thatmove in appropriate directions on this issue. For instance, it is likely that smallerfirms will face greater difficulties than larger firms in aligning their actual investmentlevels with those that would be privately efficient. This could be offset by weightinggovernment funding disproportionately towards smaller firms.

Second, it is quite possible for governments to use public funds in ways that achievelittle impact, or at least an impact that is not commensurate with the publicexpenditure committed. This might arise, for instance, if public funding was used byfirms to cover the costs of technology development that firms would have undertakenin any case, or to cover the costs of activities which had nothing to do withtechnology development even though they were described as such. In other words,public funding might simply transfer windfall profits to firms without influencingtheir behaviour in ways that yielded adequate (or any) social return.

Again, however, that is an issue that can be addressed at least partially in the designand administration of the particular funding mechanism. For instance, as we outlinein Appendix B, governments in several countries have devised schemes that focusexclusively on additions to R&D expenditure by firms. They have also developedmonitoring/approval systems to ensure that firms do not claim public technologydevelopment funding for activities that are not technology development.

These and other considerations have led to the development of a wide diversity ofdifferent kinds of mechanism. Appendix B provides detailed illustrations of some ofthis diversity under two broad headings: tax incentives and direct grant-basedsubsidies. The purpose is not to provide a ‘menu’ from which one can simply selectmeasures for application in Thailand. We do argue strongly later in this chapter thatthe time is long overdue for Thailand to develop a much more effective array ofpolicy measures in this area. However, an equally important conclusion is about theneed to exploit the diversity of available experience as a body of understanding thatcan be drawn on to inform the independent design of policy measures for specificcircumstances and times.

3.2.3 Impact and Effectiveness

With the growing array of tax incentive and subsidy schemes to stimulate and supporttechnology development in business enterprises, there has been a correspondinggrowth in efforts to assess whether they achieve their intended objectives. However,a major difficulty about these efforts is that it they have almost all focused on

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schemes in the context of industrialised countries where substantial R&D capabilitiesalready exist, and also where many of the schemes have centred on stimulatinginnovation at the international technological frontier. Consequently, most of theanalysis tells us very little about how such schemes might work in industrialisingeconomies at the stage when, like Thailand currently, they are seeking to start asignificant deepening of technology development capabilities and activities inindustrial firms. Nevertheless a number of points might be highlighted.

Several of these, points (i) – (v), concentrate on the particular forms of technologydevelopment that are conventionally described as ‘R&D’. The remainder, points (vi)– (x) widen the range of technology development activities to include the whole rangethat was outlined earlier in Section 1 (Exhibit 1).

3.2.3.1 Outcomes are highly variable.

For instance, one recent review of evaluation studies (Klette et al., 2000) summarisesseveral positive assessments:• - a study of the SEMATECH project in the US “convincingly shows that it has

been a profitable project in terms of social costs and benefits”;• - an evaluation of a programme to subsidise research consortia in the semi-

conductor industry and other high-tech industries in Japan found that“membership in the Japanese consortia typically stimulated private R&Dspending, and also made the research effort more productive … (and) …augments knowledge spill-overs”;

• - an assessment of government support for private R&D projects in Israelreported that:

“there are large private benefits to the firms carrying out these government-fundedprojects, and …the social rate of return is even higher if these R&D programmes inaddition generated any spillovers as presumably was expected”.

On the other hand, the authors produced their own negative evidence about aprogramme to support R&D in Norwegian firms:

“…the effort to promote IT-related manufacturing has been largely unsuccessful ….Government R&D support did not crowd out private R&D spending, but nor did thefirms increase their own R&D spending as was expected in the matching grantcontract scheme…”.

Other studies suggest that the impact of schemes may be positive initially, but thendecline. For instance, a study of the Small Business Innovation Research (SBIR)program in the US found that:

“the superior performance of SBIR awardees is particularly significant in high-techindustries, and furthermore that the first award to a firm plays a significant role,while the marginal value of subsequent awards declines sharply”;

Similar variability between and within programmes can be found across a wide rangeof studies. However, methodologies for assessing the impact of these types of policymechanism are still incomplete and disputed, and a large part of the variation inresults seems to be attributable to difference in assessment method rather than todifference in the impact made.

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3.2.3.2 R&D Tax incentive schemes typically just about ‘break even’

Several studies suggest that tax incentive schemes tend to stimulate about the sameamount of expenditure on R&D as is lost in foregone tax – though there are otherreviews suggesting the opposite. Generally positive comment on this issue can befound, for instance, in Bronwyn Hall’s review of US experience (Hall, 1996a), and inPeter Hall’s review of Australian experience (Hall, 1996b).

3.2.3.3 Nevertheless R&D Tax incentive schemes involve considerable ‘redundancy’

A considerable amount of the tax foregone in such schemes simply pays for R&D thatwould have been carried out anyway. This seems to be much less the case with‘incremental’ forms of scheme that subsidise firms’ increases in R&D, but even anincrease in R&D in the presence of an incentive might have occurred without thesubsidy.

3.2.3.4 Linking tax incentives to corporate income tax can dissipate their effectiveness

This is reflected in both analyses of company responses to incentive systems and inthe recent design of schemes that de-link the incentive from income tax (e.g. theNetherlands system that links it to employment taxes), as well as innovativearrangements to deal with the problems of tax loss firms that cannot fully useavailable incentives. However, instead of arguing for detailed design features in taxincentive systems, some arguments go further and suggest using a simple subsidypayment (direct grant) equal to a specified proportion of R&D expenditure.

3.2.3.5 Impact and effectiveness seem to depend heavily on careful design and adaptation

The particular characteristics of market failure differ across situations, and thepatterns of response to particular measures may also differ. Not surprisingly thereseems to be some evidence that different kinds of measures suit different situations(e.g. Hall, 1996b). One striking example of this is the German SME-centredprogramme summarised in Appendix A.

Not only was this targeted on a specific objective, its effectiveness was quite carefullymonitored and significant adaptations were made during the life of the programme.Then, when it seemed that its main purpose had been served, it was scrapped.Assessment of its impact are strikingly positive. The number of ‘free riders’ wassurprisingly low – only about 15 per cent of firms merely used the subsidy to reducethe costs of the R&D they would have undertaken in any case. A large part of thefunding was used to expand ongoing R&D activities or to advance the start of projectswhich, otherwise, would not have been carried out on the scale undertaken or wouldhave been initiated at a later date. Broadly, the programme appears to have achievedits objective of increasing the number of personnel engaged in R&D. Particularlystriking, especially in relation to the conditions facing many firms in Thailand, a largepart of that increase was achieved by raising the proportion of working time spent onR&D by employees with only part-time R&D responsibilities. It is also striking thatthe type of work undertaken was rarely research. Instead it was the adaptation ofexisting products and the development of advanced versions of existing designs. Allthese features suggest that:

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“…the programme primarily improved the level of development activities foradaptation and modernization, and reached many small and medium-sized firmswhich did not previously benefit from research, technology and innovation policies.”(Meyer-Krahmer et al. 1983, p.166)

3.2.3.6 Stimulating technology ‘diffusion’ is more important than technology ‘invention’

Across a widening array of industrialised countries, governments have becomeincreasingly aware over the last 10-15 years that forms of technology development(including R&D) concerned with the acquisition, application and utilisation ofexisting knowledge and practices may have much greater effects on competitivenessthan forms that centre on creating new inventions and ‘original’ innovations.Consequently, measures to facilitate and stimulate these kinds of technology‘diffusion’ may yield greater benefits to society as a whole than measures focusingsolely on technology ‘invention’.

As this awareness has gradually grown, the diversity of policy measures has furtherincreased. As illustrated in Section 1 (Exhibit 10) and in Appendix A, there is now avery wide range of differing mechanisms designed to stimulate firms’ awareness of,access to and application of existing knowledge and good practice.

3.2.3.7 Financial incentives cannot radically change firms’ technological behaviour

Evaluation of the German programme also illustrates the importance of the point thatwas emphasised earlier about the conditions under which policy-based incentives arelikely to have an impact.

“Those firms which had already been convinced of the importance of R&D for thecontinued existence of their enterprise were reinforced in this attitude by the grants.Those firms for which R&D played only a marginal role, or which adopted arelatively sceptical attitude to this corporate function, were not likely to change thispoint of view as a result of claiming a grant … [though] in these firms, a relativelyskeptical management is frequently opposed to the R&D staff whose position,however, is strengthened by a grant when it comes to the allocation of resources.”(Meyer-Krahmer et al. 1983, p.166)

This echoes a conclusion reached in many studies. Financial incentive mechanisms,however they are designed, will not on their own induce radical changes in attitudeand behaviour.41 They can reinforce changes that are also being induced by otherforces; they can accelerate the translation of emerging views into new kinds of action,and they can help to transform tentative experiments into habits. This highlights theimportance of the kinds of mechanism that are designed to change ‘demand’, asdiscussed in Section 1. Further examples of such mechanisms are outlined inAppendix B where they are described as mechanisms to strengthen the ‘strategic’capabilities of firms.

41 This point is also made in the report on the TDRI study of innovative activity in firm in Thai

industrys, drawn on in the previous chapter (TDRI, 1998)

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3.2.3.8 Integrated administration of policy mechanisms increases effectiveness

The administration of policy mechanisms, and not just their design, may influenceeffectiveness. In particular, it seems likely that their impact will be greater if theadministration of ‘subsidy’ schemes is closely linked to the administration of schemesproviding services to support technology development in industry. Advice andinformation about the practicalities of technology development activities, preferablylinked to advice about market opportunities, can be closely associated with theprovision of information and advice about financial support that can help intranslating those ideas into action.

3.2.3.9 The administration of tax incentives and direct subsidies may be similar

It has been quite common to argue that, because of fundamental differences inadministration, the impact of tax subsidies and direct grants will inherently be quitedifferent. On the one hand, it is suggested, tax incentives are not ‘selective’ and sorequire no administrative discretion in their application. They are therefore likely toavoid ‘distortions’ in market outcomes, the promotion of rent-seeking behaviour byfirms, and corruption by administrators. On the other hand, grants and similarsubsidies, are often described as inherently ‘selective’. They require bureaucrats to‘pick winners’, so giving administrators discretion over the allocation of resources toindividual businesses – with all the well known outcomes.

Much of the literature therefore argues that, as a matter of basic principle, taxincentives will be more efficient than direct grants. We suggest that increasingdiversity in the design of both types of scheme has made this distinction irrelevant tocontemporary practice. There seems to be no inherent difference, for instance,between, the following two types of scheme.• A tax incentive scheme in which (i) the types of technological activity falling

within the scope of the provision is broadly defined (e.g. expenditure on R&D asdefined by the WTO); (ii) the acceptability of activities claimed to meet thecriteria are technologically audited with considerable care; and (iii) the resultingtax credits may be provided as cash grants for tax loss firms, or drawn downduring (or even in advance of) the time when expenditure is incurred.

• A grant-based scheme in which (i) the activities eligible for grant are also broadlydefined without requiring anyone to ‘pick winners’ among a range of technologiesor industries; (ii) activities proposed by firms as meeting those criteria aresimilarly audited systematically by technically informed assessors; and (iii) thegrants payments are scheduled through the period when the activity will beundertaken.

One can imagine variations on these cases in which the tax incentive scheme is moreselective (e.g. based on R&D expenditure for certain classes of activity) and the grant-based scheme is made more general – for example, the German scheme discussed inAppendix A in which the nature of the firm’s allocation of the grant funds was not acondition of payment. In other words, questions about whether schemes are ‘general’(‘horizontal’)or ‘selective’ seem to have little to do with inherent differences betweentax-based and grant-based arrangements. This may be particularly important inconsidering the implications of WTO provisions on subsidies.

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3.2.3.10 The constraints of WTO agreements may be less restrictive than often thought

In several of our discussions in Thailand, we encountered views suggesting that theprovisions of the Uruguay Round of WTO agreements would pose a major constrainton introducing the kinds of measures discussed in this chapter. However, we believethe constraints are much less significant than suggested.

The key provisions in this area are included in the Agreement on Subsidies andCountervailing Measures in the Uruguay Round WTO agreements. This agreementdefined three categories of subsidy: prohibited, actionable and non-actionable. Thekey general feature of non-actionable subsidies is that they should be ‘non-specific’ (i.e. access should not be limited to certain enterprises or industries) and that eligibilityshould be based on the automatic application of objective criteria. Moreover, even‘specific’ subsidies are non-actionable (though notifiable) if they are subsidies for(parts of) the costs of research and pre-competitive development.

This is likely to permit a very wide range of ‘subsidy’ measures to stimulate andsupport investment in technology development and in the underlying knowledge andcapabilities needed to carry it out. A priori generalisations about what will beacceptable seem unlikely to be helpful; and again the key issues will have much moreto do with pragmatic aspects of the design and administration of particularmechanisms in specific circumstances.

3.2.4 Tax Incentives and Subsidies: The System in Thailand

Tax incentives for Technology DevelopmentThere are two different channels providing tax allowances for firms undertakingR&D. As far as we can assess, neither of these is used by many firms and neitherappears to have any significant effect in stimulating additional R&D, and even less instimulating firms to deepen their design and engineering-based technologydevelopment activities.

One scheme is operated by the Board of Investment which includes tax allowances forselected R&D investments among its portfolio of promotional privileges. The use ofthis facility appears to have been very limited, involving few firms and very smallR&D investments.42 We are not aware of any analysis of the impact of theseprovisions in stimulating additional R&D, but our impression from a few casualconversations with managers is that this is probably insignificant. Seniormanagement in the BOI is aware of the limitations of this scheme as a genuineincentive system to promote and stimulate technology development activities.However, it is not considered appropriate for BOI to develop these provisions furtherin order to play an effective role in this area. This, it was suggested to us, would takethe organisation beyond the scope of its existing responsibilities, calling for differentpromotional mechanisms than those available to it and for substantially differentcapabilities than those it currently has.

The second channel is through the taxation provisions of the Ministry of Finance andits Revenue Department. Since 1994, the depreciation provisions have allowedmachinery and equipment for R&D to be written off at a slightly faster rate than other

42 See TDRI (1998) for information on these issues in the period 1989-96.

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forms of equipment. Although this provision was introduced to encourage increasedprivate R&D activities, it seems unlikely that such a marginal change in the financingcosts for only the capital equipment fraction of total R&D expenditure will have asubstantial impact in raising the amount of R&D performed in industry. In addition,the TDRI report noted earlier (TDRI, 1998) also suggests that firms found theadministrative arrangements complex and unhelpful.43

In 1994, the government introduced a broader, additional tax incentive scheme. Thisallowed 100 per cent expensing of R&D expenditure, plus a further 50 per cent creditagainst income tax. The combined 150 per cent was raised to 200 per cent two yearslater. There appears to be no publicly available information about the use of thisscheme or its impact in stimulating increased R&D activities. 44 However, althoughthe additional 100 per cent tax credit is relatively high, it is questionable whether thescheme does, or even could, have a substantial impact in shifting R&D investmentdecisions in industry. It is even more questionable whether it could have much effecton stimulating firms to deepen their technology development capabilities by enteringinto significant design and engineering activities. There seem to be several reasonsfor this.

(i) Firms are apparently reluctant to claim tax allowances because of uncertaintyabout the eligibility of their technological activities. Since any errors in theself-assessment reporting of tax liability are heavily penalised, claims for‘R&D’ expenditure carry a risk of incurring a high penalty if they aresubsequently deemed ineligible. The problem is apparently enhanced becausefirms also have little confidence in the ability of tax auditors to draw informedand consistent distinctions between R&D and non-R&D. This problem isalready being addressed, and the Revenue Department will shortly be settingup an arrangement whereby firms can obtain from the National Science andTechnology Development Agency (NSTDA) a ‘pre-audit’ of the eligibility ofthe technological activities for which they may subsequently claim tax credit.

(ii) The basic definition of R&D follows fairly conventional ‘narrow’ lines. Evenif interpreted quite loosely, this definition is likely to exclude a very largeproportion of the wide range of design and engineering activities thatcontribute to technology development. Consequently, even if the pre-auditscheme involving NSTDA eases one difficulty about eligibility, it may notaddress this other much broader problem. Moreover, as we have suggestedearlier, this problem centres on the ‘threshold’ of technological deepening thatis currently most important in Thai industry.

(iii) The scheme is based on a highly restrictive operational procedure. Theallowable expenditure by firms must be made in the form of payments to a

43 For instance, “At least one firm reported that it had filed for such provision 3 years ago and had not

yet received an edict on the matter”. Compared, for instance, with tax schemes that can provide up-front financing in advance of the execution of R&D, that kind of experience is hardly encouragingto the would-be R&D performer.

44 The TDRI (1998) study was unable to obtain data on these issues, though it noted that it wasprobably still too soon to evaluate the impact of the scheme. We are unaware of any more recentstudy or publicly available information. See also the comment in the following footnote aboutpractical limitations faced by the Revenue Department.

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specified public or private R&D ‘organisation’ that has been approved by, andregistered with, the Ministry of Finance. While this can cover expenditure onR&D contracted from ‘registered’ public R&D organisations, it posesconsiderable difficulties in the case of expenditure on in-house R&Dperformed by firms themselves – the core of a well-functioning industrialtechnology development system. In order to have such expenditure allowablefor these tax provisions, firms have to separate out their R&D activities andlocate them in a clearly defined ‘organisation’ that can be registered by theMinistry of Finance. In formal terms, this organisational separation can belimited to a clear distinction in company accounts, but even that posesconsiderable difficulties for many firms. In effect it presents firms with therequirement to jump over two qualification hurdles: before they can claimparticular expenditures as eligible ‘R&D’, they must first have a distinct partof their business approved as an ‘R&D organisation’.

While this organisational separation might be feasible (though ofteninconvenient and costly) for the more formally organised parts of the R&Dactivity of large firms, it appears to be inapplicable for the vast bulk ofindustrial technology development that takes place in Thailand or, moreimportantly, might take place if suitably encouraged. Such technologydevelopment necessarily has to be undertaken in close proximity to ongoingproduction and marketing operations. Also, for many firms it is in any case anactivity undertaken on an intermittent and often ‘part-time basis in response toproblems and opportunities arising in markets and production operations. Evenif the required organisational boundary is limited to an accounting distinction,it will often be extremely difficult for even medium-sized firms to organisethese kinds of technology development activity into ‘R&D organisations’ thatare clearly distinguishable in accounting terms. This aspect of the schemeappears to have been designed to help minimise tax avoidance, but it would behard to imagine a system less well designed to serve a role in promotingsignificant deepening of technological activities at the current stage oftechnological development in Thai industry.

(iv) The R&D stimulating role of the scheme is further constrained by its closelinkage to revenue collection. This carries with it the usual difficulties such asthe attenuation of incentive effects by the carry-forward provisions for firmswhose tax liability is insufficient to ‘absorb’ tax credits. This is especiallysignificant because a substantial number of firms already have tax allowancesunder the investment promotional arrangements of the Board of Investment.In addition, of course, even if firms are aware of the existence of the scheme,many of them (especially SMEs) prefer to keep as large a distance as they canfrom the tax authorities, and they are unlikely to choose to narrow that gap inorder to try and obtain uncertain tax advantages in relation to very smallexpenditures on R&D.

(v) Finally, the incentive effect of the scheme may be further attenuated, at least inprinciple, by the fact that it is based on firms’ total, not incremental, R&Dexpenditure. With such a low rate of take-up by firms, the revenue cost of theredundant element of this arrangement is probably still of limited

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significance.45 However, at the very least, the signal that total, not additional,R&D expenditure will be subsidised carries a very limited promotionalmessage.

In effect then, it is not surprising that the scheme is thought to have had very limitedimpact on the technological activities of firms. It might be argued that this stems fromthe specific design features of the scheme because. But this is probably only partlyvalid because it would be inherently difficult to design any tax-based scheme thatwould address the most important part of the challenge facing Thai industry at thisstage in its technological development – the need to deepen technology developmentat the lower boundary of ‘engineering-based’ capabilities and activities. In thatsituation, more direct and flexible grant-based systems are likely to be more effective.

Grants and subsidised credit for technology developmentThere are virtually no mechanisms that draw on public funds to provide grants forfirm-based technology development, or for strengthening capabilities for it. Inprinciple, NSTDA has a grant-awarding facility, but this awarded only eight grantsduring the 1992-97 period46, its operation has not been included in its budgetaryincome arrangements with the Budget Bureau for several years, and it has now beendiscontinued.

In principle also, the Thailand Research Foundation (TRF), set up in 1992, has theability to fund R&D projects undertaken by firms as well as by universities and publicresearch institutes. However, as of 1997, it had allocated only 0.8 per cent of itsexpenditure on finished and ongoing R&D projects carried out by the private sector.47

For all practical purposes, the TRF was operating exclusively as a mechanism forfunding R&D in public sector organisations. Our own discussion with the Foundationas part of this study indicate that this has changed very little.

We understand that administrative concerns about corruption and the misuse of fundsare a major obstacle to the implementation of grant-based systems. If that is so, itconstitutes a major handicap. It therefore seems critically important to designarrangements that can deal effectively with the problems, rather than simplyabandoning the use of a type of policy mechanism that has been found useful andeffective in many other countries.

In principle, industrial firms also have access to a multiplicity of sources of ‘soft’credit for technology development and commercialisation. The TDRI study in 1998identified the following schemes.• The Research and Technology Development Revolving Fund. This facility is

operated by the Ministry of Science, Technology and the Environment (MOSTE).

45 The Revenue Department estimated total claimed R&D expenditure as about 200 million baht in

1995 (the last year for which information is available). With a 30 per cent tax rate, the foregone taxrevenue was less than 70 million. It is believed that this will not have changed much since 1995.Even if all of that foregone revenue is subsidising R&D that would have been undertaken in anycase, it is apparently such a small sum that it does not even justify the costs the Department wouldincur in extracting from its records more up to date information about the scheme’s operation.

46 TDRI (1998, p. 33)47 TDRI (1998, pp. 34-37)

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Over the ten year period 1987-97, it supported only 40 projects, with a total andaverage value of 324 and 8.1 million baht respectively.

• The NSTDA soft loan facility was originally set up under the STDB in the1980s, and continued through the 1990s. In the ten year period up to 1997, itsupported a total of 31 projects with a total and average loan value of 148 and 4.7million baht respectively.

• The Bank of Thailand soft loan facility for R&D projects. This scheme hasoperated through the Industrial Finance Corporation of Thailand since 1989.Between then and 1997, it financed only two projects in its own right, andcontributed with NSTDA to financing two others, with a total loan value of about30 million baht.

That is hardly a striking record of R&D-stimulating finance. To put it in someperspective, the total loan financing over about ten years up to 1997 (about 500million baht) is equivalent to less than half of public funding provided annually inrecent years to NSTDA, a single public R&D organisation.

The TDRI study indicated some of the possible reasons for this limited role of creditfinancing for firm-based R&D. Similar views were expressed in other discussionduring our study. These include the following.• On the supply side, financing organisations operate essentially like conventional

banks, expecting well-defined projects with ‘visible’ commercial returns anddemanding conventional types of collateral.

• On the demand side, funding for clearly defined R&D projects was not a priorityfor many Thai firms. For all the reasons we have outlined already, the nature oftheir emerging technological activities rarely fit that kind of package. Instead,effective support for their technology development efforts is likely to involvesupport for a much wider range of activities and capability-building efforts.

• Even when firms’ technology development activities can be packaged intocommercially fundable R&D projects, such specialised funding is often not thepriority financial requirement for the firms involved.

In order to address some of these issues, the TDRI study proposed the establishmentof a new facility that would concentrate the existing range of financing arrangements,while linking these to some of the necessary advisory, consultancy and capabilitystrengthening services. An approach along these lines to integrate the different kindsof mechanism to support technology development in industrial firms might have veryconsiderable merits. Not only would the array of different funding channels besimplified, but these could be closely linked to a range of subsidised support servicesthat are likely to be much more important at this stage in the development ofcapabilities and technological learning in large parts of industry.

However, there might be even greater merit in considering a yet broader approach tointegration. Precisely because of the current stage of capability development andtechnological learning in industry, there is a very blurred distinction between (i)support for technology development and (ii) support for developing the underlyingskills and capabilities needed to manage and implement it. Policy concerned with thesecond of these inevitably involves policy mechanisms to stimulate industrial trainingand capability development.

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3.3 Incentives for Training and Capability Development

3.3.1 The Absence of Effective Mechanisms in Thailand

We have suggested earlier that, at the threshold of industrial technology deepeningthat is currently most important in Thailand, technology development activities mergeinto various kinds of learning and training. Similarly, building the capabilities toenter into design, engineering or R&D may often require initial investment in trainingand experience acquisition.

It is striking therefore that, compared with several other countries in the region,Thailand has very limited policy measures designed to stimulate firms’ investment intraining and skill development. As we understand it, the only incentive mechanismthat is intended to influence the behaviour of firms in this area is the facilitypermitting a 150% tax deduction for eligible training expenditure.48 Our discussionswith company managers and senior staff in training institutions suggests that this hasvery little impact on the behaviour of firms. This, of course, is not surprising. Studiesin several other countries have shown such schemes to be pervasively ineffective.49

Two features in particular are common.

(a) Very small proportions of firms typically make any use of the tax deductionfacility. The most commonly cited reasons for this are non-awareness of thescheme, its perceived irrelevance to the needs of firms, and the hurdle ofadministrative/bureaucratic procedures involved in gaining access to thefacility – a range of issues that were echoed in our discussions in Thailand.

(b) Even when it is used, typically by large locally owned and TNC-linkedcompanies, the mechanism does not act as an incentive to change thebehaviour of firms. It typically subsidises the types and volumes of trainingthat would probably have been undertaken in any case without the taxdeduction provision. In effect to the extent that they are used, suchmechanisms appear to do little more than transfer windfall benefits fromforegone government revenue to private firms without generating any(significant) benefit for society.

Given the potential importance of introducing more effective mechanisms to stimulateinvestment in training and learning as a basis for deepening technology developmentcapabilities and activities, we review below how a number of other countries in theregion have approached this issue

48 There is also a scheme that aims to influence the investment in training made by individual workers

– the Skill Development Fund which provides finance for individuals to invest in their own training.This appears to have had very limited impact since it was introduced, but we are not aware of anyevaluation of the scheme.

49 Comment on some of this experience, is included in World Bank (1997, Section 4).

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3.3.2 Incentive systems in Other Countries in the Region

In contrast to Thailand’s reliance on an ineffective tax incentive system, several othercountries in the region have developed variations on a different type of mechanism forinducing firms to invest more than they otherwise would in the development of theirhuman resources, or to invest in different kinds of skill development than theyotherwise would. These mechanisms have involved variations on a levy-grant systemby which firms contribute a ‘levy’ to a central fund from which they can secure a‘grant’ to reimburse costs incurred in undertaking training. Such schemes have beenrunning, for instance, in Korea since the mid-1970s, in Singapore since the early1980s, and in Malaysia since the early 1990s. In all cases, the schemes have involveda mandatory levy as the main basis for the grant-providing fund.50 In other words, theschemes set up a pervasive disincentive for not investing in training – not merely anincentive for doing so. In most other respects, the schemes have varied quite widely –both between the three countries and within each of them over time.

Several aspects of such policy mechanisms have only tangential relevance for thisstudy, in particular their role in stimulating general training in basic industrial skills.However, other aspects are centrally important, especially those concerned withdeveloping design, engineering and related management skills and capabilities. Sincethe two areas of capability development cannot sensibly be disconnected, a selectiveoverview of experience in these countries is drawn on here to illuminate key questionsabout policy to support the creation and accumulation of capabilities for technologydevelopment in Thai industry. Since the Government of Thailand is currently in themidst of developing such a levy-grant system, this illumination may be timely.51

The Korean scheme is the oldest of the three. However, for at least two reasons, theKorean experience has perhaps the least relevance for Thailand. First, until quiterecently its operation depended very heavily on Korea’s large-company (chaebol-dominated) industrial structure. Second, it never developed features designed toaddress the specific circumstances of human resource development in the context ofhigh levels of foreign direct investment. In contrast, the experience of Singapore andMalaysia may offer much more interesting and useful insights for policy developmentin Thailand. Nevertheless, it may be worth noting at least some aspects of the policymechanisms in all three.

This brief review takes note of six features of these systems. These have beenimportant variables in the design and operation of the schemes. The first three areconcerned with the financial ‘mechanics’ of the schemes: the levy rates, theexemption systems, and the reimbursement/grant levels and rates. The second three

50 In Korea, however, the original system established in the 1970s operated, in effect, in reverse. It

mandated a specific volume of training to be undertaken by firms (defined in terms of costs as aspecified proportion of the wage bill), and required firms to pay any shortfall in that expenditure inthe form of a training levy.

51 At the time of our discussions in Thailand in May 2000, the outline of a levy grant scheme had beenincorporated in a proposed revision to earlier legislation, and this had been approved in principle bythe Cabinet. However, this defined only the barest skeleton of the proposed mechanism, leavingmany of the key design features to be defined and implemented by Ministerial regulations.

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are concerned with the sources and types of training and with innovativearrangements for the organisation of training provision.52

(i) The levy rateUsually defined as a proportion of the wage bill, this has varied widely betweenthe countries and changed over time within them. For instance, in Korea in the1970s the required level of in-house training expenditure was set at 2% of thewage bill. Recent changes have set up a more flexible system, with a moreconventional levy-grant mechanism incorporating a levy at relatively low levels,with differences across firm sizes – large firms being required to meet a higherlevel (0.7%) than small firms (varying from 0.5% down to 0.1%). In Singapore,the skill development levy was initially 2%. It rose to 4% for a period when rapidand pervasive skill upgrading became an urgent priority, and then fell again to1%.53 In Malaysia, the levy is set at a flat rate of 1%.

(ii) The exemption systemAll the schemes have defined firm-size limits below which firms are exempt fromthe levy system. In Korea, the mandatory training requirements were specifiedinitially only for firms employing more than 200 employees and this was raisedto 300 in 1976, falling back again to 200 in 1989 and to 150 in 1992. Thechanges to the system in 1999 widened the scope to cover almost all firms but, asnoted above, with low levy rates for the smallest size groups.

In Malaysia on the other hand, the levy system had a wide scope right from thestart, with the exemption level being set at firms with only 50 employees.However, it is highly questionable whether such a low level has been effective.Several years after the start of the scheme, almost half of the eligible firms in the50-100 employee category had not registered for levy with the Human ResourceDevelopment Fund (HRDF). Then, about half of those which had registered didnot claim reimbursement for training. Clearly, despite a large administrativeeffort, the scheme was by-passing around three-quarters of the firms in the 50-100 employees category. Moreover, the limited resources available to the HRDFwere unable to enforce significantly greater compliance.

(iii) Grant/reimbursement levels and rates, and government matching fundsThe level of permitted reimbursement has differed between and within thecountries. In Malaysia, for instance, the reimbursement available to any firm in ayear is capped at the level of its contribution to the HRDF. In Korea on the otherhand, recent changes in the system have recognised that some firms typicallycontribute disproportionately to the overall pool of skills for particular industries,and firms are permitted to secure reimbursement up to twice the total of the leviesthey have paid.

Rates of reimbursement relative to the training expenditure incurred by firms alsovary. In some cases, reimbursement has been made at a level higher than the cost

52 At the time of the research, none of these six design features of an incentive system has been

defined in the proposed revision the legislation that aims to create such a system in Thailand.

53 It is actually set as 1% or a flat rate of S$2.00 per head, whichever is the greater.

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incurred – setting up a subsidy ‘premium’ with an intended effect similar to thataimed for in tax deduction incentive systems. In other cases, as in Malaysia,different rates varying downwards from 100% have been set for different types oftraining that are perceived to have differing priorities, and also for different sizesof firm - generally being lower for larger companies.

Clearly, then, some configurations of system can involve reimbursements/grantsthat exceed the levy income. In these cases general government funding has metthe difference, in effect providing matching funds to subsidise the costs of firms’investment in training. In Malaysia, for instance, the government contributed aninitial sum to match the projected company levies in the first year, with a smallersum in each of the subsequent three years.

Thus, in each of these countries, quite a wide array of levy rates, exemptionconditions, and reimbursement levels and rates have been combined to provide astructure of differing incentives for different types of firms and different kinds oftraining provision. This flexibility in the systems, has enabled the schemes to attemptto address differences in what were seen as social and economic priorities in differentcountries; and it has also enabled the schemes to be modified over time as perceivedpriorities have changed within countries – perhaps most strikingly in Singapore.

That flexibility has been reinforced by other features of the systems concerned withthe types of training targeted and the organisational arrangements for their provision.Three of these have been particularly important.

(iv) Sources of trainingThe schemes have given differing emphases to developing particular kinds oftraining provider under the eligibility rules for grant/reimbursement. In Korea,for instance, primary emphasis was placed for many years on developing in-firm training organisations. In effect, the scheme sought to induce larger firmsto set up vocational training organisations to meet not only their own needs forskilled employees but also to act as training providers for other firms in theirindustries. In Singapore, on the other hand, the Skill Development Fundrecognised and encouraged training provision from a wider range of sourcesalongside in-house provision – not only local training organisations andinstitutions but also overseas providers of specialised types of training,including suppliers and parent companies.

(v) Types of trainingIn Korea, the scheme originally centred on providing a wide range of basicentry-level skills for new employees in industry. Over time, as the larger firmsparticipating in the scheme met their own skill needs, they became anincreasingly important source of basic generic skills for other firms in theirindustries, especially SMEs. More recently the scope of eligible training hasbeen widened to give greater emphasis to training in more specialised andhigher level skills.

In Singapore, there was initially no attempt to target particular types or levels of skill,and the majority of grant funding came to be used by firms for various types of‘management’ training. In the late 1980s, the Skill Development Fund sought to re-

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orient this pattern and emphasised training in basic entry-level skills. More recentlyhowever, the Singapore scheme, like the Korean, has widened the eligibility criteria togive more emphasis to higher level, more specialised and ‘pioneering’ types oftraining, and has also sought to target what are seen as high priority fields such as theuse and application of IT.

Thus, in both these cases, the schemes were initially rather blunt instruments, centredon stimulating an increased total volume of training mainly centred (after a bit of adelay in the Singapore case) on fairly general entry-level skill needs. However,increasingly refined design and management of the schemes has turned them intomuch more selective instruments to promote training which simultaneously meetshigh-volume generic types of skill need and more specialised, high priorityrequirements.

The more recently introduced Malaysian scheme has sought to encompass some ofthis diversity in its original basic design. In particular, it provides significantflexibility for firms to secure reimbursement for pre-approved ad-hoc training projectsundertaken in-house or via external training providers. It is quite striking that claimsunder this HRDF facility have outnumbered those under its two other facilitiescatering for more standardised training arrangements. This suggests that the ability torespond flexibly to specific plans and projects at the firm level may be an importantmeans of supporting demand-driven training development, but it also indicates theimportance of informed administrative support for the operation of such schemes.

(vi) Innovative arrangements for the organisation of trainingAn important feature of all the schemes, though probably more striking in theSingapore and Malaysia cases, has been the development of innovativearrangements to help target particular problems.

Many of these have centred on the particular problems of skill development in smallerfirms. In the Korean case, few specific initiatives in this area were taken until veryrecently, and the basic mechanism simply sought to address the issue indirectly byusing large-firm training organisations as the providers of certified basic skills forSMEs – something it seems to have achieved with considerable success in its lateryears. Singapore and Malaysia on the other hand, have developed aspects of theirschemes in ways that seek to address the needs of SMEs more directly. In Singapore,for instance, the scheme was modified in 1992 in order to target SMEs moreeffectively. This has also been the aim of new initiatives under the Malaysianscheme: including (a) mechanisms to reduce the cost outlays made by small firmsbefore they can secure reimbursement, and (b) the organisation of training needsanalysis workshops and clinics.

More striking have been two more recent Malaysian initiatives designed to foster andsupport collective action by smaller firms. The Joint Training Scheme (JTS)encourages groups of firms to collaborate in engaging training providers to runspecific training programmes for them on a joint basis. The intention is that this willhelp to match training provision more closely to firms’ needs while reducing costs pertrainee. At the same time, the JTS provides an additional incentive for the firm thatorganises the collaborative arrangement. The Group Training Scheme (GTS)encourages employer associations to take the initiative in providing training to

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members, with the HRDF providing funds for facilities and initial staffing and set-upcosts.

As yet, adequate experience about the effectiveness of these experiments isunavailable, but training and capability building initiatives based on collective actionappear to have proved highly effective in other countries as well. In addition, there isno reason to confine such experiments to the SME sector. Similar benefits can bederived from collective action by large firms, or by networks of large firms and theirsmaller suppliers. Indeed, it is interesting to note that medium and large firms aremore frequent users of joint training programmes in Malaysia than small firms.

We are not aware of any systematic comparative evaluation of the effectiveness ofthese schemes in terms of increasing the volume of training or changing itscomposition. However, it is useful to note the two basic conclusions from a samplesurvey that permitted a preliminary analysis of the Malaysian HRDF in the mid-1990s:

• within the total sample, including firms with foreign capital participation, theHRDF “has had a significant role in increasing training among medium and largefirms registered with the HRDF, but not small firms”;54

• among purely domestic firms, HRDF “has only been effective in increasing thetraining of large firms with over 250 employees; the HRDF incentive was noteffective in increasing training among small and medium-size local firms”.(World Bank, 1997)

This pattern is consistent with impressions and anecdotes about experience elsewhere,and there is no reason to believe that a system in Thailand that was broadly along thelines of the Malaysian scheme would generate wildly different outcomes. There aretwo ways of looking at this.

The first centres on the conventional framework of thinking that is normally used tounderpin the design of these kinds of training incentive system. This centres on theconcept of ‘market failures’ facing individual firms, giving rise to sociallyundesirable under-investment in training. This perspective might suggest that theresults of the Malaysian study illustrate the fact that market failures are moresignificant for SMEs than for larger firms, leading to the conclusion that the incentivescheme should be modified in ways which strengthen the elements designed to offsetthese greater market failures for the relatively disadvantaged group.

The second perspective lifts the analytical framework above the level of the individualfirm to encompass groups of firms in particular industries or value-chains. Thisperspective would highlight the significance of flows of skills between firms – forinstance, from firms with strong training capabilities to those undertaking limitedtraining. These inter-firm flows of knowledge and skill, it might be suggested, are not‘externalities’ and sources of market failure. Instead, they are ‘internal’ to the multi-firm system, mediated by market forces between those component parts of the system, 54 Size categories used in the study were as follows: micro-firms (15 or fewer employees); small

firms (16 – 100 employees); medium firms (101-250 employees); large firms (more than 250employees).

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and possibly contributing to overall efficiency in the use, creation and (re)allocationof knowledge resources.

From this second perspective, one might seek to develop policy measures aiming to‘optimise’ the investment in training by the system as a whole, not the investment intraining by each individual component firm in the system. The policy implicationsmight be to reinforce the training activities undertaken by larger firms, and toincrease the externalities associated with these activities by taking complementarysteps to increase the mobility of skills and knowledge between large and small firms.That, after all, is a fairly close approximation to the knowledge development anddiffusion systems that were operated by the multi-firm Keiretsu groups in Japanduring the phase of rapid knowledge accumulation in the early post-war decades.55

To move in that direction in the context of an industrial structure where such self-organising groups are virtually absent, one might borrow an element from Koreanexperience and design an incentive system which at least in part induces larger firmsto undertake a disproportionately large share of an industry’s training activity.

That second approach might be especially significant in areas of skill developmentwhich are especially dependent on in-firm training that would be difficult or veryexpensive to replicate in training institutions. We therefore explored in a verypreliminary way during our study the practicalities of this approach. We discussedwith senior managers in a few larger companies whether, with suitable compensationto cover the additional costs, they might be willing to expand some of their higherlevel training activities beyond their foreseeable needs – in effect acting as trainingsuppliers for their industry. In some cases this was not thought possible on grounds ofprinciple – for instance, because of the possible leakage of key proprietary know-how.In others, however, the broad principle seemed quite acceptable. The issue was seenessentially as a matter about practicalities concerning such questions as the levels ofcompensation relative to costs, the numbers involved, and the fields of training whereit would be feasible.

3.3.3 Towards an Incentive System in Thailand

Given the urgency facing Thailand in trying to make up for several decades of verylimited technological capability accumulation in industrial firms, it would be long-sighted to design from the start an incentive system incorporating both of theapproaches noted immediately above:• one which seeks to offset as far as possible the ‘market failures’ facing SME

investment in skills and technological capabilities,• another which seeks to mobilise the skill development capability of larger firms to

serve the interests of industries, clusters or value chains within which they arelocated.

Such a strategy, especially the second element in it, would need to address objectivesabout the types and qualities of skills developed, not just about their quantity. Thiscalls for the design and management of an incentive system that will induce firms to

55 For one example of how this operated alongside a sectoral system of public technology support

institutions, see the study of training and technology support in the foundry industry in Japan byKojima and Okada (1997).

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undertake particular types of training earlier than they might otherwise do, or toundertake higher volumes of training in those ‘pioneering’ levels of training. Morespecifically, in the context of the current structure of technology-developmentcapabilities in Thailand, it would be a system designed at least in part to push skilldevelopment across key thresholds in the progressive deepening of technological andrelated capabilities. This dynamic, structure-changing perspective on the design andmanagement of an incentive system in Thailand also highlights the issue of‘additionality’ would also have to ensure that financial resources were used as far aspossible to induce levels and types of training that would not otherwise take place.

This combination of objectives would involve two approaches to designing anappropriate scheme.• One would be to concentrate resources in the ‘threshold’ areas of skill

development where under-investment was likely to be greatest – for instance, bypermitting relatively high reimbursement rates for training in those areas, perhapsexceeding 100% in some cases.

• The other approach, the ‘flip-side’ of the first, would seek to reduce as much aspossible the allocation of resources to subsidise types and volumes of training thatwould probably take place anyway. This might involve, for instance, not justdefining types of training that are eligible for reimbursement/grant, but alsodefining types that are not eligible.

• We outline below some of the possible features of such a system, with key featuressummarised in the diagram in Exhibit 19. This distinguishes between types of skillsand types of firms.• types or ‘levels’ of skills and training range upwards from basic skills for

operating and using industrial technologies, through intermediate levels oftechnician, engineering and managerial capability to higher levels of R&D andmanagement skills. In this study we are concerned in principle with only the partsof this structure that relate to ‘technology development’. However, as we haveemphasised earlier, that takes us quite deeply into the overall structure ofindustrial labour skills. In particular, in some areas, critically important skillinputs to technology development are at the craft/technician level – for instance,highly skilled toolmakers to support product development, the creation of productprototypes or the development of high-precision automation devices. It alsoincludes a wide range of ‘middle-level’ design and engineering capabilities, largeparts of which typically consist of ‘experience’ derived from ‘doing’ morecreative kinds of design and engineering activity. At ‘higher levels’ of R&Dcapability, the key skill inputs consist not just of ‘technical’ skills, but also ofparticular types of management expertise which again depend heavily onexperience.

• categories of firms - running from small firms (defined here as those with lessthan 100 employees), through medium-sized locally owned firms (defined here intwo categories),

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Exhibit 19 Basic features of a skill development subsidy scheme

CATEGORIES OF FIRMTYPES OF SKILL/TRAINING SMALL

‘Traditional’Industries

MEDIUM (A)Traditional’Industries

MEDIUM (B) LARGE (A)and

‘Advanced’ SMEs

LARGE (B)and

‘High-Tech’SMEs

HIGH-LEVEL TECHNOLOGYMANAGEMENT SKILLS AND

RELATED CAPABILITIESR&D SKILLS

AND CAPABILITIESIncluding R & D Management

DESIGN AND ENGINEERINGSKILLS AND CAPABILITIESIncluding D & E Management

LEVEL 2 GENERALMANAGEMENT SKILLS AND

CAPABILITIES

TECHNICIAN AND CRAFT SKILLSAND CAPABILITIES

(Including Level 1 GeneralManagement Skills)

Only highly specialisedskills in short supply (e.g.

Toolmaking)

Only highly specialisedskills in short supply

(e.g. Toolmaking)

BASIC OPERATING SKILLS ANDCAPABILITIES(Including Basic

General Management Skills)

Not Eligible Not Eligible Not Eligible

FIRM SIZE (Employees) andOwnership

1 - 99 100-299 300 - 499 Domestic firms 500 - 1999 Domestic0 – 999 JVs and WOSs

≥ 2000 Domestic≥ 1000 JVs and WOSs

INCLUDED IN LEVYNO YES YES YES YES

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• to two types of ‘large’ firm (with ‘large’ defined differently for locally andforeign-owned firms).

The more heavily shaded areas in the diagram (as well as the arrows) indicate currentpriority ‘thresholds’ for capability development in the different categories of firm.These indicate that the priority thresholds differ across the firm categories. Withinsuch a framework, one might envisage a skill development incentive system withsomething like the following characteristics.

(i) A levy-grant scheme. Given the urgency of building up a high-skills andknowledge-based ‘culture’ in industry, this would go beyond the re-circulation oflevy payments as reimbursements for (proportions of) the costs of trainingundertaken by particular firms. It would incorporate an additional subsidyelement in the grant component. This might be concentrated in priority skill/firmcategories in order to stimulate more intensive training in those areas and tocompensate firms for the high levels of net outward labour mobility that wouldbe likely for firms providing training in those areas.

(ii) The exclusion of small firms from the levy component of the system. Thiswould recognise the widespread experience of low rates of compliance in suchschemes by small firms, combined with the high administrative costs ofprocessing the very large number of low-value contributions from those firmsthat do comply, and the yet higher costs of trying to secure participation by theothers. In the first instance, the size ceiling might be set at 100 employees, oreven higher. Although it might be lowered later, it may never be cost-effective totake it below 50.

(iii) The inclusion of small firms in the Training Provision Component of thesystem. A very large part of the most important kinds of training needed by smallfirms is likely to be provided by external training suppliers. This might beorganised in two ways. One arrangement would reimburse the suppliers oftraining for (part of?) the cost of providing training to small-firm. In effect, thiswould continue, though extend, current arrangements for small firm trainingthrough organisations like the vocational training institutes of the Department ofSkill Development or the technical institutes operating under the Ministry ofIndustry. This public subsidy for the provision of training for small firms is likelyto become increasingly important as (some of) these institutes becomeprogressively ‘privatised’. Without specific contracts for small firm training,supplier institutes would be likely to discontinue such increasingly unprofitableactivities within their overall training business. A second approach might putmore effective power on the demand side of the relationship by providing smallfirms with entitlements (e.g. in the form of ‘vouchers’) to cover (a proportion of)the costs of training provided by supplier organisations.

(iv) The definition of non-eligible types of training. Particular types of training byparticular categories of firm would be ineligible for the grant component of thescheme. As illustrated by the non-shaded areas in Exhibit 19, these exclusionsmight cover, for instance, training in basic operating skills and generalmanagement skills which larger firms, especially TNCs, already provide veryefficiently for their employees. Designed to reduce the extent to which grant

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payments simply compensated firms for undertaking the training they wouldprovide in any case, these non-eligibility arrangements would ‘free up’ resourcesto enable the scheme to focus positive subsidy incentives on training provision inthe priority threshold areas.

(v) High (or variable) levels of grant capping. Although capping the absolutelevel of grant payable to individual firms, say at the level of their levy payments,would make sense for a scheme that focused only on individual firms, it wouldmake less sense from a more systemic perspective. If the aim was to generatelarger flows of skills between firms as an important contribution to raising thecapability levels of industries or industry sub-groups, one would want to inducesome firms to undertake training beyond their own needs. One would want toincrease externalities, not just try to compensate firms for those that aroseinvoluntarily, and a rigid, uniform requirement that all payments were cappedwould make it difficult to pursue this approach. It might therefore be importantto permit high levels of grant payment in particular situations where firms were,by explicit design and agreement, acting as training suppliers for an industry, itssuppliers or its customers.

(vi) The support of high-priority training and learning projects in areas ofadvanced technology. These might include, for instance:

− provision of training by large firms for their suppliers, along the lines of the LIUP scheme inSingapore,

− the development and operation of collective training schemes by groups of firms, along thelines of the Penang Skill Development Centre and other schemes supported by recentinitiatives in Malaysia,

− surveys of the training needs of firms in particular industries or value-chains,− she design and development of the content of new training packages in high priority areas

(e.g. commissioning by a group of firms of the design of a new training package from auniversity engineering department, or the hiring of an overseas consultant to kick-start a newspecialised training programme),

− short periods of overseas training or experience acquisition in priority areas, as included forinstance in the system in Singapore.

(vii)Support for ‘learning-intensive’ technology development projects inadvanced technology areas. This would include projects in which theacquisition of design and engineering skills and experience was an importantobjective alongside the development of new technology. In contrast to subsidiesfor undertaking R&D and other technology development activities with existingcapabilities already available to firms, support for this type of project wouldcentre on creating new capabilities. In other words, these kinds of project wouldfocus specifically on assisting firms in pushing across capability thresholds in thetop right-hand segment of Exhibit 19.

It may be useful to distinguish between two sub-groups within this list of features Thefirst five might constitute features of a broad and comprehensive approach to theprovision of incentives for general industrial training in Thailand. However, the lasttwo - items (vi) and (vii) – are different in several respects.• They are concerned primarily with deepening industry’s ‘higher level’ design and

engineering capabilities rather than more routine operating skills.

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• They involve activities that are likely to be organised in the form of specificprojects, rather than as more regular and routine training programmes.

• Because of the critical importance of ‘experience’ in developing these kinds ofcapability, many of these projects are likely to be indistinguishable fromtechnology development projects; and conversely a major output of projectsdesigned to contribute to technology development will frequently be enhancedcapabilities for technology development.

• Because of the heterogeneity of activities in this area, and the need for speed andflexibility in providing support, these kinds of project would almost certainly bebest supported by a carefully designed grant-based system, rather than by anannually administered system for supporting more general forms of training.

We therefore suggest that action in this area should be taken along two parallel paths:one concerned with a new system of incentives for general industrial training, theother concerned with a project-based initiative to strengthen specific technologydevelopment capabilities in industry.

1 A new system of incentives for general industrial training. The existingdeliberations, consultations and planning concerned with the detailedcharacteristics of the proposed new Skill Development Fund should be movedahead as quickly as possible, taking account of points (i) – (v) above, and takingadvantage of the experience of schemes in other South and East Asian countries indesigning the operational details.

2 Project-based initiative to strengthen technology development capabilities inindustry. A more detailed study than has been possible in this project should beundertaken as quickly as possible to assess the detailed arrangements to create agrant-based mechanism to support the types of activity outlined under points (vi)and (vii) above. The study should also consider integrating this capability-strengthening initiative with the type of scheme to support technologydevelopment itself that was outlined earlier at the end of Section 3.2.

3.4 Broad Conclusions

There are strong grounds for believing that, in principle, significant public interestsare served by subsidies for investment in technology and skill development by privateenterprises in industry (and elsewhere). These grounds are concerned primarily withthe public benefits arising from increased diffusion of knowledge, skill andexperience in any economy. They are also concerned with the benefits toindustrialising countries from assisting substantial shifts across structuraldiscontinuities in building up a body of technological capabilities in industrial firms.

There is also considerable evidence that, provided they are well designed forparticular circumstances, mechanisms to provide such subsidies have had animportant impact in many situations and, far more often than not, they have alsoconstituted an efficient use of public finance. Although the available evidence on thispoint is scarce for the particular experience of industrialising countries like Thailand,there is every reason to believe that mechanisms can be designed that will be effectiveand efficient in those circumstances also.

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In practice, however, there is virtually no such mechanism available yet in Thailand.In this respect, Thailand again differs from several other countries in the region whichhave implemented a variety of innovative mechanisms for these purposes for manyyears.

We therefore suggest that urgent consideration should be given to five courses ofaction.

• The existing tax incentive for R&D should be reviewed to consider furtheramendments in its design and administration that would increase its effectivenessin stimulating increased R&D by industrial and other firms. Among other issues,this review should explore (a) the need to continue operating the scheme on thebasis of firms’ payments to approved ‘R&D organisations’, (b) the possibility ofdefining ‘R&D’ in ways that come closer to meeting priorities at the current stageof technological development in Thai industry, and (c) the value of operating boththe BOI and standard Ministry of Finance schemes in parallel.

• A study should be undertaken to examine whether and how a simple and flexiblegrant-based mechanism could be put in place to stimulate firms to undertaketechnology development activities involving forms of design and engineeringwork that would not meet the eligibility conditions of the R&D tax incentivesystem. This might be envisaged as a technology development ‘apprenticeshipscheme’ which, focusing on encouraging firms to deepen the early stages of theirtechnology development activities, would only be available to individual firms fora limited period of time or for a limited number of projects. Thereafter, firmswould be expected to ‘graduate’ to meet the eligibility conditions required by the(modified) R&D tax incentive scheme.

• In parallel with that study, or perhaps in combination with it, another enquiryshould examine whether and how a flexible grant-based mechanism could beestablished in order to assist firms invest in training and related capability buildingactivities concerned with strengthening their human resources for design,engineering and R&D. This enquiry would consider two slightly different kindsof activity as outlined in the previous section – both (a) ‘straight’ training-relatedactivities and (b) design/engineering projects with high levels of training/learningcontent. It would also consider ways of assisting investment in such activities byboth individual firms and groups of enterprises with common interests.

• Consideration should be given to the organisational arrangements foradministering such schemes. In particular, consideration should be given toarrangements that would:

− create a ‘one-stop-shop’ covering the range of financial incentives to support advanced leveltraining and learning, technology development at the design and engineering level, and moreformally organised R&D;

− ensure close linkage between (a) activities and organisations providing consultancy, advisoryand similar services to industry, and (b) organisations responsible for promoting these kinds offinancial support for firms.

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At the same time, consideration should be given to ways in which public concernsabout the possible misuse of grant funds might be met – for instance by contractingprivate sector organisations to act as administrative and decision-makingintermediaries between private sector claimants and public sector funding.

• Steps should be taken to move forward as fast as possible with defining andimplementing the details of a broad and comprehensive training support systemwithin the framework of the proposed Skill Development Fund. This is importantin its own right, but is also important for helping to build a stronger structure oftechnology-using and assimilating skills to underpin the deepening of technologydevelopment capabilities. In defining these details considerable efforts should bemade to avoid the bureaucratic costs of inflexible and over-extended aspects ofschemes in other countries, while capturing those aspects of good practice andexperiment that seems to have contributed most to strengthening skills andcapabilities.

Cutting across these further enquiries it will be important to bear in mind the broadissue raised earlier in this study. The problem on hand is not about assistingindividual firms to achieve their own private interests – though that will usually be anecessary means. Instead, the end at stake is about generating system-wide publicbenefits from both creating and spreading knowledge, skills and experience.Consequently the key issue is not about finding welfare mechanisms to supportdisadvantaged firms that ‘need’ assistance – though that might be an addeddimension. Instead the key perspective is about finding ways to enhance investmentsmade by firms to generate important areas of knowledge, skill and experience, and atthe same time it is about finding ways to intensify the extent to which that knowledge,skill and experience spreads across and spills over into the rest of the industrialsystem.

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4 Policy: developing technology institutions

This chapter reviews the structure of public institutions that have been set up tocontribute to industrial technology development in Thailand. It follows the sameformat as the previous two chapters. It first highlights selected aspects ofinternational experience (Section 4.1), then briefly reviews the development ofselected institutions in Thailand (Section 4.2). It concludes with a number ofsuggestions about the future development of the country’s structure of industry-oriented technology institutions (Section 4.3).

4.1 Industrial Technology Support Institutes: Aspects of InternationalExperience

4.1.1 The Importance of Diversity, Flexibility and Institutional Innovation

It is especially difficult to draw on international experience to outline a pattern of‘good practice’ in this area. Three factors contribute to this difficulty.

First, over the last decade or so we have learned a great deal about the ways in whichimportant characteristics of effective institutional structures to support industrialtechnology development vary across different circumstances. We know, for instance,that the institutional arrangements supporting technology development in the contextof strong interactions between large and small firms in Baden Wurtemburg in the1980s differed from those of the structure developed to support the foundry industryin Japan in the 1950s-1980s; and in any case there were important differencesbetween the arrangements for foundries that were part of large-firm Keiretsu groupsand those that were not. In turn, both of those arrangements differed from theinstitutional structures developed in Japan to support technology development in‘high-tech’ industries in the 1980s.

In other words, it is clear that it does not make sense to offer standardised institutionalprescriptions across the wide range of different circumstances in industrialisingcountries. We will therefore try to avoid dispensing a uniform model in the style, forinstance, of UNESCO in the 1960s and 1970s, or of various bilateral science policy‘missionaries’ through the 1960s to 1980s - whether from Australia offering theCSIRO model, from Korea offering the KIST model or from the US offering mini-NAS or NSF structures.

Second, we have also begun to learn that times change. Institutional arrangementsthat were effective in supporting technology development in one phase of economicor technological development may become redundant in another. This is illustrated,for instance, by the rapid evolution of the roles and structures of the ResearchAssociations in Japan between the 1950s and the 1980s. It is also illustrated by therapid evolution of the Singapore Institute of Standards and Industrial Research(SISIR) between the 1970s and 1990s, and by the crisis facing KIST in the late 1990s– this core of the Korean public sector industrial R&D system in the 1970s wasstruggling to find a productive role in that changing structure by the 1990s.

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This suggests that any ‘best practice’ model leading to the commitment of a largenumber of institutional eggs to a single inflexible basket might well pose seriousconstraints on flexibility and evolutionary dynamism in a rapidly changing world.

Third, industrialising countries like Thailand currently face a special case of theproblem posed by changing times. For a relatively large industrialising economy thatretains a substantial rural/agricultural sector, there are simply no prior models of anyrelevant institutional arrangement to support industrial technology development. Noother economy of this type has yet developed a structure of industry-orientedtechnology support institutions that has been successful in the following combinationof circumstances:• A stage of industrial development which combines (a) industry accounting for

around 40 per cent of GDP, (b) generally lagging competitiveness, especially inmanufacturing, and (c) a requirement for rapid entry into the kind of structuraltransition in technology development capabilities discussed in Section 2;

• A phase of rapidly accelerating trade policy liberalisation, with the consequentprospect of progressively more intense competition across a wide range ofindustries and in domestic, regional and global markets;

• a commitment to continuing openness to foreign investment, with somestrategically important industries (e.g. automobiles and electronics) alreadydominated by TNC subsidiaries;

• a commitment to the principles of ‘non-selective’ regulation and policy that areembodied in WTO and related agreements.

With no prior model of institutional arrangements for supporting industrial technologydevelopment in these circumstances, institutional innovation must be the order of theday. This will have to involve a willingness to experiment and invent, a capacity toadapt and modify experiments that look as if they will work, a preparedness toabandon those that don’t, and a culture that rewards and esteems experiment andinvention very much more than it penalises failure.

This does not mean that nothing useful can be from drawn from experience elsewhere.There are a number of features of institutional structures in other countries that seemto have been important in their effectiveness. Some of these are highlighted below

4.1.2 Some Common Features of International Expereince

4.1.2.1 Institutional specialisation

Across the industrialised countries and in the more advanced industrialising countries,the structure of technology institutions supporting industry has developed asubstantial degree of specialisation. In detail, this takes a wide variety of forms; butat a broad level it has very similar features across countries, industries and times.These can be illustrated by the structure of the system in the Federal Republic ofGermany in the late 1980s – not because that constitutes any kind of ideal structure,but because its relatively clear distinctions make it a useful illustrative model. Thekey features are shown in Exhibit 20.

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The first feature has been emphasised already: industrial firms themselves make upby far the largest component of the overall institutional system. Universities have amuch smaller, though still substantial role. Then, all the other institutions togetheraccount for around the same proportion of the whole as the universities. Though it isnot shown in Exhibit 20, it is also pertinent to note that, in the case of Germany,government expenditure in all these non-university institutions together is slightly lessthan government expenditure on R&D that is performed by industry.

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Exhibit 20 Research and innovation system in the federal republic of Germany

(Expenditure million DM, 1987)

Fundamental Research

Long-term applicationoriented (strategic)research

Applied research

Development

Testing

Design, etc.Consultancy, adviceand information

7,110

Industry

Universities

Federal and stateresearch establishments

National research centres

Max PlanckSociety

Technology transfer centres(e.g. Steinbeis Foundation)

Federation of industrial Research Associations

Fraunhofer Society

Technology Developmentin/by Firms

LinkageOrganisations

Other Research Organisations

40,2802,351

2,386

984

490

310

Major area of performance

Minor area of performance

Source: Adapted form Meyer-Krahmer, 1990

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Among the non-university institutions, one can distinguish five main types , each witha relatively specialised role in the overall structure.

The Federal and State research establishments carry out research and relatedfunctions directly concerned with the objectives of federal and state ministries. As inother countries, a large part of this activity is concerned with supporting governmentregulatory, safety and standards-setting functions.

The National Research Centres were mostly set up in the post-war years when mostof the industrialised countries expected much from the combination of large ‘mission-oriented’ institutes and basic ‘big’ science. In particular, as in many other countries, amajor role of these centres was concerned with ‘big science’ in such areas as fastbreeder and high temperature reactors, nuclear fusion, high energy physics, spaceresearch and so forth.

The Max Planck Society operates a number of institutes undertaking basic research,and also providing universities and industry with access to high-cost, large-scalefacilities. It undertakes very little research under contract with industry, providinginstead contributions to the open public knowledge base.

In contrast, the Fraunhofer Society operates a large group of institutes with theexplicit purpose of contributing to the application and diffusion of new technologiesin industry. Core public funding accounts for a relatively small proportion of theinstitutes’ budgets, typically around 30 per cent. The institutes collaborates veryclosely with industry, undertaking contract work that accounts for a large proportionof its total budget. It also undertakes contract research for government mainly in thedefence area. It is important to bear in mind that the Society’s contract research roleoriginated in these public sector areas in the 1950s, and the growth of strongcollaboration with industry did not emerge until the 1970s.

The laboratories of the Federation of Industrial Research Associations perform co-operative research for particular sectors of industry; and they provide testing servicesas well as company-specific technology transfer projects. About 25 per cent of itsbudget comes from public funds and about 75 per cent from industry. Similar researchassociations have been established in several other countries where, as in Japan, theyhave often played an important role is acquiring and diffusing established industrialtechnologies. The Federation also plays an important role in administering undercontract the government grant-based incentive schemes for technology developmentin industry.

There are also a number of specialised technology transfer organisations such asthe Steinbeis foundation. Like consultancy/transfer organisations in many othercountries, this foundation plays an important role in linking firms with sources oftechnical support and advice in institutes and universities.

This pattern of specialisation reflects the particular history of institutionaldevelopment in Germany, but it also reflects the different internal incentive andmanagement systems, and different external networks, different knowledge bases anddifferent ‘cultures’ that seem to be required for different kinds of scientific and

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technological activity. It appears to be very difficult to package these all together inlarge multi-purpose institutions.

Consequently, although the pattern illustrated above has emerged over a long time ina mature industrial economy, a common experience in advanced industrialisingcountries has been the evolution of increasingly differentiated structures oftechnological institutions – as, for instance, in Korea or Singapore.

4.1.2.2 Specialisation among government bodies

Corresponding to the patterns of specialisation among scientific and technologicalinstitutions themselves, there are also in many countries clear distinctions betweenparts of government that support particular segments of the array of specialisedinstitutions. In particular, one can distinguish between the roles of ‘economic’ and‘S&T’ agencies within government.

This broad distinction is common in many countries. ‘Economic’ agencies (e.g.ministries of (trade and) industry) typically take responsibility for the institutions andpolicy measures towards the left-hand end of the spectrum in Exhibit 20 – coveringsuch things as incentive schemes for technology development and capability buildingin industry, and for supporting various kinds of linkage organisation. ‘S&T’ agencies(e.g. Ministries of Science and Technology, or National Councils of Science andTechnology) take responsibility for institutions and other policy measures towards theright-hand end of spectrum.

Not surprisingly, there is often considerable tension between these two spheres ofgovernment, with each seeking to increase resources in the particular areas that itconsiders important. But it seems that such tension can be stimulating andproductive. For example in Korea through the 1970s and 1980s the strongcompetitive tension between the Ministry of Commerce, Industry and Energy(MOCIE) and the Ministry of Science and Technology (MOST) appears to havecontributed to the diversification of initiatives across the whole spectrum of activitiescovered by Exhibit 20 – perhaps to a greater extent than would have arisen withpolicy being driven more exclusively from one or other end of the spectrum. It mayeven be the case that this competitive tension contributed to an overall increase in thescale and intensity of technology development efforts above the levels that mightotherwise have been attained with a more ‘one-sided’ advocacy and development ofpolicy.

4.1.2.3 The role of industry associations and groups

Formal and informal groups of firms have played an important role in helping toshape the development of institutions and their activities. This has included suchthings as direct involvement in initiating plans to set up collaborative research (as inthe case of the creation of a research association to support a small group ofautomobile radiator producers in Japan in the 1950s); lobbying for new institutionalinitiatives (as in the case of the creation of a special chair and institute for printingtechnology in Darmstadt in Germany in the 1970s); overseeing the activities ofcollaborative institutions (as with the Research Associations in the UK); and the directinvolvement in committees and other mechanisms to define future programmes andpriorities (widespread, but especially striking in the case of the Fraunhofer institutes

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in Germany). In addition, as noted above in the case of the Federation of IndustrialResearch Associations in Germany, industry bodies may play a role in theadministration of policy mechanisms to support technological activities in industry.

Industry participation in this wide array of activities has not simply been‘representational’ at high levels on Boards and similar bodies. Important as that is, ithas also involved much more direct and operational roles in orienting the activities ofthe institutional structure towards the interests and needs of industry.

4.1.2.4 Complementarity in University and Industry R&D

Although much is said about the strength of university industry linkages in theindustrialised world, it is important to be clear what this most frequently involves.Industry-oriented university R&D in the industrialised countries has been shaped overthe last 50 years or so to act as a complement to the R&D performed by businessfirms. In particular, firms typically do not expect to acquire from universities ‘ready-made’ innovations that they can introduce fairly directly into their production andmarketing operations. Instead, the outputs of ‘technology’ they acquire consistsmainly of inputs to their own R&D – for instance, new understanding underlying thetechnologies they are developing, advanced research skills and techniques, or newkinds of research instrumentation. University R&D rarely involves the developmentof technology to the point which generates inventions or realisable innovations. Forinstance, after considerable efforts to enhance the contribution of US university R&Dto later-stage technology development in the late 1980s and early 1990s, USuniversities accounted for only about 0.8% of all US originated patent applications in1995.

This common feature of university R&D appears to create difficulties forindustrialising countries which seek to combine (a) the industrialised world’s modelof university-based R&D activity with (b) industry-based R&D that is often weak orabsent. In that situation, the complementary symbiosis of university R&D andindustry R&D breaks down (or rather, it never gets started), and university R&D isseen to be ‘ineffective’. This inevitable disconnection between university R&D andR&D-free industry often leads to calls for universities to take on much more ‘applied’and ‘relevant’ kinds of D that will result in the missing innovations being produced.

However, relative to international experience, such views over-estimate the value ofone kind of output from university research (specific technological ‘results’ that willcontribute to ‘innovations’) while undervaluing another kind of output (skills andknowledge embodied in people, especially in graduates who have been involved inuniversity R&D). This is a broader issue that applies to the role of other kinds oftechnology institute as well.

4.1.2.5 The central role of people in technology transfer to industry

It is becoming increasingly clear that the output from university research to whichbusiness enterprises in the industrialised countries attach greatest value is talent ratherthan technology.56 To a very large extent, their involvement with university R&D is

56 Ref, to SPRU report,

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driven by interests in the people-output from universities, and often the ‘technology’output is incidental.

This people-centred role also constitutes a major part of the contribution made bylinkage institutions like the Fraunhofer Institutes in Germany. They actively promotethe transfer of people through their organisations as one of the most important ways oftransferring technology to industry. Similarly in industrialising countries, despite thehopes of policy-makers and planners that public R&D institutions will generateinnovations for industry, it is often the people-output that is much more important.For example, the Korean Institute of Science and Technology (KIST) is commonlycited in industrialising countries as a highly successful technology institute.However, it is useful to examine quite closely where that success lay. Linsu Kim, hasanalysed the details of technology development in Korea for nearly thirty years andhas summarised the contribution made by technology transfer from KIST to industryas follows:

“…science and technology infrastructure played little role in promoting thedevelopment of industries with mature technologies. The government established…KIST as an integrated technical center, and subsequently its spin-offs, to meetindustry’s technical needs. However, the institutes suffered from poor linkages withindustry at least through the mid-1970s. In these institutes, most of the overseastrained Korean researchers came from either academic fields or from R&Dorganizations of highly industrialized countries that undertook advanced research.Expertise was particularly lacking in manufacturing know-how and the developmentof prototypes which were in great demand in the early years. Furthermore, Koreanresearchers could not compete with foreign licensors in supplying detailed blueprintsand other manufacturing know-how, as well as being unable to assist industry insolving problems in the crucial initial stages.” (Kim, 199, p. 364)

Instead, the contribution of these government research institutes (GRIs) was toemerge later as a people-centred role when industry rapidly expanded its own R&Dactivities from the 1980s.

“The most important but unintended role the GRIs played during the early years ofthe industrialization in Korea was the production of experiencedresearchers…..The government at this time launched various programs to induce theprivate sector to set up formal R&D laboratories. These included tax incentives andpreferential financing….Spurred on by these programs and in response to increasingmarket competition, the number of corporate R&D laboratories increased …. Thenewly established corporate R&D centers were able to draw on the existing GRIs formost of their experienced researchers, as well as on Korean graduates workingabroad.” (Kim and Yi, 1997, p. 172, our emphasis)

That contrast between expectations about transferring newly developed technologiesand the reality of people-centred technology transfer has been quite common in bothindustrialising and industrialised countries.

4.1.2.6 Industry’s demand for the outputs from technology institutes

There is a marked contrast between the results from two kinds of study of the linksbetween technology institutes and industry. One type has sought to identify thesources of ‘innovations’ used by firms, or the sources of information contributing toto their own product and process innovation. Such studies typically show that publicinstitutes contribute very little. For instance:A large scale survey of innovation in firms across twelve European countriesidentified among other things the sources of information that the firms considered

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very important for innovation. Consistently across the whole range of countries,government or private non-profit research institutes were cited by only around 3-5 percent of firms. (see Exhibit 6 in Section 1)

• In a 1985 government survey of 4,226 firms in Taiwan, only about 5 per centreported that collaboration with local research institutes had been the main sourceof the technology they used. The use of their own reverse engineering to extractknowledge from existing products appears to have been much more important.(Hou and Gee, 1993)

• In a survey of Korean exporting firms in the mid-1970s, only 9 per cent of firmsidentified government-supported institutes as an important source of technology.(Westphal et al., 1981)

Another kind of study has enquired more broadly about the use which firms make ofpublic technology institutes (TIs) and has found a very much higher positiveresponses. For instance, based on a survey of about 2000 firms in a range ofindustrialised and developing countries and covering several different industries, aWorld Bank study in the 1990s noted that “…more than 70 per cent had used a publicTI at least once”. (Goldman and Ergas, 1997)

The contrast arises because of the very much wider range of outputs from institutesthat is examined in the second type of study. In the case of the World Bank study itincluded information services, training and standards services as well as problemsolving and R&D. What was striking was the balance in demand between these:

“The overwhelming demand by industrial firms is for services related towhat might be called diffusion, that is, the transfer and application ofknown technology. Firms most frequently use services related toinformation, standards and testing, problem-solving (and trouble-shooting) and technology training. And even when they use R&Dservices of TIs, they tend to want answers to particular questions, ratherthan the development of entirely new technologies. The study unearthedfew examples where firms purchased off-the-shelf, self-containedtechnologies developed by TIs. This was in stark contrast to the claimsand publicly projected image of many TIs, particularly R&D labs.” (p.2)

“The use of individual services varied across countries, sectors and sizes offirms. The most often cited service in Japan was education and training; inKorea it was information services; and in India it was standards and testing.Contract R&D was least cited in all countries.” (p. 17)

Again then, people-centred types of output are identified as important, as is existingknowledge. In contrast, R&D-based innovations and new technologies from R&Dplay a minor part in the pattern of demand. As the report states, this is in contrast tothe claims and projected image of many R&D-centred institutes.

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4.1.2.7 Financial pressure as a stimulus to strengthening links

One implication of that contrast between the claims and aims of R&D institutes on theone hand and the demands of firms on the other is the need for a fairly standardstrategic response by institutes: their ‘product portfolio’ needs to be shaped less bythe internal interests and perceptions of research staff and their managers and more bythe needs and demands of their industrial customers.

It is not surprising therefore that, when pressure has been imposed on publictechnology institutes to increase the income they derive from industry, it has tended tohave two effects. Institutes have altered the profile of services they offer, and theyhave intensified their efforts to market what they offer already.57

This has been evident in a wide range of institutions where government funding forlinkage-type institutes has been cut back or explicitly connected (via ‘matching grant’arrangements) to the level of funding secured from industry. It was evident, forinstance, when government funding for the Research Associations in the UK was cutback by the Thatcher government in the 1980s. It was also evident at the other end ofthe political spectrum when public funding for linkage-type technology institutes inChina was sharply cut back as part of the science and technology policy reformprocess in the 1980s. Somewhere between these two, similar effects have apparentlybeen generated by such measures in countries like India and Brazil.

An ongoing SPRU-managed study of the changing structure of public researchsystems in twelve European countries has shown similar effects. 58 Pressures oninstitutes have been increased in a variety of different ways, but a common responsehas been to shift the type of work carried out. However the study also cautions that,when applied indiscriminately across universities and a wide range of different kindsof institute, these kinds of pressure run the risk of shifting the whole array of R&Dactivity too far towards the short-term end of the spectrum. They may also push R&Daway from public interest problems concerned with such issues as safety and theenvironment. In effect, as institutes seek to increase their ‘relevance’ to industry andtheir income derived from it, there is some risk of blurring important aspects of thedifferentiation and specialisation between institutes which has served useful purposesin the past.

(viii) External environments and differences in the intensity of links

Two characteristics of firms appear to be particularly important in influencing theprobability that they will enter into links with universities and other technologyinstitutes.

First, firms in different kinds of industry will vary in their propensity to do so. Inparticular, several studies have shown that firms in more science-based andtechnology-intensive types of industry will be more likely to draw inputs fromtechnology institutes. For instance, the data from Belussi’s study of the Venetoregion in Italy (see Exhibit 5 in Section 1) shows that very few firms in ‘traditional’

57 There is also a third type of effect: institutes unable to find effective responses to the pressure have

closed.58 J.Senker et al. European Comparison of Public Research Systems, SPRU, September 1999

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types of industry draw on technology from universities and public institutions; firmsin more science-based and larger scale industries are two or three times more likely todo so. The multi-country World Bank study in the 1990s found similar patterns:firms in more science-intensive industries were a little more likely to draw on publicinstitutes, but when they did so they were a lot more likely to draw on R&D andproblem-solving types of service.

Second, the size of firm seems to be important: larger firms are more likely to usepublic institutes than smaller ones. But firm size is closely linked to another factorwhich seems to be more important: the extent to which firms are themselves activelyinvolved in technology development activities. This has been shown in severalstudies that demonstrate the close relationship between the existence (or the scale) offirms’ in-house R&D or other technology development activity and the strength oftheir links with universities and public technology institutes – for example:

“More significant than size is the presence of internal labs or technical departments:firms with internal resources were more likely to seek outside help, from publicinstitutions in particular. Moreover, small firms with internal laboratories were twiceas likely to use public TIs as those without internal laboratories. These resultssuggest the difficulty in reaching and serving small firms, particularly those withoutinternal capabilities.” (Goldman and Ergas, 1997, p. 16)

Very similar conclusions were generated by a completely different kind of studyfocusing on the food processing industry in Australia. This noted that only a minorityof firms in the industry found contract research links with public institutes useful.However, those tended to be particular kinds of firm.

“Three points regarding links with public sector research emerge clearly from thesurvey and supporting interviews. First, the most technologically active firms …placed the greatest emphasis on links with public sector research organisations ….Second, while many firms hold public sector research organisations in high regardand considered them to be ‘very useful’, just as many have a relatively low opinionof the present usefulness of these organisations … Third, the majority of firms’ linkswith CSIRO were intermittent and involved short term problem solving, informationprovision and testing … The low level of long term innovative activity in most firmslimits the development of links with public sector research organisations as suchlinks are clearly a complement to, not a substitute for, in-house R&D.” (Scott-Kemmis et al., 1990, pp. 27-28, our emphasis)

So, once again we return to the issue of complementarity. Across a wide range ofcircumstances, firms that are innovative themselves typically do two things: theyintensify their own internal technology development activities in response to marketpressures and opportunities, and they draw on external inputs to supplement thoseinternal efforts. Two implications seem clear.

First, in seeking to strengthen the links between firms and universities or technologyinstitutes policy may follow two approaches: (a) efforts can be made to improve the‘supply side’ by pushing institutes to alter their ‘product range’ and to ‘market’ itmore effectively, or (b) steps can be taken to stimulate the innovation intensity offirms and hence their demand for the outputs from institutes. On their own, supply-side approaches will often have little impact.

Second, technology institutes are likely to find few customers if they (a) focus onassisting SMEs and (b) concentrate on industries with relatively mature technologies,but then also (c) identify their core business as R&D and the development of

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transferable innovations and (d) see themselves as substitutes for the weak or absentcapabilities of firms.

4.2 Development of the Institutional Infrastructure in Thailand

Because of the focus of this study, this brief review concentrates on industry-oriented S&T institutions, giving no attention to institutions supporting otherimportant areas of scientific and technological development – in particular in relationto agriculture and health. However it does include brief reference to institutionswhich have broad policy and funding roles that cover other areas, as well as theuniversities which obviously cover far more than just industry-oriented science andtechnology.

4.2.1 The evolution of the system

A few highlights in the development of the structure of institutions over the last 50years are outlined below and summarised in Exhibit 21. The review is organised inten-year periods, but the decade boundaries are necessarily a bit rough and ready.

The 1950sIn the 1950s, the only significant centre for ‘research’ was the Department ofScience which had been established in the early years of the century. By the 1950s itwas located in the Ministry of Industry. At that stage it carried out a wide range oftesting/analysis work and a certain amount of applied technology research. For allpractical purposes, this was also the location of science policy advice for thegovernment. By the 1960s, it was also the location of the Atomic EnergyCommission for Peace.

The 1960sTwo main steps were taken in the in the 1960s. First, a National Research Councilwas set up under the Office of the Prime Minister. This involved representation fromalmost all government ministries, and it sought to establish a ‘national science policy’.To this end it was the locus for the science and technology components of earlynational 5-Year development plans. It also had a small research funding role, mainlyconcerned with R&D in Universities.

The Applied Scientific Research Corporation of Thailand (ASRCT) was set up inthe mid-1960s. The basic idea was to set up a central ‘flagship’ for a range ofgovernment executed scientific and technological activities. With respect to ‘applied’R&D, which came to be mainly industry-oriented, it was hoped that the new institutewould be more effective than the Department of Science because it would be set uppartially outside the civil service - as a public enterprise with slightly greaterflexibility with respect to salaries and terms of employment. It was also hoped thateffectiveness would be enhanced by its larger scale and more comprehensivecoverage of a wide range of R&D. Over the years it has consistently been thought tohave fallen far short of these expectations about its effectiveness. At the same time, itwas used as a general purpose vehicle to take on responsibility for a range of nationalscientific functions like the Thai National Documentation Centre; a national role withrespect to standards, instrumentation and calibration; and housing the NationalReference Collection. It was later re-named the Thailand Institute for Scientific and

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Technological Research (TISTR) and was incorporated into the Ministry of ScienceTechnology and Energy when that was established and the end of the 1970s.

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Exhibit 21 Main steps in the development of ‘industry-oriented’ S&T institutions in Thailand

CURRENTLY MINISTRY OF SCIENCE,TECHNOLOGY AND ENVIRONMENT

(MOSTE)

MINISTRY OFINDUSTRY

UNIVERSITIESAND MINISTRYOF UNIVERSITY

AFFAIRS

OFFICE OF THEPRIME

MINISTER(AND OTHER)

POLICY AND FUNDING RESEARCH AND LINKAGE1950s (Pre-1950)

Department of Science1960s National Research

Council of Thailand

Applied ScientificResearch Corporationof Thailand(ASRCT, later TISTR)

1970s Development oftechnical institutes

1980s(Thailand DevelopmentResearch Institute,TDRI)

Science and TechnologyDevelopment Board (STDB)

Three National Research Centres, BIOTEC thenMTECNECTEC

1990sThailand Research Fund

National Science and Technology Development Agency (NSTDA)

2000+ ???A National Council forS&T ?

Reinvigoration of MoItechnical/service supportinstitutes

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The 1970sDuring the 1970s, steps were taken to strengthen or establish a number of sectoraltechnical and service institutes under Department of Industrial Promotion of theMinistry of Industry, these covered industries with substantial numbers of small firmssuch as foundries and textiles.

At the very end of the 1970s, a Ministry of Science, Technology and Energy(MOSTE) was created. This was designed to replace the National Research Councilas the oversight body for all government policy in the S&T area - though the NationalResearch Council remained in existence and was incorporated into MOSTE. Inpractice, however, the Ministry’s policy role is exercised only at the most generallevel, since effective policy responsibility in many areas of S&T lies with the relevantsectoral ministries.

The Ministry also became responsible for most of the public organisations involved inexecuting industry-oriented R&D. So it came to acquire direct responsibility for theDepartment of Science (transferred from the Ministry of Industry and renamed theDepartment of Science Service) and for TISTR. It also incorporated the Commission(now Office) of Atomic Energy for Peace. Several government activities concernedwith energy and the environment were also incorporated in the Ministry – and the ‘E’now refers to Environment. MOSTE also has a private sector research funding roleexercised through the Research and Development Revolving Fund - though as notedearlier this has operated on a very limited scale.

The 1980sThree main steps were taken in the 1980s. First, a group of three National ResearchCentres were created under the auspices of MOSTE. The first of these, the nationalCentre for Genetic Engineering and Biotechnology (BIOTEC) was followed by twoothers in broad areas of technology thought to be of strategic importance: theNational Centre for Metals and Materials Technology (MTEC) and the NationalCentre for Electronics and Computer Technology (NECTEC). These were initiallycreated to fund R&D undertaken by other organisations.

Second, almost in parallel to the development of the national centres, the Science andTechnology Development Board (STDB) was set up to operate a US-Thai technicalassistance project. This also was created as an R&D funding organisation, with astrong emphasis on funding technology development in the private sector – thoughthis came to involve quite substantial funding of work in universities and publicinstitutes carried out in varying degrees of collaboration with the private sector. It alsocame to develop a range of other support schemes for private sector industry -industrial consultancy and technical assistance, support for technology acquisitionfrom overseas, etc.

Third, the Thailand Development Research Institute was set up. This was a ‘think-tank’ covering a wide range of policy issues. It was created as a foundation-typeorganisation with almost complete independence from government. It had a divisionconcerned with Science and Technology Policy research this has undertaken a numberof major studies on aspects of industrial technology development.

The 1990s

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The most important step during the 1990s was the establishment of the NationalScience and Technology Development Agency (NSTDA) in 1991. In at least tworespects, this step was very similar to the creation of TISTR twenty-five years earlier.First, while the organisation was to be wholly (or very largely) funded bygovernment, it was created as a ‘specialised agency’ which was yet further outside thestandard government bureaucracy with a formal status that permitted both highersalaries that were more competitive with the private sector and greater budgetaryflexibility. Second, the aim was again to establish an organisation that would play amajor ‘flagship’ role within the overall national scientific and technological effort.The legislation to establish the new body was framed very broadly, and through asubstantial process of functional integration and diversification, NSTDA has becomea major operating arm of MOSTE, covering a wide range of roles and responsibilities.The main features of that process of integration included the following:

• The National Centres of MOSTE were incorporated into NSTDA, but during theprocess of developing the legislation a substantial R&D performing role wasadded the their funding role. As well as continuing to fund R&D, mainly in theuniversities, they were now seen as being the basis for national centres ofexcellence in actually carrying out R&D in their respective fields, and this becameincreasingly emphasised and ‘concretised’ as plans for the physical facilities ofthe new ‘Science Park’ came to concentrate almost entirely on laboratory andother facilities for NSTDA and its National Centres.

• The private sector-supporting operations of STDB were incorporated into the newbody and became the Private Sector Support Programmes in the NSTDADepartment of Industrial and Techno-Business Development.

• A substantial role in managing and funding national human resource developmentprogrammes was developed – partly in its own right, and partly on behalf ofMOSTE.

• It was expected also to play a major role with respect to policy analysis and policyadvice, and this has become an increasingly visible activity.

• At the same time it has taken on management/development responsibility formajor infrastructure projects such as a large Science Park and a Software Park.

A second important step was the creation of the Thailand Research Fund in 1993.This is exclusively an R&D funding body, supporting work mainly in the universities,but also in public sector institutes and, to a very small extent, the private sector.59

A further series of important steps was started in the 1990s. These have involvedmajor efforts to reinvigorate the technical institutes of the Department of IndustrialPromotion of the Ministry of industry, together with the establishment of newinstitutes. These have responsibilities for providing a range of support service forindustry – training, consultancy, testing, provision of market information and advice,and so forth. The reinvigoration has included things like (i) incorporating them under‘foundation status’ which provides them with greater independence from civil servicepay scales and bureaucracy, and (ii) the appointment in several cases of new directorswho have substantial industrial and managerial experience.

59 Further information about the TRF is provided in Appendix C

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Steps have also been taken to change the status of TISTR and the Department ofScience Service, moving them towards foundation-type status, with requirements tobecome substantially self-financing within defined periods of time.

2000+Around the middle of 2000, at the early stages of this project, there was considerabledebate about three areas of governmental re-structuring which, if implemented, wouldhave important implications for the issues addressed here.

First, plans have been made to establish a National Science and Technology PolicyCommittee. The proposal is that this would be located in the Office of the PrimeMinister in order to provide an overall framework of science and technology policy atthe national level. In effect, this would return the main policy-making component ofthe institutional structure to its shape in the 1960s and 1970s when the NationalResearch Council, also in the Office of the Prime Minister, had overall formalresponsibility for science and technology policy at the national level.

The plans also include a proposal that the Council’s secretariat, as well as its coresource of policy research and analysis, would be provided by NSTDA. This wouldfurther reinforce the pervasive diversity of NSTDA roles in the institutional system.It would be at the heart of overall planning and policy-making, with a responsibilityfor providing an overall national perspective. At the same time it would be a majorrecipient of public funds for R&D and related technological activities, while its ownNational Centres and Department of Industrial and Techno-Business Developmentwould be major claimants on those funds.

Second, as a follow-on from the proposal to set up a National Council, considerationwas apparently given to the future role of MOSTE. One view considered that theMinistry would be redundant if there was both a new National Science andTechnology Policy Committee in the Office of the Prime Minister and a continuationof NSTDA’s broad-ranging operational responsibilities covering the spectrum frompolicy analysis and advice, through the funding of R&D and human resourcedevelopment to the provision of funding and technical support for industry. Othersargued that a single body at ministerial level would remain critically important tosecure the continued strengthening of science and technology in the country.

Third, there was also discussion (at least as reported by the press) about merging theMinistries of Industry and Commerce into a single broad ‘economics’ ministryalong the lines of integrated industry and trade ministries that exist in many countriesin the region.

4.2.2 The Institutional Structure: links with Industry

We are not aware of any systematic review of the links between industry-orientedtechnology institutions and industrial firms in Thailand. Even partial information isscarce. What there is suggests that the links are very limited. For instance, theThailand Industrial Survey undertaken by the Ministry of Industry with assistancefrom the World Bank in 1997-98 indicated that only around 3-5 per cent of the 1200firms surveyed had used the services of any of a range science and technology

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programmes. 60 It is interesting, however, that even within this small group firms,those with relatively high levels of productivity were a little more likely to use theseservices than firms with low productivity.

Other sources of fragmentary information about particular institutions, often verydated, also suggests that links are weak. Our own discussions during this project pointin the same direction. However, although these anecdotes probably reflect reality, twopoints should be borne in mind. First, the number of links may sometimes be a poorreflection of the value of the interaction between institutes and industry. It is wellrecognised that the returns to R&D projects are very highly skewed, with a very largenumber yielding little or nothing and a very small number yielding very high returnsthat may offset the costs of first group. So for instance, the very limited number oflinks between BIOTEC and the aquaculture industry, primarily concerned withmethods of disease control have probably had very high returns for the industry.Second, in several cases, reports on particular institutes have noted that, withinstitutes still building their capabilities, there has not yet been time to developeffective linkages. This, for instance, was the case in a report on a 1996 study ofMTEC.

In the case of universities, we have a little more information to go on – though thisalso is a bit dated. It was generated by a study in 1995 by the Brooker Group whichsurveyed a number of firms and universities to identify the nature and strengths ofuniversity industry linkages (UILs). The broad conclusion suggested there was verylimited linkage.

“… the areas where linkages are “little” and “very little”, which both private andpublic universities have in common, are training of industry persons by the faculty,R&D cooperation, representation by industry in institutional academic bodies and incurriculum development, and donation of equipment. Common areas where moresubstantial links exist are student training for industrial experience and donations ofstudent scholarships. Understandably, public universities, having a longer history, agreater range of technical programs, and more extensive equipment, are able toprovide more consultancy work and testing and other services for industry.The initial impression from the surveys, interviews and also the brainstormingworkshop is that while all players in the S&T higher education arena recognize thepotential of UILs. The levels of understanding and vision of the true potential of suchlinkages are not great. In most cases, the examples of UILs that were reported werenot very substantial and represented short term training or ad-hoc use of consultingservices rather than a longer-term, more extensive relationship.” (Brooker Group,1995, pp. 45- 47)

Our own discussions with some of the larger firms that are more likely to draw ontechnological inputs from universities suggests that this situation may not havechanged much since the mid-1990s. Also, our earlier comments about the specificcase of the universities role in providing advanced level training for companiessuggests that, with a few exceptions, that kind of relationship is also fairly weak.

60 See Dollar et al., 1998, p. 176. We are not aware of the precise form of the questions asked on this

topic in the survey reported in this paper. Consequently we can’t suggest whether this 3-5% rangeshould be considered as (a) matching fairly closely the responses that have often been obtained tofairly narrow questions about public institutions as important sources of firms’ technology, or as (b)deviating very substantially from the much higher levels of positive response often made toquestion about the use made of a much wider range of services from such institutions.

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4.2.3 The Institutional Structure: some general characteristics

In this section, with reference to the aspects of international experience that wereoutlined earlier, we comment briefly on characteristics of the structure of industry-oriented technology institutions in Thailand.

4.2.3.1 Limited institutional specialisation

At relatively early stages of institutional development in an industrialising country, itwould be natural to find single institutions having to undertake a wide range ofdifferent activities, and so being unable to develop significant specialisation untilfurther steps in the overall development of the structure. However, the Thai caseexhibits the curious structural feature of several relatively specialised institutions(TISTR, DSS, MOI Institutes, TRF, NRCT) doing a number of similar things, most ofwhich are also undertaken by one larger and more recently developed institution(NSTDA). Aspects of this are summarised in the table below.

Type of Technological Activity Institutions involved

Providing technical and other support services MoIInstitutes

Department ofScience Service

NSTDA

Applied technology development and transfer TISTR Department ofScience Service

NSTDA

Undertaking strategic/basic research Universities NSTDA

Funding R&D TRF NRCT NSTDA

While competition between institutions in similar fields is often useful, andredundancy between programmes and institutions has been found productive in somesituations – for instance in Baden Wurtemburg in Germany61, it is a little surprisingthat Thailand can afford these kinds of multiplicity and limited specialisation. Thisappears to reflect the inability of successive governments over many years to closedown or rationalise and integrate existing institutions when new ones are created.Consequently, the development of S&T institutions over the last 40-50 years has notresulted in progressive specialisation, as in many other countries. It seems to haveachieved precisely the opposite.

4.2.3.2 The Absence of Specialisation in the Structure of Government

A striking feature of the Thai structure is the considerable imbalance between theroles of the ‘economic’ and ‘S&T’ agencies with respect to industrial technologydevelopment. Since the 1950s, the latter have dominated policy-making concernedwith industrial technology development. In contrast, the Ministry of Industry appearsto have played a very limited role. Consequently there is little sign of the tension thathas existed in other countries. Instead, the process of policy-making andimplementation appears to have been deeply imbued with ideas about the importance

61 See Herrigel (1993) on this important issue that runs counter to more bureaucratic ideas and

phobias about organisational ‘tidiness’ and ‘duplication’

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of ‘co-ordination’ and integration, and this is evident again in discussions about themerits of setting up a new National Science and Technology Policy Committee.

In principle, this ‘monopolistic’ structure of governance for industry-oriented scienceand technology could perhaps accommodate something like the spectrum of broadlydifferent strategies and policies that are achieved in other countries by substantialspecialisation within government and among science and technology institutions. It isour impression, however, that this does not happen in the Thai structure. Many of theimportant Boards and Committees concerned with industrial technology developmentdo indeed have representation from a wide range of government agencies, as well asrepresentatives from the private sector in many cases. However, this does not seem tolead to the examination, advocacy and implementation of a portfolio differingcomplementary strategies. Instead, large unwieldy bodies seem to address relativelydetailed aspects of implementation and administration, while the broad frameworksand strategies are defined largely by the ‘S&T’ agencies and the ‘supply-side’scientific communities they represent.

One apparent consequence of this is that very limited emphasis has been given to thetypes of broad approach to policy that have been emphasised by ‘economic’ agenciesin other countries - for instance, the Economic Development Board in Singapore orMOCIE in Korea. In particular, these kinds of ‘economic’ agency in other Asiancountries (and also in Europe) have typically implemented the kinds of supportmeasures for technology development by industry and capability building in industrythat we reviewed in Section 3 and in Appendix B. In contrast, we have suggested thatthey are rare, embryonic or neglected in Thailand.

4.2.3.3 The role of industry associations and business groups

Until recently, industry groups appear to have had only very marginal links with thestructure of industry-oriented technology institutions, mainly limited to high-levelrepresentational involvement in the boards of some of the larger institutes. Followingthe economic crisis, however, this has begun to change and bodies like the Federationof Thai Industries and the Board of Trade of Thailand have played a growing role incontributing to the technology-related and other aspects of discussions about newpolicy approaches to strengthen competitiveness.

As yet, however, more direct involvement in helping to shape the structure, roles andpriorities of technology institutions seems to have remained quite limited. But againthis may be changing. For instance, industry involvement in shaping the programmesof some of the new or reinvigorated Ministry of Industry institutes seems to besignificant, and there have been discussions about further collaborative initiativesinvolving the food industry and the Food Institute. However, just as individual firmswill have to learn about managing unfamiliar kinds of resources as they deepen theirown technological capabilities and activities in order to strengthen their individualcompetitiveness, so also will groups of firms have to learn about new kinds ofcollaborative activity in new fields if they are to take collective action for the samepurposes. They are likely to need support and assistance, not merely financial, inpursuing the necessary experiments.

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4.2.3.4 Complementarity in University and industry R&D

Quite evidently there is a very limited basis for this complementarity in Thailand.Areas of international excellence in industry-relevant R&D in the universities are few,and the execution of strategic R&D by industry is almost entirely absent. It might betempting to conclude that universities should therefore shift large parts of theirresearch towards more ‘applied’ and ‘relevant’ R&D so that they can link moreeffectively with industry’s current requirements for technology. Our own view wouldbe different –in two ways.

• While a shift towards greater ‘relevance’ would be useful in many departments inmany universities, it should not be driven by the aim of delivering newtechnologies and innovations to industry. Much more important for many years islikely to be the aim of strengthen people-centred modes of transferring oftechnology from universities to industry. Strengthening ‘applied’ types of researchwill often be an important basis for achieving that aim, but their contribution tomeeting industry’s needs for specific technologies and innovations is likely to beat best only a minor supplement.

• It will be equally important to achieve specialisation and differentiation amonguniversities. While some departments might usefully shift their R&D in more‘applied’ directions, it will also be important that others strengthen capabilities forachieving international excellence in more basic/strategic areas of R&D. In thelonger run, that excellence is likely to constitute a key part of the basis forcomplementary R&D links between universities and firms. For that reason itseems to be a matter of considerable priority to move ahead with implementingthe stalled ADB-assisted programme to create a number of collaborative centresof R&D excellence and PhD training.62

4.2.3.5 People-centred approaches to technology transfer

Our impression is that, across a range of institutions, and not just in universities, therole of people as the means for transferring technology to industry is massivelyundervalued. Even in universities, the model of transfer by consultancy and by thedevelopment of innovations seems to carry much more weight than the model oftransfer via people. This seems to be reflected, for instance, in the limited universityresponses to industry interests in developing training programmes in areas ofadvanced technology. It may be that this reflects in turn a set of incentives within theuniversity system which attach higher financial or status rewards to the developmentof technologies and the delivery of consultancy services. If that is the case, it meritsmuch closer examination. It is certainly our impression that significant parts theexternal industrial world in Thailand already attach considerable value to the deliveryof advanced technology from a range of institutions. However they want it embodiedin people, not in ‘inventions’ and ‘new technologies’.

In contrast, our discussions about industry linkages and technology transfer withmanagers in R&D centres and institutes (in NSTDA, for instance) concentrated very

62 There is at least one example where university and industry actors have already moved forward to

implement this type of project despite the delay in the overall programme. In doing so they seem tohave demonstrated precisely the general point we have emphasised about excellence in strategicR&D in universities being a basis for complementary R&D relationships with industry.

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heavily on issues about the transfer of ‘technologies’ and hardly ever on the transferof people. Given the urgency and importance of deepening technology developmentcapabilities in industry, this perspective (if it is as pervasive as we believe) must be amajor impediment to the current effectiveness of the institutional system for industrialtechnology development.

4.2.3.6 Financial pressure as a stimulus to strengthening links

Little can be said on this subject in the Thai context. As far as we are aware, noeffective use has yet been made in Thailand of the kinds of policy mechanism thathave been used elsewhere to require linkage-type organisations to raise substantiallyincreased revenue from industry. An approach in this direction has been made inconnection with the reinvigoration of the Ministry of Industry institutes63, but there itseems to have been applied as a fairly blunt (and distant) instrument. Ourunderstanding is that these institutes have been given a period of 5 years to becomefinancially self-supporting. The bluntness of the instrument arises because nodistinctions seem to have been made between the different kinds of markets served bythese institutes. As the manger of one explained to us:

“I can probably become financially self-supporting quite easily in a year or two.However, in order to do that, I will have to narrow very sharply the kinds of firms wesupport. We will need to ignore the large number of small firms in the industry whodo not appreciate the importance of the services we provide and can afford to paylittle for them. Instead, we will have to work much more closely with the largerfirms in the industry.”

The manager of another showed us detailed data for the costs and demand for thedifferent kinds of training offered by the institute. Programmes that had been designedwith greatest relevance to the needs of smaller firms were not profitable. Theimplications about what to do to achieve financial self sufficiency were obviousenough – close down the subsidised unprofitable activities.

There is, then, a great danger that ritual adherence to simple rules about financial self-sufficiency will drive out subsidised programmes developed by these organisations.This would run against experience in many other countries where, as illustrated by theexamples from Europe in Appendix B, subsidised programmes have been foundvaluable and important in stimulating technology development capabilities inindustry. What is needed instead of simple rules is the pragmatic and detailed designof mechanisms that maintain the pressures for efficiency and high performance, whilealso maintaining an ability to meet social objectives and broad public interests.

4.3 Conclusions

Within this short project, our review of such a wide range of institutional issues isnecessarily impressionistic. Nevertheless, there appear to be quite striking ‘gaps’between aspects of experience elsewhere and the corresponding practice in Thailand.These suggest that consideration should be given to the following issues.

63 Initial steps in this direction have also been taken or planned with respect to TISTR and the DSS.

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4.3.1 Institutional specialisation

(i) There appears to be an urgent need to push into a new phase ofinstitutional development that will create a structure of more clearlydifferentiated institutions that can concentrate on playing more specialisedroles within the overall system.

(ii) In some areas, this will require clear decisions to separate functions andresponsibilities that are currently collected in single institutions like NSTDA. Itmay also be appropriate to integrate some functions that are now separated – forexample, the R&D funding roles of NRCT and the TRF. However, it seemsunlikely that centralised bureaucratic ‘rationalisation’ will achieve the structureof vigorous specialised institutions that will be needed. To achieve this, it is alsolikely to be useful to foster competition between institutions. For example:

• If the NSTDA national Centres are to continue undertaking ‘basic’ and‘strategic’ types of research, considerable benefits will probably be achievedif they and Universities have to compete for public funding provided througha third-party organisation – perhaps a strengthened TRF, or a re-constitutedNSTDA that acts as a policy and funding organisation;

• similarly, in areas concerned with providing technology support forindustry, the relevant parts of NSTDA, TISTR, the MOI Institutes and theDSS could be required to compete for the funding to operate particular kindsof programme. The consequence would almost certainly be a self-organisedprocess of rationalisation, specialisation and integration. An important basisfor this competition would be the organisation of a ‘level playing field’,involving similar funding arrangements for all the organisations and similarforms of organisational status.

4.3.2 Stakeholder involvement in shaping developments and priorities

The ‘economic’ agencies of government (and the Ministry of Industry in particular)should take on direct responsibility for a much more substantial segment of the arrayof policy and institutional support for industrial technology development. The designand development of that role might be built on the basis of a detailed analysis of theexperience of organisations like the Economic Development Board in Singapore,MOCIE in Korea, and several similar agencies in European countries like Ireland, theNetherlands and the UK.

Industry groups and associations should be encouraged to increase their directinvolvement in shaping both the direction of institutional development and theorientation of strategies and programme priorities within institutes. However, thisshould not be limited to the established ‘representational’ bodies. Other groups,associations and ‘clusters’ should be supported in taking steps to develop suchtechnology-centred roles.

4.3.3 Complementarity in university and industry R&D

Steps should be taken to accelerate implementation of the planned project to create anumber ‘Centres of Excellence’ in R&D, involving collaboration between universitiesand industry in world class research and doctoral training.

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4.3.4 Links between technology institutes and industrial firms

Incentives in universities and other institutions should be shifted to give greaterweight to people-centred forms of linkage with, and technology transfer to, industrialenterprises.

Extensive studies should be undertaken to develop a much more systematicunderstanding of (a) the nature and scale of industry’s demands for different kinds ofservice product from supporting institutions, and (b) the factors that influencedifferences and changes in those patterns of demand.

4.3.5 Financial mechanisms to raise performance and achieve social objectives

Financing arrangements, competitive conditions and organisational re-structuringshould be developed and implemented in order to bring greater pressure to bear on theoperations of linkage-type technology institutes

However, these new arrangements should incorporate mechanism to ensure that theachievement of social objectives and broad public goals is not undermined.

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5 Policy for industrial technology development – afundamental change in strategy

5.1 The Need for Fundamental Change

The terms of reference for the project asked us to review the overall framework ofindustry-oriented science and technology policy, and to consider the need for changeat a broad strategic level. Having undertaken that review, our conclusion is that avery fundamental change is indeed required. While the scale of technologydevelopment organisations, technology training and education institutes, andtechnology policy institutions have changed over the last 40-50 years, along with theirlocations in the bureaucratic structure of government, there has been surprisingly littlechange in the broad aims being sought or the measures being used to achieve them.For example:

• the main vehicle for the government’s industrial technology development policy isthe complex of technology development institutes assembled under NSTDA, andit is remarkable how closely the rationale for this organisation compares with therationale put forward for setting up the Applied Scientific Research Corporationof Thailand in 1961 - although the complexity of the technologies discussed isobviously much greater and the envisaged directions of technology developmentare different;64

• it is also remarkable how closely the underlying rationale and purposes of the newNational Science and Technology Policy Committee echo those put forward for theestablishment of the National Research Council in 1959, while the return of the‘new’ national policy and co-ordination body to the 1960s location of itspredecessor in the Office of the Prime Minister is perhaps symbolic of thatsimilarity;65

• the scale of industry-oriented scientific/technological education and traininginstitutions (universities and others) has obviously increased massively; thecontent of training has obviously altered; and the ‘open’ universities have widenedaccess to higher education; but, with respect to supporting industrial technologydevelopment, these institutions are essentially playing the same kinds of role asthey began to play in the 1960s – with very much the same set of incentives, inbroadly the same kinds of institutional structure and under the same policyframework;66

64 It is illuminating to search for fundamental differences in rationale, aims and basic approaches

between recent policy statements and documents concerned with NSTDA’s technologydevelopment activities and those of nearly forty years ago concerned with ASRCT - such asNicholls (1961) and (1962).

65 Again it is interesting to compare the main roles being suggested for the new national council withthe main recommendations about policy-making bodies in reports of thirty years ago – such as VanVorst (1968) or Solomon (1970).

66 The recent provisions for university autonomy provide an opportunity to alter many of theseconditions. Whether they will do so in practice in ways that fundamentally alter the university’srole in industrial technology development remains to be seen.

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• apart from the of array of little-used tax incentives and credit schemes outlined inSection 3, very few new types of policy vehicle or mechanism have been added tothe range that was already present by the end of the 1960s - albeit in slightlydifferent shapes and sizes.

We outline in this chapter the main directions of fundamental change in policy whichwe believe will have to be made. We believe it is a matter of great importance tomake these changes. Because of the long history of limited ‘technology deepening’ inThai industry, there is some risk that the competitive weakness of industry may resultin a contraction of industrial output and employment as further liberalisation proceeds- or it will contribute to further devaluation of the currency, and hence to falling realincomes rather than making the positive contribution that is expected. Further, webelieve it is a matter of great urgency to make these changes because it takes aconsiderable time to deepen the technology development capabilities of industry. Butsignificant technology deepening will be required very quickly if industry in Thailandis going to contribute even to maintaining real income levels over the medium term,let alone to raising them in a world where competitiveness depends increasingly ontechnology development and its underlying knowledge, skills and organisationalarrangements.

We elaborate on this issue of fundamental policy change in three stages in theremainder of this chapter. We first outline the broad strategic directions of change inpolicy that are called for (Section 5.2). We then indicate the types of policy measurethat seem to be needed and the kinds of institutional changes that will be required todevelop and implement those new approaches (Section 5.3).

5.2 The Strategic Orientation of Policy for Industrial TechnologyDevelopment

In Section 1 we highlighted sharp contrasts in the broad emphases that governmentsmight pursue in two aspects of their policy frameworks for industrial technologydevelopment: one is concerned with aspects of policy designed to help build uptechnology development capabilities, the other with aspects designed to stimulateindustrial innovation.

5.2.1 Building capabilities: ‘dual-‘ and ‘mono-structural’ policy frameworks

With respect to policy designed to help build up technology development capabilities,emphases may differ between the organisational location of the capability buildingefforts:

• One type of policy measure is designed to support the strengthening anddeepening of technology development capabilities located within industrialfirms.

• Another type is designed to build and support technology developmentcapabilities located in a structure of public and semi-public institutions which,it is hoped, will deliver trained/educated employees, technical services,knowledge, and innovations to firms.

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We referred to one kind of policy framework as having a ‘dual structure’ – one thatgives significant emphasis to both kinds of measure. In contrast, we described otherpolicy frameworks as ‘mono-structural’ – those that concentrate heavily orexclusively on the development of capabilities in public institutes.

We have suggested through Chapters 3 and 4 that Thailand has been pursuingindustrial growth over the last forty years within a mono-structural framework oftechnology development policy. Almost all measures and the vast majority of publicexpenditure have been concerned with building up technology developmentcapabilities in public institutes. At the same time, successive governments havedeveloped and implemented virtually no (effective) measures to support either thetechnology development activities of firms or their investment in building human andother capabilities for undertaking technology development. This is in sharp contrastto the dual-structured frameworks that have been put in place in almost all the moreadvanced industrial countries in the East Asian region - Japan, Korea, Taiwan,Singapore and Malaysia. It also contrasts sharply with the dual-policy structures thathave been developed in advanced industrial countries in Europe and North America,and also by recently industrialising countries in Europe, such as Ireland.

5.2.2 Stimulating innovation: demand- and supply-oriented policy frameworks

We also distinguished between two broad orientations of policy concerned withstimulating industrial innovation:

• one consists of measures designed to stimulate the demand for technologydevelopment on the part of industrial firms;

• the other consists of measures designed to stimulate the supply of technology forincorporation into industrial innovation – supply that might be provided byexternal institutes or by industrial firms themselves, or some combination of both.

We have suggested in Chapters 3 and 4 that the broad policy framework in Thailandhas been heavily supply-oriented for the last forty years or so. Changes in overalltrade and industry policies have increased competitive pressures on firms, hencestimulating their demand for technology development and innovation. However,within the array of policy measures concerned more directly with industrialtechnology development, there is almost nothing that is explicitly oriented towardsstimulating demand among industrial firms.67

The combination of these two emphases in the broad framework of policy in Thailandis illustrated in panel ‘A’ in Exhibit 22. The overall strategic balance in policy ismassively concentrated in the ‘North-West’ quadrant of the figure, combiningemphases that focus on building up technology development capabilities in publicinstitutes in order to try and stimulate the supply of technology into innovation.

We believe this imbalance in policy, and the contrast with more balanced structures inmany other countries, is directly related to another contrast we highlighted in Section1: the lagging position of Thailand compared to other East Asian countries in theintensity of industrial technology development. To recapitulate, the key issue is that

67 Recent small initiatives under the Ministry of Industry have begun to experiment with ways of

developing a much more demand-oriented approach.

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the intensity of technology development activities undertaken by industrial firms inThailand appears not only to be lagging far behind the current intensity in these othercountries. It also appears to be lagging far behind the intensity of technologydevelopment which these other countries demonstrated in the past when they hadsimilar levels and structures of industrial development to those in contemporaryThailand.

The broad outline of the required change in overall strategy is, we suggest, relativelysimple. As illustrated in Panel B of Exhibit 22, it is to move the emphasis of policyvery substantially out of the ‘North-West’ quadrant and into the other three. Thisrequires the development and implementation of:

• measures to ensure that the infrastructure of public technology institutesincorporate a significant component of activities that are explicitly directed atstimulating demand in firms, not simply concerned with trying to supply themwith technology (Transition direction 1);

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Exhibit 22 Industrial technology development policy in Thailand: alternativestrategies: Relative Emphases in Policy

CAPBILITIES

BUILDING

InTechnologyInstitutes

InIndustrial

Firms

PAST ANDPRESENT

STRUCTURE

REQUIREDTRANSITIONDIRECTIONS

CAPBILITIES

BUILDING


InIndustrial

Firms

CAPBILITIES

BUILDING


InIndustrial

Firms

FUTURESTRUCTURE

PANEL A

PANEL B

PANEL C

1

23

STIMULATING INNOVATION

Supply Demand

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• other kinds of policy measure that also aim to help build up technology-demandcapabilities in firms – the kinds of capabilities we described in Section 1 asbeing limited or absent in Type 1 and 2 firms - referred to again in Section 4 andAppendix B as the ‘strategic’ capabilities of firms (Transition direction 2);

• a body of new policy measures that are focused on strengthening firms’investments in building their own technology development capabilities and onstimulating their application of those capabilities in undertaking larger parts of thetechnology development and technology acquisition they need in order tointensify their innovation (Transition direction 3).

Despite the urgency and importance of making these transitions, it will take sometime to assess and design effective ways of achieving these re-balanced emphases inpolicy. Nevertheless, because any significant impact of new policy on technologydevelopment capabilities and activities in industry will take some time to work itsway through, the aim should be to achieve a re-balance in policy (along the lines ofpanel C in Exhibit 22) within as short a period as possible – say, three years at themost.

5.3 Policy Measures and Institutional Changes

Re-balancing the structure of policy as outlined above will require more than simplyputting in place a new range of policy measures. It will also require quite radicalchanges in the existing structure of institutions. Moreover, those two dimensions ofchange are not independent of each other. It is our view that fundamentally newapproaches to technology development policy cannot be effectively devised orimplemented via the existing structure of institutions. New organisational andinstitutional arrangements will be needed – both to design, develop and manage thenew policy measures and approaches in the first place; and then to undertake newkinds of technology development and support activities. However, for the purpose ofexposition here, we will address these dimensions of change separately.

5.3.1 Policy measures and approaches

Moving in the direction of Transition 1 (Panel B, Exhibit 22) will require themanagers of technology institutes to give much more attention to activities designedto stimulate demand for technology development. It is important to emphasise,however, that this will mean something very different from the kind of activitymentioned to us by several institute managers when we discussed issues aboutdemand-stimulation with them.

These discussions tended to shift into a discussion about ‘marketing’ – taking steps to‘sell’ more effectively the results of an institute’s technology development efforts byconvincing firms about the value of what was on offer. Such perspectives are almostdiametrically opposed to the approaches pursued in more effective types of demanddevelopment programme. These typically start where firms are located, not where thetechnology developing institute happens to be. Their aim is to try and understand theexisting capabilities and business strategies of firms as they are, and then to assist anopen-ended process of learning. Organisations staffed with large numbers of PhDsdetermined to convince others (including firms) about the value of their owntechnology development efforts are often poorly equipped to play this role –

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especially in situations where industries are densely populated by firms falling intothe Type 1 and 2 categories outlined in Section 1.

Movement in the direction of Transitions 2 and 3 can be considered together. Withdiffering emphases this will require measures of the type discussed in Section 1 andillustrated in Exhibit 10. We returned to these again in more detail in Section 368,where we highlighted the importance of the following main steps.

1. Moving forward as rapidly as possible to define and implement a broad andcomprehensive training support system within the framework of the proposedSkill Development Fund. This is important for helping to build a strongerstructure of technology-using and assimilating skills to underpin the deepeningof technology development capabilities. Considerable efforts should be madeto avoid the bureaucratic costs of inflexible and over-extended aspects ofschemes in other countries, but imagination will be needed to avoid creating ascheme which, as a result of negotiation centred only the short-term interestsof business and government, simply amounts to a cost-minimising ‘lowestcommon denominator’ among the many possible options. Instead, recognitionof the significance of the skill deficits in Thailand will need to be combinedwith creativity and innovation in order to capture those aspects of goodpractice and experiment in other countries that seem to have contributed mostto strengthening skills and capabilities.

2. Reviewing the design and administration of the existing tax incentivescheme for R&D in order to raise its effectiveness in stimulating increasedR&D by industrial and other firms. Details of the issues that should beexamined are provided in Section 3, and illustrative material about experienceelsewhere is included in Appendix B.

3. Putting in place a set of simple and flexible grant-based subsidy schemesdesigned to stimulate firms to undertake technology development activitiesthat would not meet the eligibility conditions of the R&D tax incentive system.The design of these could usefully draw on the wide range of experience thatis available in other countries and selectively illustrated in Appendix B.Reflecting that experience, these should be combined with grant-based subsidyand service mechanisms which, as a supplement to the basic training supportscheme, would be designed to assist firms invest in training and relatedcapability building activities concerned with strengthening their higher levelhuman resources for design, engineering and R&D.

5.3.2 Institutional changes: Technology development and support institutes

5.3.2.1 Institutional specialisation

As we emphasised in Section 4, there is an urgent need to push into a new phase ofinstitutional development that will create a structure of more clearly differentiatedinstitutions that can concentrate on playing more specialised roles within the overallsystem.

68 Further illustrative details are provided in Annexe 2

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In some areas, this will require clear decisions to separate functions andresponsibilities that are currently collected in single institutions like NSTDA.Possible examples include (i) the separation of basic/strategic types of R&D fromactivities concerned with providing technological and related support to industry, and(ii) separating the roles of funding and executing technology development. In otherareas, greater specialisation may be achieved by longer term funding programmes toencourage differentiated roles across similar types of institution – for instance, theplanned project to create ‘Centres of Excellence’ in R&D, involving collaborationbetween universities and industry in world class research and doctoral training.

It may also be appropriate to integrate some functions that are now separated – forexample, the R&D funding roles of NRCT and the TRF, or the industry supportactivities carried out under both NSTDA and the Ministry of Industry. At the sametime, institutional restructuring may be effectively stimulated by fostering competitionfor funding between institutions - for example: between the NSTDA National Centresand universities in the execution of ‘basic’/‘strategic’ types of research, or betweenorganisations providing technology support for industry (such as parts of NSTDA,TISTR, the MOI Institutes and the DSS).

5.3.2.2 Strengthening links between institutes and firms

Much greater emphasis needs to be given to developing links that are centred more onpeople, skills and knowledge, and less on delivering technologies and innovations.This is partly an issue about generating and diffusing better understanding about thenature of industrial demand for technology. Consequently studies should beundertaken to develop a much more systematic understanding of those patterns ofdemand. But it is also an issue about the pattern of financial and other incentivesfacing individuals in universities and other institutions. These should be shifted togive greater weight to people-centred forms of linkage with, and technology transferto, industrial enterprises.

At the same time, financing arrangements for linkage-type technology institutesshould be altered in order to bring greater pressure to bear on performance in actuallyachieving links and delivering support. There now exists in other countries a widerange of experience in designing and implementing various types of mechanism bywhich funding comes to depend on performance. However, in drawing on suchexperience, it will be important that the design of new arrangements incorporatesmechanisms to ensure that the achievement of social objectives and broad publicgoals is not undermined.

5.3.3 Institutional changes: Policy, funding and governance

One important requirement for building a structure of competitive, performance-driven technology development and support institutes is that responsibility for policy,funding and governance is much more clearly separated from responsibility forundertaking technology development and delivering industry support. This willrequire in part serious re-consideration of the structure and roles of NSTDA. But itwill also require reconsideration of roles and responsibilities across a broader front –including the Ministry of Science, Technology and the Environment, the Thailand

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Research Fund, and the Ministry of University Affairs, as well as the Ministry ofIndustry.

In particular, we believe that the Ministry of Industry should take on directresponsibility for a much more substantial segment of the array of policy andinstitutional support for industrial technology development. The design anddevelopment of that role might be built on the basis of a detailed analysis of theexperience of organisations like the Economic Development Board in Singapore,MOCIE in Korea, and several similar agencies in European countries like Ireland, theNetherlands and the UK.

At a more detailed level, and perhaps associated with the Ministry of Industry playinga much larger and more active role, consideration should be given to creating a ‘one-stop-shop’ to promote and administer the new range of subsidy and industry-supportprogrammes designed to stimulate demand for technology development and tosupport advanced level training and learning, technology development at the designand engineering level, and more formally organised R&D.

Again, in designing such an integrated structure, there is a wealth of experience todraw on in other countries. Some of it might suggest that an element of specialisationwould be valuable in this area also. This concerns the particular types of skills andapproaches that might most effective in administering mechanisms designed toenhance local technology development by, and the generation of substantialexternalities from, TNC subsidiaries. It might therefore be useful to considerdeveloping an arrangement along the lines of the example of Ireland, for instance,where a specialised organisation administered the incentive and support schemes forTNC subsidiaries.

Finally, in considering new arrangements for the governance and administration of aradically re-balanced structure of industry-oriented technology policy, greatlyincreased emphasis should be given to the role of industry groups and associations –not just the formally organised and well established representational bodies, but awide range of less formally organised groups and clusters. These should not simplybe seen ‘clients’ of the new system of support and incentives for technologydevelopment and capability building. They should be seen as stakeholders in thatsystem, and should be encouraged to increase their direct involvement in shaping boththe direction of institutional development and the orientation of strategies andprogramme priorities.

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Appendix A Terms of reference for consulting services

Enhancing Institutional and Policy Support for Technology Development

Selected Key Elements

A.1 Background and rationale

Thai industry has developed considerable capabilities to implement importedtechnologies. It retains a tradition of heavy dependence on foreign sources oftechnology. There is now a need to adapt and improve upon imported technology andto deepen and diversify its technology base. In the small-scale sector, the lack oftechnological capabilities is proving a critical handicap to upgrading and exportdevelopment. Current practices limit the ability of the Thai corporate sector tosupport innovative value-added products, enhance margins and grow out ofcommodity product markets which depend entirely on low input costs for theirprofitability and competitiveness. Indeed the deterioration of labor costcompetitiveness of Thailand relative to some regional neighbors is considered a keycontributing factor to the Thai financial crisis.

• An integrated technology policy, including regulatory, fiscal policy, procurement,standards, and industry support does not exist. The main manifestation of thetechnology gap in Thailand is strikingly low R&D spending in the private sector,one of the lowest in the region … Such a technology strategy is not suited to theskill and technology based pattern of industrial development that Thailand mustadopt to sustain future competitiveness. …..

• A substantial public investment in technology research and developmentinstitutions has not created collaborative partnerships in technology diffusion.…….. The S&T infrastructure, including universities and nationally-fundedinstitutes, is presently geared to a ‘supply push’ strategy of technology funding,with weak linkages with industry and a mutual lack of interaction and trust. …….The role of public investment in research and technology may need to bereassessed.

• A key component of Thailand’s public investment in technology is the NationalScience and Technology Development Agency (NSTDA). …. Since its inceptionin 1991, a number of local and expatriate specialists have evaluated theperformance of NSTDA. While these audits and evaluations have been useful andhave contributed to internal improvements, none of them evaluated both theinternal and external factors which influence NSTDA's success in stimulatingtechnology diffusion. .…..

• The opportunity to improve effective policy framework now exists. …..

A.2 Objectives of consulting services

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The objective of the consulting services is to improve the Thai technologydevelopment policy framework and institutional role of the NSTDA ……

A.3 Scope of work

The consultant … is expected to review Thailand‘s policy framework for science andtechnology development, and make recommendations towards improving the strategicmanagement of this policy ….. As a key component of this institutional framework,the consultant is expected to review NSTDA’s capabilities and achievements and todraw upon international experience to proposes how it may be improved to meet thegovernment’s strategic objective of technology development. …..

3.1 Inception Report

3.2 Review of Policy Framework

3.3 Relations between NSTDA and the Government

3.4 Relations between NSTDA, Private Industry and the University

3.5 Assessment of NSTDA’S Management Systems

3.6 Policy Recommendations and Implementation Schedule

A.4 Implementation arrangements

A.5 Qualification of consultant

A.6 REPORTING REQUIREMENT

The consultant will provide a detailed report on the analysis and interviews.

A.7 OUTCOME OF CONSULTING SERVICES

The consultant will deliver at the end of the engagement the final report in bothelectronic form and hard copy and make not less than 5 presentations to thegovernment, NSTDA and the private sector.

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Appendix B Policy mechanisms to support technologydevelopment and innovation

B.1 Introduction

This Annex provides summary information about policy mechanisms used in a rangeof industrialised countries to stimulate, support and facilitate technology developmentand innovation by industrial firms. One purpose of the annex is to illustrate thesignificance of two points that are emphasised in Section 3 in the main report.

• There is very considerable diversity in the types of mechanism used for thesepurposes

• A large part of that diversity reflects the design of mechanisms to achieveparticular objectives in particular circumstances, though often that independentdesign process has ‘borrowed’ underlying ideas and principles from theexperience of other countries.

Cutting across that diversity, however, the information in this annex also serves toillustrate three broad common features of policy development in recent years in manyindustrialised countries.

• Within the overall array of policy measures concerned with industrial technologydevelopment, a very large part is concerned with supporting and facilitating actionby firms themselves. Mechanisms to support technology institutions are animportant component of the policy system, but at least over the last ten years or soa major emphasis in policy development has been given to mechanisms that assistand empower firms to make use of those institutions (or of each other) in order tosupport to their own technology development activities and to strengthen theirown technological capabilities. In effect, policy development has focused heavilyon mechanisms that will strengthen demand-driven technology developmentsystems, rather than continuing the earlier often exclusive emphasis on supportingtechnology institutions within supply-driven systems.

• Within that firm-centred approach to policy increasing emphasis has been given tostimulating and facilitating various forms of collective activity involving groupsof firms. These groups may be established industry associations, but they mayalso be less formally structured groups organised around (segments of) value-chains, and/or regional concentrations or clusters of firms in related industries.

• A large and growing proportion of these firm-centred policy mechanisms havebeen concerned with stimulating forms of technology development that drawprimarily on existing knowledge and practice. Obviously very large volumes ofpublic resources are committed to supporting the development of new knowledgeand original innovations at the international frontier. However, over the last tenyears or so greatly increased emphasis has been given to measures that supportfirms in acquiring, using, incrementally developing and applying existingknowledge and practices.

We argue strongly in the report that Thailand has so far failed to follow thesedirections of policy development. The main policy mechanisms are still focused

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overwhelmingly on supporting technology institutions in a supply-driven approach tobuilding an industrial technology development system; and, to the extent that supportis provided to firms rather than institutions, it centres almost exclusively on individualenterprises, not on groups and associations. Moreover, within that supply-drivenframework, the emphasis given to supporting the development of new knowledge andoriginal innovation far outweighs the effort given to the supporting the diffusion ofexisting knowledge and practice. The illustrative information in this annex may helpto support and illuminate the major re-orientation and re-balancing of policy that wecall for in the main report.

The information is provided under two broad headings:- tax incentive (section 2)- grants and subsidies (section 3)

However, while these headings are convenient, they hide other important distinctions,as well as obscuring important practical overlaps between the categories – especiallybetween the second and third. We will therefore also make some use of a differentframework that distinguishes between policy mechanisms in terms of the types ofcapabilities they are mainly concerned with. For this purpose, we divide firms’technological capabilities into three broad classes: strategic, internal and linkage ornetworking capabilities.

Strategic capabilities rest on an underlying understanding of the relationshipbetween a firm’s technology and its business aims and success in achieving them.This understanding includes the types and levels of awareness discussed in Section 1of the main report: awareness of the need to change (in order to achieve businessaims) and awareness of what to change and how to change it. Based on those types ofawareness, these capabilities provide the key linkage between a firm’s businessstrategy and its technological behaviour. They are therefore critical determinants ofthe intensity and effectiveness of technology development efforts in industry. Notsurprisingly, therefore, policy development in many countries has come to giveincreasing emphasis to the design and implementation of measures to strengthen thesecapabilities - especially, but not only, among smaller and medium sized firms.

Internal capabilities are the in-house technological resources that a firm brings tobear on achieving its business aims. They fall into three main categories:

- Tangible technological assets and resources (e.g. products, plant and equipment,and design or R&D facilities), plus the ability to manage these;

- Intangible technological assets and resources (e.g. codified knowledge, skills, andtacit knowledge), together with the ability to manage these;

- Organisational assets and resources (e.g. internal organisational structures formobilising and co-ordinating tangible and intangible capabilities).

Linkage/Networking capabilities provide a firm’s ability to draw on and exploitexternal technological resources. They also can be seen as falling into threecategories:

- Ability to access external knowledge (e.g. information resources, know-how,practices, technologies or scientific knowledge);

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- Ability to manage producer-user relationships – i.e. the interactions running alongsupply chains (of material/components and products or for machinery and tooling)that are centrally important in almost all technology development and innovation;

- Ability to ally with partners having complementary assets (e.g. complementaryknowledge, production facilities or other supply chain assets).

This framework has been used by one of the partners in this project (The TechnopolisGroup) in reviewing the policy mechanisms supporting technology development in anumber of OECD countries.69 The review identified the following main types ofmechanism.

Measures to help strengthen Strategic capabilities• Business capability development, especially marketing• Business and technology audits,• Mentoring schemes• Awareness-raising programmes, including visits, benchmarking and other

comparisons• Feasibility assessments

Measures to support firms’ development of their internal capabilitiesDeveloping and managing the tangible technology base• Product development assistance• R&D tax incentives• R&D grant-type subsidies• Manufacturing consultancyDeveloping and managing intangible resources• Quality programmes• Placements of qualified personnel (e.g. engineering graduates)• Loans/secondments of research personnel• Training needs analyses• Training programme/project subsidiesDeveloping organisational resources• Technology management courses

Measures to support firms in developing their linkage/networking capabilitiesAccessing external knowledge• Innovation credits, vouchers or ‘cheques’• Subsidised use of consultants, advisers, experienced managers, university faculty,

etc.• Subsidised access to ‘technology’ institutes, and to standards and testing facilities• Subsidised and facilitated collaborative technology development

programmes/networks• Subsidised university industry R&D collaboration• Support for technology transfer/brokerage (research-industry or firm-to-firm)• Support for research associations and institutes, technology centres, and science

parks,

69 E.Arnold, P.Boekholt, M. Meyer, P. Sowden, and B. Thuriaux, Policies to Support Company

Technological Capabiulities: Good Practices and Opportunities for NFR – A Report to theResearch Council of Norway; Technopolis, 1997

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• Support for university liaison officers, information services, etc.Strengthening user-producer interactions• Several above (e.g. subsidy/support for collaborative technology development)• Subsidy and support for company supplier development programmes• Public procurementStrengthening firms’ access to partners with complementary assets• Partner-search programmes• Inter-company network programmes

The review covered six European countries: Germany (D) - including both federal-level schemes and more decentralised mechanisms operated in three länder(states/provinces); Ireland (IRL); the Netherlands (NL); Norway (N); Sweden (S); andthe United Kingdom (UK). In total, nearly 150 different kinds of policy mechanismwere identified. These were distributed between countries and categories as shown inExhibit 23.

Exhibit 23 Number of Selected European Programmes Addressing VariousTypes of Capability

D IRL NL N S UK TOTAL

Strategic Capabilities 3 4 3 2 6 6 24

Internal CapabilitiesTangible technology base 10 6 6 Many* 3 5 30+

Intangible resources 6 4 1 2 4 6 23

Organisation 1 1

External CapabilitiesAccess external knowledge 13 3 4 10 7 11 48

Producer/user relations 1 1 2 1 1 6

Complementary assets 1 3 1 5 2 2 14

TOTAL 33 22 16 21+ 23 31 146+

* Sector-specific

This array of policy instruments can also be classified in terms of the basicmechanism used – as follows.• Tax-based incentive mechanisms provide firms with a tax benefit if they

undertake the particular type of technological activity that the government istrying to promote – usually R&D, sometimes training.

• Subsidised credit mechanisms typically provide firms with access to credit onpreferential terms for investment in specified kinds of asset (e.g. new automationequipment) or in particular kinds of activity (e.g. the design and development ofautomation equipment). These mechanisms usually involve interest rates belowcommercial levels, and sometimes risk underwriting for credit provided throughcommercial channels; or they may open up access to credit for particularcategories of firm that might otherwise not be able to obtain it on any terms at all

• Grant-based mechanisms commonly provide financial grants to firms whichundertake particular kinds of technological activity (e.g. R&D, design,technological or managerial training, engagement of consultants, employment of

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qualified scientists or engineers, and many others). In most cases the grants covera defined proportion of the costs of the specified activity.70 In other cases, thegrant is set in terms of a sum that can be allocated to quite broadly definedpurposes (e.g. innovation ‘cheques’). In this kind of scheme, the government issimply assisting the firm to undertake the activity, without attempting to organiseor facilitate the ‘supply’ of any input to the activity.

• Service-plus-grant mechanisms typically centre on organising or facilitating thesupply of particular types of service for firms (e.g. technology audits or qualityaudits), but incorporate in the arrangement a mechanism that provides a grant tothe user firms to cover part of the cost of the service. Facilitation may also centreon the ‘demand side’, as in schemes involving efforts to mobilise groups of firmsto collaborate in undertaking some kind of technological activity; and a grant tocover (part of) the costs of organising collaboration is often incorporated in suchmechanisms.

• Subsidised service mechanisms focus almost exclusively on the ‘supply side’.They organise or facilitate the provision of particular kinds of technologicalactivity or service for firms, with all or part of the cost met from governmentfunds. The most common arrangements in the past have centred on various kindsof ‘technology institute’ (e.g. R&D institutes) which have been expected toundertake technology development on behalf of industrial firms, providing theresults at low or zero charge to industry, and so recovering at best only somefraction of their total costs. These subsidised institutes may operate at thebasic/generic ‘R’ end of the R&D spectrum, contributing to the underlyingknowledge-base for industrial innovation (often available at no charge toindustrial firms); or they may operate at the testing/analysis/advisory end of thespectrum, typically making at least some financial charge to users of the services.

Based on a reclassification of most of the policy mechanisms covered in the 1997Technopolis review (Exhibit 23 above), a rough indication of the relative numbers ofsuch mechanisms in selected European countries is provided in Exhibit 24 below.

70 The WTO Agreement on Subsidies and Countervailing Measures defines maximum proportions

for non-actionable, though specific, subsidies in the case of industrial research (75%) and pre-competitive development activities (50%).

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Exhibit 24 Numbers of Different Types of Mechanism to SupportTechnological Capability Development in Selected European Countries

COUNTRY TotalTax

IncentivesSubsidised

Credit GrantsService-

plus-Grant

SubsidisedService

Germany 37 0 8 9 10 10Ireland 19 4 0 3 7 5Netherlands 10 1 2 2 0 5Sweden 20 0 2 2 5 11UK 29 0 3 6 7 13

Total 115 5 15 22 29 44100% 4% 13% 19% 25% 38%

There is a striking contrast with the pattern in Thailand – as reviewed in Section 3 inthe main report.

• In Europe, the least frequently used mechanisms are various forms of taxincentive and subsidised credit facility. The most frequently used are variouskinds of grant, service-plus-grant or subsidised service mechanism.

• In Thailand, almost the reverse is the case. There are several tax and credit-basedschemes; but with a very few exceptions; there are no effective grant-basedmechanisms and almost all subsidised service mechanisms are embryonic orpoorly developed.71

We review two segments of this array of mechanisms in the remainder of this Annex:(a) tax incentives; (b) grant-based schemes, including those that may be linked to theprovision of services.

B.2 Tax incentives

Tax incentives for technology development vary widely between countries, withdifferences across a wide range of aspects. Some of these differences are outlined inExhibit 25 The first is about the scope of activities that is allowable. In many OECDcountries this is quite narrowly specified in terms of Frascati Manual definitions ofR&D, with a heavy emphasis on the ‘originality’ of the innovative activity. In others,especially among industrialising countries, a much broader scope is allowed. Thismay include not only various types of less ‘original’ development and engineering butalso, as in Australia, Korea, Malaysia and Singapore, other kinds of knowledge-creating activity, like market research, that contribute to the overall innovationprocess.

A second area of variation concerns the tax treatment of capital expenditure fortechnology development. In one quite widely adopted approach, depreciation rulesallow total R&D expenditure (including capital expenditure) to be deducted in the

71 We distinguish here between (a) public funding of technological activities undertaken in technology

institutes in the hope that some sort of service will be provided for industry, and (b) the operation ofschemes that are explicitly designed to provide technological services for industry. The formerhave been supported by the government for many years. With a very few exceptions, the latter areeither relatively recent initiatives that have yet to demonstrate effectiveness, or they are long-established schemes that have been neglected and run down over the years.

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year in which it is incurred. This ‘expensing’ of the capital cost of R&D treats itpreferentially compared with other kinds of capital expenditure. However, the detailsvary between countries. Beyond, that, some countries (e.g. Australia and Denmark)permit depreciation at rates greater than 100%. This has a subsidy effect similar tothat of additional tax credits provided in many countries.

Additional tax credits usually take the form of a specified proportion of R&Dexpenditure which can be set against tax liabilities.72 The defined proportion variesquite widely between countries and it also changes over time within them. Moregenerally, the countries using such schemes also changes. Some have never done so(e.g. the UK). Others have implemented schemes only relatively recently (e.g. the USand France in the 1980s, or the Netherlands in the 1990s); while others havediscontinued their use (e.g. Sweden and Germany which now rely totally on grant-based mechanisms).

72 In some countries, this credit may be defined as a proportion of only part of R&D expenditure – for

instance R&D salary costs, as in the Netherlands.

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Exhibit 25 Variations in Tax and Grant Subsidy Mechanisms

Narrowly Defined

Accelerated depreciation(Expensing)

Total Volume

No Credit CarryForward

‘Light’

No Credit CarryForward

Broadly Defined

Additional TaxCredit

Incremental

Cash Refund

DifferentiallyWeighted

‘Heavy’

Scope of Activities

Treatment ofExpenditure

(capital or total)

Expenditure Admitted

Tax Exhaustion Treatment

Additional Aims

Audit/Monitoring

Credit CarryForward

Tax Incentive TrainingIncentive

‘Subsidy’Full Grant, Partial, or Delivered in the

Form of Support and FacilitationServices

For NarrowlySpecified Purposes

For BroadlySpecified Purposes

ForParticularTypes of

Technology

For Co-operation

amongFirms

ForAdoption ofTechnology

For Cp-operation

withUniversities

ForParticularTypes of

Firm

Public Funding for Industrial Technology Development by Firms

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An important feature of many schemes is that only ‘incremental’ R&D expendituresare allowed as the base for tax credit. The purpose of this approach, in contrast tothose which use the total volume of all expenditure on R&D as the base, is to focusthe incentive system on stimulating additional R&D activity, so trying to limit theextent to which public funds subsidise the activities which firms would undertake inany case – and some countries (e.g. Spain) have developed hybrid systems involvinghigher credit rates for incremental expenditures than for underlying constant levels ofexpenditure.

As an additional mechanism to achieve the same purpose, especially in the case offirms with high levels of R&D, many countries also impose an upper limit (or cap) onthe absolute amount of a firm’s tax credit in any period.73 In principle the incrementfor an individual firm could be estimated relative to an industry-wide norm ofexpenditure, so linking the incentive to the specifics conditions of an industry, butstimulating increments above some base level of expenditure. In practice however,most arrangements estimate incremental expenditure relative to a measure of eachfirm’s past expenditure – sometimes in the immediate past year; sometimes averagedover two or three years.

A common situation is that firms’ R&D tax credits in some years may exceed theirtax liabilities. Indeed, some firms may have no tax liabilities at all against which toset their credits. This is particularly common in the case of small start-up firms whichare still operating at a loss. It is also common in the case of firms set up under inwardforeign investment incentives which permit other tax allowances and tax holidays forvarious periods, often quite long. In some countries the R&D credit is simply lost insuch circumstances. However, a fairly common solution to the problem is to permitthe credit to be carried forward for one or more years to be set against future taxliabilities.

However, by deferring the receipt of any ‘surplus’ tax credit into an uncertain future,such carry-forward provisions attenuate the effect of the incentive mechanism ondecisions that are made in the immediate present. Some countries have thereforeorganised provisions to try and reduce this weakening of the system. In France, forinstance, any surplus tax credit is refunded to the firm after three years; and for newfirms it is refunded immediately - so providing, for instance, a very rapid positivecash flow effect for R&D-based start-ups.

The designers of the system in the Netherlands in the early 1990s took theseprinciples a step further. They considered that carry-forward provisions would addundesirable complications to the system, and in any case they wanted to create anincentive system that would be more effective by incorporating “an immediate linkbetween actual expense on business R&D on the one hand, and the benefit whichcompanies receive on the other”. 74 To achieve this they included two elements.First, they de-linked the incentive mechanism from the variability of profits by settingthe deductions against the much more stable wage-based taxes and social insurance

73 However, one should bear in mind that, if the core purpose of incentive schemes is to compensate

firms for the externalities arising from their R&D, these externalities are presumably generated bythe total volume of their R&D, not jut by the increment.

74 Nijland (1996, p.90)

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payments by firms. Second, they permitted firms to make provisional deductionsevery month so that they would not even have to wait until the end of the tax year tobenefit from their tax credits.

Some countries have gone even further in bringing forward the timing of the receiptof benefits by firms. In Korea and Singapore firms can receive tax benefits inadvance of carrying out research: provisions against the tax credits for planned futureR&D can be drawn on in advance. An interesting feature of such developments in thedesign of tax systems is that the clear-cut distinction which used to be drawn betweentax incentives and grant financing for R&D becomes much more blurred.

Another aspect of variation in the design of tax incentive systems concerns the waysin which they address additional aims beyond the provision of a general subsidy fortechnology development that is common across all situations. It is quite common, forinstance, to provide tax credits at preferential rates for small firms.75 In Canada, thesystem combines such differentiation with credits that are refundable for SMEs, butnot for larger firms. In addition, some countries (for instance, Italy, Spain or Canada)differentiate between geographic areas by providing preferential credits for R&D indisadvantaged regions.

Tax credit systems may also differentiate between types of technology. For instance,the Japanese system provides additional credits for energy-saving technologydevelopment or for R&D in selected areas of key industrial technology such asrobotics, biotechnology and new materials. This may reflect a recognition of theexternalities that arise from building a larger ‘base’ of activities and firms working insuch fields. The Korean system also gives preferential treatment to selected ‘hightechnology’ fields of R&D, while Denmark focuses its system exclusively on priorityfields of basic and applied research, and the US introduced a separate tax credit for‘basic’ research in 1986.

Some countries have also introduced elements of incentive systems that encourageparticular kinds of collaboration in technology development. The system in theNetherlands, for instance, includes R&D by universities which can benefit from theincentives, and has added a special tax rebate for post-graduate students doingresearch requested by firms. Australia has introduced a mechanism to encouragecollaborative R&D among firms. This provides tax concessions to collaboratinggroups up to twelve months in advance of carrying out the work. For schemesinvolving subsidisation of such institutional (or regional) linkages, an additionaltheoretical justification is that the transaction costs of establishing new kinds ofcollaboration may be a substantial barrier. In industrialising countries where linkagesbetween different actors in the overall technology development system may be verylimited, this may be a particularly important issue.

In these cases where preferences are given to particular sizes of firm, technologies,regions or modes of collaboration, it might appear that tax incentive systems havebeen increasingly designed to serve as more than remedies for general market failures.They seem to be more like instruments of selective industrial technology policy. 75 In the Netherlands a similar effect is achieved by differentiating between ‘tranches’ of R&D.

Expenditure up to a specified maximum level attracts a higher rate of credit that expenditure in asecond, higher ‘tranche’.

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However, it may also be that they are just becoming increasingly sensitive todifferences in the nature and intensity of market failures in different circumstances.

Tax incentive systems also vary in the way they are administered. Some of thisvariation arises because administration requires two quite different tasks: one centreson the financial aspects and the other on the technological. The financial aspectsinvolve the normal accounting and auditing activities of fiscal administration. Thetechnological aspects are essentially concerned with assessing whether the activitiesincluded in firms’ claims for favourable tax treatment fall within the technologicalscope defined by legislation.

Variation between countries seems to exist in the intensity of these monitoring andaudit procedures. In the US, for instance, around 80 per cent of claimants aremonitored. In other countries the intensity of monitoring seems to be much lower,with potential abuse perhaps being deterred more by selective ex-post inspection andthe threat of prosecution. Variation also arises with respect to how these twoactivities are organised. In some countries, the tax authorities take directresponsibility for both, drawing on supplementary technical support and advice asneeded. In other countries. The activities are more clearly distinguished andorganised separately.

The system in the Netherlands provides an interesting illustration of the second typeof approach (see Nijland, 1996). Two organisations are involved: one is SENTER, aspecialised agency, responsible to the main economics ministry, which administerstechnology policy instruments; the second is the tax authority. Administration by thetwo bodies involves a three-step process. First, prospective control is exercisedduring the application phase when SENTER tests whether the R&D projects meet thedefinitions in the Act. Second, during the year, SENTER can make random checks onthe activities being undertaken. Third, at the end of the fiscal year, the tax authoritiesmonitor the appropriateness of the accounting and related financial procedures. Oneinteresting feature of this approach is that it is barely distinguishable in practice fromsystems to support technology development that are based on direct grants.

B.3 Grants and subsidies

The provision of grants to subsidise a wide range of technology developmentactivities has been common in the industrialised countries and in the more advancedindustrialising countries. In many cases these have centred on quite narrowly definedpurposes. These have included support for the following:• for the development of particular types of technology – for instance many

countries in the 1980s set up programmes to stimulate the development anddiffusion of information technologies;

• for technology development by particular types of firm – most often such schemeshave focused on SMEs, though the definition of this category has varied widelyand has often included firms as large as those with 500 or 1000 employees;

• for collaboration in technology development with public institutes or universities– in many cases, this type of mechanism operates through firms as the activeagents, with the grants enabling them to ‘purchase’ technology developmentinputs from institutes, not just to ‘sign on’ to co-operative projects funded throughthe institutes or universities;

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• for co-operation among groups of firms – such schemes vary widely in structureand purpose, though many of them are organised through industry associations;

• for the acquisition of particular kinds of external services – frequently this hascentred on stimulating the acquisition of advice and consultancy services to helpfirms identify more clearly their technology development and upgrading needs;

• for the adoption of technology, rather than its development – such mechanismsoften act like accelerated depreciation provisions by providing funds forinvestment in specific types of capital equipment (though ‘soft’ credit is morecommon for this); other schemes centre on subsidising the costs of acquiringforeign know-how, and this blurs into grants for specific types of training that wewill review later in this chapter;

• for providing particular types of training, or for employing qualified scientists,engineers or managers.

• For seconding engineers or managers from firms to acquire experience workingwith firms in other countries

In many cases these kinds of grant scheme combine several purposes. For example,in the mid-1980s the Danish Government established a Technology DevelopmentProgramme which centred on the diffusion of information technology. This favouredsmall firms (less than 200 employees) and provided grants (40 per cent of projectcosts) and low-cost loans (50-75 per cent of costs) to individual companies to supporttheir development of new electronic applications in products and processes. Butconsiderable emphasis was put on collaborative activities involving groups of firmsand/or projects incorporated publication and demonstration.

In other cases the aims of grant-funding schemes have been much more broadlydefined. One such scheme in Germany in the 1980s merits review in a little detailbecause it sought to play a broad-ranging role in stimulating firms to deepen theirtechnology development capabilities and activities. The programme did focus on aparticular type of enterprise: SMEs, with an upper size limit initially set at 1000employees - though this was later reduced to 500. The scheme provided firms with agrant equivalent to a proportion of the employment costs of their R&D staff.76 Theunderlying rationale was based on a growing recognition in the late 1970s of thecompetitive significance of knowledge, and a consequent shift in public subsidyprogrammes away from traditional capital investment assistance towards subsidies forinvestment in human capital.77

There was no requirement to develop any particular type of technology or tocollaborate with any kind of institute. Indeed, while the basis of the subsidy wasR&D salary expenditure in the previous year, the application of the funds was notspecified. In other words, in the same way as most tax incentive schemes, it operatedas a general subsidy for firms’ R&D costs..

76 This was set at 40 per cent of wages and salaries up to a level of DM 300,000, and 25 per cent

above that level up to a maximum total grant of DM 400,000.77 The programme is reviewed in Meyer-Krahmer et al. 1983; and Kuntze and Hornschild, 1995.

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Run for ten years between 1979 and 1988,78 the scheme was drawn on by nearly20,000 different companies, approximately 40 per cent of manufacturing firmswith more than 19 and less than 500 employees. Examination of theeffectiveness of the scheme during the early stage of its implementationsuggests that it had a significant positive effect on stimulating additionalinnovative activity – as outlined later in this section.

Other approaches to broad grant-based systems to stimulate technology developmentby firms have been established by industrialising countries in the Asian region. InTaiwan, for instance, support is provided for the development of ‘new leadingproducts’. The eligible areas of technology are defined very broadly, with the mainrequirement being that the technology should exceed existing technical levels in theindustries covered. In Korea also, the Generic Industrial Technology DevelopmentProgramme was set up to finance R&D projects undertaken by firms across a widerange of industries and technologies. With an eye on WTO conditions, themechanism has recently been modified to operate on a loan basis – but with nocollateral and no interest rate, and requiring repayment only if the projects arecommercially successful.

A little more illustrative detail about these types of grant-based mechanisms isprovided in the following list derived from the Technopolis 1997 survey of policymeasures in selected European countries. However, we should emphasise again thatthe purpose of this list is to illustrate, not to recommend. Nor is it in any sensecomprehensive: it includes only about 15% of the various measures included in theTechnopolis survey; and that itself provided a far from comprehensive coverage ofEuropean experience.

Illustrative List of Grant and Subsidy Mechanisms to Support CompanyTechnological Capability Development in Selected European Countries

1. STRATEGIC CAPABILITIES

Name: The Enterprise Initiative (UK)

Main Objectives:The Enterprise Initiative ran from 1988 to 1995. It was the largest singlepackage of DTI support for businesses ever devised. Some services, such asthose for export and standards were a simple reimaging of support existing atthe time. The main focus was the provision of consultancy services to SMEsthrough six “Consultancy Initiatives” covering Design, Marketing, Quality,Manufacturing and Business Planning. The Consultancy Initiatives aredescribed below, the remainder of the programme was available throughGovernment Offices in UK Regions.

Target Businesses

78 It was subsequently continued for a short period on a different basis which subsidised additional

R&D employment, and again for firms with up to 1000 employees.

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Any UK business employing 500 or fewer. Most industrial sectors werecovered; exceptions were those which are considered politically sensitive (egTobacco) or those which have their own advisory network (eg Farming). Somesubject areas were excluded for political or legal reasons (eg Health and Safetyclaims, Trade Union negotiations).

Mechanism

• A multi-million pound TV and press campaign announced thelaunch of the programme nationwide. Businesses interested inthe scheme were channelled through “freephone” lines or togovernment Regional Enterprise Units. Simple applicationforms were sent in response.

• When completed forms were received back, an EnterpriseAdvisor would make an appointment to visit the firm. TheAdvisor’s role was to inform the Chief Executive of the businessabout the scheme. If both agreed that consultancy was needed areport on their requirements was prepared and sent to therelevant Consultancy Initiative contractors. If not they would besign posted to other sources of assistance.

• Enterprise Counsellors (ECs) were recently retired industrialistswith broad business experience who were subcontracted byDTI. They were paid a nominal £75 per day, plus expenses, fortheir services.

• The EC’s reports were sent to one of five specialist DTIContractors whose role was to identify an appropriate source ofconsultancy assistance for the client. In order to do this eachcontractor maintained extensive databases of consultancy skills,sectoral expertise and track records of completed projects.

• When a consultancy organisation had been identified indiscussion with the client, they were invited to prepare aproposal tailored to the client’s needs. The proposal wassubsequently approved by both the client and the managingcontractor, who would then place an order for the DTI share ofthe project cost. Clients were responsible for paying their sharedirect to the consultant.

• At the conclusion of the project, both the client and themanaging contractor would receive copies of the report, afterquality checks the contractor would pay the DTI share of thecost. These payments were then claimed from DTI on a monthlybasis.

• The original EC visited the client approximately 6 to 8 weeksafter the conclusion of the project as an initial check on theoutcome. A report on the visit was sent to the contractor.

• Users were entitled to a single consultancy project of up to 15man-days spread over a maximum of 16 weeks. DTI met 50% ofthe cost of the project. Consultancy fee rates were based on adaily figure which was inclusive of expenses.

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Comments

The programme is seen as one of the most successful ever devised.Almost 60 000 businesses were assisted; at it’s peak, annual DTI spendexceeded £50m. The Quality Initiative was particularly successful,largely because of the packaged nature of ISO 9000 consultancy and thepopularity of the subject at that time. The programme is the largestsingle reason for the UK’s lead in ISO 9000 certification.

Apart from the direct benefits to client businesses there were someadditional national benefits. The consultancy sector developed as aresult; the 15 day project limit within a sixteen week framework meantthat they had to improve their working efficiency - this benefited otherclients. Stringent quality checks caused a general improvement in workdone and a series of networking events brought together consultantsfrom this disparate sector to initiate informal clusters. All of thesefactors have helped to improve the competitiveness of UK consultantsin the international market place.

A change in UK political direction in the mid 1990s saw a reduction innational services and greater emphasis on local delivery throughBusiness Links. The Enterprise programme fell victim to this and wasreplaced by a much reduced and arguably less professional BusinessLink service.

Name: The National Technology Audit Programme - NTAP (IRL)

Main Objectives:

To assess the current status of technology applied in a company inrelation to products, human and material resources. The resultingAudit, recommends how existing technology can be improved toincrease profitability. Appropriate technology is the focus , but it isstudied in conjunction with other areas such as finance, quality,marketing and management.

Target BusinessesNTAP is targeted primarily at manufacturing SMEs with 50 or feweremployees and with an annual turnover of less than IR£3m.

Mechanism• The programme is conducted in two phases. Phase one, the

initial audit, results in a report which identifies opportunitieswhich form the basis for the company’s future manufacturingand/or business strategy. Phase two represents theimplementation of the developmental strategy identified in thefirst stage.

• The Action Plan produced as a result of the second phase makerecommendations on improving manufacturing techniques,including; purchase of capital equipment on a cost/benefitbasis; opportunities for cost reduction and/or productivityimprovement; improved product quality, reduction of inventory

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and minimisation of waste and finally, long-term companydevelopment.

• Projects are undertaken by a team of experienced consultants,sometimes augmented by technical specialists.

• Each audit involves a half day of interviews with key personnel, followedby two to five days of on-site assessment of methods and procedures,Investigations off-site and preparation of a detailed report then takes afurther five to seven days. A follow-up visit is usually made six to twelvemonths after completion of the initial audit.

CommentsThe title of this programme is rather misleading, it should really beseen as a “business audit”. The modular approach and full fundingfrom government have made the programme very popular with Irishindustry. Results are well documented; to mid-1995 some 630 Phase Iand 250 Phase II audits had been carried out since the launch of theprogramme in 1989. Follow-up visits report that on average 50% ofrecommendations had been implemented 6 to 12 months after theaudit, in addition users said that they would implement a further 25%of recommendations at a later stage. Figures given for improvements inparticular areas are also impressive; employment +5.4%, turnover peremployee +12.3%, turnover +18.4% and profit +41.3%.

Name: United Kingdom Benchmarking Index (UK)

Main Objectives:

• To encourage the transfer and adoption of good practice• To give access to comprehensive, low cost benchmarking

information to all UK SMEs• To encourage awareness of the importance of measures as a wayof improving performance

Target BusinessesAll UK SMEs regardless of sector - both manufacturing and service.

MechanismA private contractor (Pera Consulting Ltd) runs the United KingdomBenchmarking Index (UKBI) on behalf of the DTI. They have designedand developed the system, which is computerised, running on PCs. InEngland, the delivery channel is solely via Business Links or Trainingand Enterprise Councils (TECs), using Personal Business Advisers(PBAs) or Innovation and Technology Counsellors (ITCs). In Scotlandthe scheme operates via equivalent organisations called LocalEnterprise Councils. UKBI does not operate in Wales at the moment.

UKBI is a managed assessment scheme. This means that a PBA or ITCwill work through the whole benchmarking process with an SME,giving advice and support, and ensuring that the quality of data inputinto the database is accurate and robust. The benchmarking processcovers three areas:

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• Financial - mostly derived from annual reports• Managerial - operational data on various aspects of companyperformance such as customer service, new product development• Business Excellence - based on the well known European Foundationfor Quality Management model, this series of questions on 9 areas of abusiness, (including leadership and impact on society) measuressubjective topics in an objective way

A questionnaire is completed by the SME, (typically from arepresentative group within the company), moderated, and sent to thecentral computer. A report is returned, electronically, which the PBAis able to edit as required. The report shows comparative performancebetween the SME and its chosen comparator set, highlighting strengthsand weaknesses graphically and statistically. The PBA interprets andanalyses this report, presents it back to the SME, and works with thecompany to identify, prioritise and implement improvement actions.

CommentsThe emphasis of the scheme is on giving SMEs easy access to acomprehensive service which is easy to use, to encourage them toemulategood practice as demonstrated in other companies. Its real value lies inthe improvement activities identified, and the way they areimplemented, rather than just in the process of undergoingbenchmarking.

So far the scheme has generated a positive response from SMEs andBusiness Links. However, there are some problems, including:

• variable quality of PBAs• lack of direct marketing to end users - lack of market awareness• perceived problems of critical mass - i.e. there are not many

companies in the database. This can be seen, however, as a‘start up’ problem which should resolve itself over time

• currently there is no international aspect to the project

2. INTERNAL CAPABILITIES

Tangible technology base

Name: SMART and SPUR (UK)

Main Objectives:

• SMART: to determine the feasibility of introducing newtechnology based product in British SMEs

• SPUR: to improve the ability of SMEs to introduce new productsor processes

Target Businesses

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SMART: Individuals or partnerships, and UK SMEs with 50 or lessemployees with an annual turnover of less than ECU 7 million or abalance sheet not exceeding ECU 5 million

SPUR: British SMEs with 250 employees or less with either a turnover of lessthan ECU 40 million or a balance sheet of less than ECU 27 million

MechanismThe schemes allow individuals or SMEs to submit proposals into anannual competition. Regional DTI officials assess the viability ofproposals before submitting them to a peer review exercise. This isperformed mainly by government experts but occasionally (and onlywith the permission of the firm) using sector specific industrial experts.

The SMART (Small firms Merit Award for Science and Technology)scheme provides funds on a competitive basis for technical andcommercial feasibility study for projects involving the application ofnew technology. Support is available for up to 75% of total projectcost, to a maximum of £45,000.

The SPUR (Support for Products Under Research) scheme fundsprojects which aim to develop new products or processes up thepreproduction prototype stage. It covers 30% of total project costs, upto ECU 200,000 (unless the project previously won a SMART award inwhich case the funding goes up to 50%) .

The SPUR scheme reserves a small amount of its budget forexceptional projects of a strategic nature in areas such astelecommunications or biotechnology where prototype testing isexpensive because it has to conform to both national and internationalregulations. For these exceptional projects, maximum support is600,000 ECU and the support level is negotiable up to 30%. Theseproposals are appraised at central DTI offices by the departmentsresponsible for the appropriate industrial sector.

In some regions, support is available at a slightly higher level oradditional EC funds can be used to increase the number of projectssupported.

Firms entering into the competition must not have more than 25% ofshares or voting rights controlled by firms exceeding the above limit onturnover and balance sheets. Exceptions are possible in the case ofpublic investment corporations, charities and venture capitalcompanies such as 3i as long as they remain silent partners.

For example, a firm which wants to design a new type of engine couldapply for a SMART grant to design and test the principles of thedesign. If the application was successful and if the proposal for projectsupport was satisfactory the firm could then obtain up to 50% fundingfor the production of a prototype engine.

Comments

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The two schemes will be combined into an annual competition calledSMART from May 1997. The only significant change is that inEngland, the SPUR scheme is now a competitive scheme andapplications will not be accepted all through the year. In the past,SPUR grants would have been awarded (within available budget) toany application which was considered suitable for support. Due topolitical and budgetary pressures the scheme has now moved to acompetitive selection mechanism in which grants from different sectorswill compete against each other.

The switch to a competitive grant is officially intended to improve thequality of proposals submitted into the scheme. In reality, theappraisal of competing proposals from different sectors and requiringdifferent technical and management skills is often difficult andoccasionally subject to external and internal pressures. As with allsupport grants of this type, one of the weaker point these schemes isthat they largely rely on the public sector to ‘pick winners’.

Name: Feasibility Grants (IRL)

Main Objectives:

To encourage small or start up companies to launch new product orprocesses.

Target BusinessesAny individual or small company wishing to develop a new product orprocess. There is no official restriction on size but larger companies areexpected to finance feasibility studies themselves.

MechanismThe grants are available to individuals or Irish based companies toidentify and evaluate new product opportunities. They can cover mostof the activities involved in feasibility studies including marketresearch, cost analysis, financial projections, plant evaluation andprototyping including the cost of external consultants. If the grant issuccessful they companies can subsequently apply for support under adifferent mechanism for product development.

The grants cover up to 50% of the feasibility study up and there is noofficial maximum limit though in practice this is restricted to £15,000per study. However, for individuals aiming to commercialiseuniversity Research and Development the maximum amount offunding can be raised to £30,000.

CommentsThe scheme funds roughly 400 feasibility studies a year. As with allfeasibility support mechanism there a high level of natural wastagebecause most startups or companies realise that the business case fortheir start up is weak. As a result only 18% of studies result in firms orindividuals moving to the product development stage.

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Feasibility schemes can reassure SMEs or private individuals that thereis a business case for the introduction of new technology, new productsor processes. This reduces the perceived risk of developingtechnological capabilities and makes it easier for firms to invest.

The scheme deals with requests on a case by case basis and onlyawards serious grants to strong applications.

Intangible resources

Name: Techstart (IRL)

Main Objectives:

• To encourage Irish industry to make use of the skills of technicalgraduates

Target Businesses• Irish indigenous companies in need of embodied technical

competencies

MechanismThe scheme operates by placing young technical graduates incompanies. Forbairt operates a milkround of interviews withgraduates (and MSc students) in their final year at college and keep arecord of their details on a database. Forbairt regional staff will thenrefer firms that they believe would benefit from recruiting a younggraduate to improve their utilisation of technology to the Techstartoffices in Dublin.

Firms apply to support to Techstart and once it has been approvedthey can either use the Forbairt database to select young graduates forinterview or advertise for the post.

The Scheme provides a one-of £5,000 grant (£4,000 for diplomaholders) to support the employee’s salary in the first year. In additionan extra £2,000 may be approved by Forbairt to cover additionaltraining or consultancy associated with the recruitment of the graduateor the project that they are working on. The scheme usually placessupports the 300 graduates a year and on average 80% of graduateselect to stay with the company after the first year.

CommentsThe database operated by Forbairt allows companies to matchgraduates to their needs however the choice of graduates is left entirelyup to the company. In addition the follow on support to provideadditional training or advice on the project that the graduate isinvolved in helps firms to develop project specific competencies fortheir new employee.

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Name: Techman (IRL)

Main Objectives:

• To improve the embodied technical competence of Irishcompanies

Target BusinessesAll Irish firms irrespective of size although most applicants are SMEs

MechanismThis scheme is operated in partnership with the Techstart graduateplacement scheme. It is designed to help companies improve theirtechnological competencies by recruiting a senior technical projectmanager into the company which have substantial needs of technicalexpertise to realise a technical project.

Once the company has satisfied Forbairt regional staff that they are inneed of a senior technical manager, the company can either select asuitable candidate which Forbairt will approve or it can request advicefrom Forbairt.

In any case, the scheme provides £10,000 of the technical manager’ssalary in the first year of employment decreasing to 5,000 and 2,500 inyears two and three respectively. In addition, an extra £5,000 isprovided for the purchase of additional project related expertise ortraining for from outside the company.

The scheme is rather small, targeting around 30 companies a year.

CommentsLike the Techstart scheme which is a graduate placement scheme,Techman focusses on renewing or improving the internal technicalcompetence of Irish SMEs. This allows firms to obtain externalexperience which can help them to manage a new project but can alsoimprove their understanding of the potential of other existingtechnology. Providing a technical manager with experience ofintroducing new technology can help reassure small firms that there isless risk in investing in new technology than they previously thought.

The scheme’s decision to provide full-time experienced technicalmanagers rather than consultants recognises that the skills providedare needed on a full time basis. In addition, the provision of funds fortechnical training or advice recognises that the technical managerneeds to maintain and upgrade existing capabilities.

One of the key problems for the scheme is that similar support (thoughnot specifically targeted at R&D managers) is available at a muchhigher level from other schemes in Ireland.

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Name: Kennisdragers in het Midden en Kleinbedrijf - KIM (NL)

Main Objectives:

The objective is to increase the technological capabilities andcompetitiveness of firms by bringing in a graduate technician.

Target BusinessesSMEs with 50 employees or less, and which employ not more than oneother graduate (in addition to the SME entrepreneur).

MechanismThis programme provides subsidies for the employment of graduatesin businesses which do not yet have wide experience with graduateemployees. Firms that employ a recently graduated person with atechnological degree from either a HEI or a University (MA level ordoctoral) receive a one-off subsidy of DFL 20,000 providing that theyhire the graduate for a year for at least 32 hours a week. The aim ofattracting this graduate would be to develop innovation projectswhich would otherwise not have happened due to lack of resources orexpertise, or which would speed up the process of the planned(technological) innovation considerably.

The first application by the company is dealt with by the Central Officeof the Innovation Centres. The regional Innovation Centres play anactive role in making companies aware of this scheme and supportingthem in their application. There is a restriction on the number ofprojects that can be allocated per region.

CommentsAn indirect objective is to stimulate technology transfer betweeneducation institutes and enterprises

The budget for this scheme comes from the Ministry of EconomicAffairs. The scheme is in operation since May 1994, after a pilot schemewhich started in 1990-1991. In the experimental phase 40 placementswere made. The scheme has been evaluated and one of the results wasthat in 80% of the cases the technicians were offered a permanent jobafter the KIM project. An additional benefit was that in many casesfor the SME entrepreneur, mostly a one man technician-manager, theKIM graduate was seen as a potential successor for the business. Itwas found that after the end of the project the graduate was usuallygiven broader management tasks than just the original innovationproject. In 60% of cases the KIM graduate was still working on theinnovation project a year after the project.

On average 60-70 KIM placements are allocated each year.Government sees this as a very successful programme and is indiscussion to increase its budget. One of the major issues is thequestion whether, with the extension of the scheme, sufficienttechnological graduates can be found to fill the placements andsufficient SMEs with absorptive capacity to offer the graduates futureperspectives. For 1997 DFL 1,440,000 was allocated to this scheme.

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Name: Engineers to Japan (UK)

Main Objectives:

Aims to place younger Engineers with management potential inJapanese host companies for a period of 9-12 months. Candidates mustnormally be qualified to degree standard, be aged 25-35, employed bythe UK company for at least one year and have an interest in Japanesebusiness, culture and language. The Royal Academy of Engineeringmanage the programme for the DTI.

Target BusinessesTargeted mainly in the personal terms given above. The UKsponsoring company must agree a work programme with the Japanesehost company, ideally on a specific project of mutual benefit to bothorganisations. In addition the UK company must retain the Engineer infull employment, maintaining eligibility for pay awards, pensionrights, etc., as if in a UK post.At the end of the secondment the UKcompany must be able to offer the candidate a post in which his/hercontacts will be used and release him/her for occasional talks on theirexperiences.

Mechanism• Application forms for the scheme are sent to the Royal Academy

of Engineering who is responsible for final selection andmonitoring of candidates in partnership with the companiesconcerned.

• It is not essential that candidates speak Japanese but it isstrongly recommended that candidates undertake an intensivecourse

devoted to language and customs. The DTI will contributetowards the cost.

• The DTI will pay up to 50% of allowable costs of sending anEngineer to Japan, up to a maximum of £35000.Allowable costsinclude salary, travel and accommodation and, if necessary, thecost of sending the Engineer’s family.

• Host companies in Japan can be identified in one of three ways;The

UK company’s own contact (but not parent or subsidiarycompanies), a host company preferred by the UK company orafield of interest in which the managers will identify a suitablehost.

• The scheme has a permanent representative in Tokyo and the backing ofthe Japanese Government through MITI.

CommentsThis scheme is not only useful for building knowledge on overseastechnology transfer but also develops interest in the Japanese languageand culture. Most importantly, participants are able to build

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relationships with counterparts which in the longer term can bebeneficial to their sponsoring company or their industry as a whole.

The scheme is about to be broadened into the International Businessand Industrial Secondments Scheme which will include professionsother than Engineering on a wider international basis. The fundingbasis will change; awards will be more beneficial to smaller firms.

Organisational Capabilities

Name: R&D management Scheme (IRL)

Main Objectives:

• To improve the competence of R&D managers in Irish firms

Target BusinessesAll Irish based companies. The programme provides separate trainingfor companies with different technological competencies and marketsize

MechanismThe programme is split into 4 different modules targeted at differentcompanies.

Module one provides regional short training course for small Irishcompanies which already carry out some Development activities. Thecourse take up one day a week over a period of five weeks and coverthe following courses:

• Best practice in R&D management• Integration of R&D into business strategy• Managing the generation of concepts/ideas• Selecting and developing concepts/ideas• Project management process• Transferring products to the factory• Legal issues relating to IPR• Submitting proposals for support to Forbairt and the EU

After the course the firm is offered follow-on support in the form ofconsultancy advice on planning R&D and mapping out capabilities.The cost of module one is subsidised by up to 75% to a limit of £7,500.The company is responsible for selecting consultants to providesupport. The scheme has been set up recently but about 100 firms takepart in module one every year.

Module two is similar to module one but provides two courses a yearaimed at serious R&D performers. Courses last a week and areorganised at INSEAD in France, or MIT in Boston.

Again, the firms are offered follow on advice by a selection of 4Forbairt-approved consultancies: Arthur D Little, PRTM, PA, and AMTIreland.

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Forbairt subsidises 75% of the cost of both course (including travel andaccommodation) and subsidises 75% of the cost of the consultants (upto an upper limit of £100,000)

20 firms attend the INSEAD courses and 10 firms take part in the MITcourse every year.

Module three is an internship scheme in which Irish R&D managersare placed overseas in similar firms (often a client of supplier firm) forup to 6 months. MIT is occasionally used to broker placements.

Forbairt provides a grant worth up to 75% of salary and cost ofaccommodation during the placement period.

Module four is in the form of a part-time postgraduate course in R&Dmanagement at University College Dublin leading up to a Diploma79

or Masters degree in technology management.

Forbairt has subsidised the establishment of this centre but it isexpected to be self financing.

CommentsThe scheme differs from other consultancy support scheme because itfocusses on educating R&D managers and hand-holding them throughinitial R&D projects. This will allow managers to choose between arange of appropriate technology and techniques to manage R&Dprojects.

The modules target different types of firms and level of technologicalsophistication but they are firmly aimed at firms with existingtechnological capabilities. The scheme must be seen as a complementto other programmes that aim to ‘bootstrap’ firms.

3. EXTERNAL CAPABILITIES

Access external knowledge

Name: Bedrijfsgerichte Technologische Samenwerkingsprojecten (NL)

Main Objectives:

The BTS is a new programme run by the Ministry of Economic Affairs,from early 1997. The main objective is to increase private investmentin R&D and to improve the R&D’s output through the enhancement ofcollaboration between firms and between firms and knowledgecentres.

Target Businesses

79 A diploma is equivalent to two years study at University. In general,

managers without a degree or equivalent qualification will have to take theDiploma course before proceeding to the Masters course.

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The target businesses are groups of collaborating firms or a firmsubcontracting R&D to another organisation. The original design hada limitation for consortia of firms with more than 20,000 employees,which was altered when the scheme came into operation. The reasonfor this alteration was that with this ruling, large firms were excludedfrom support for subcontracting R&D to knowledge centres. Now allfirms are eligible to participate in the programme.

MechanismAll firm-to-firm or firm-knowledge centre collaborative projectsconsisting for at least 50% of basic or applied industrial research, andwhich are technologically innovative and have commercial potential,can apply for financial support of maximum 37,5% of the project costs.The supported projects have to be a collaboration of at least twoorganisations of which at least one is a company. The project should becompleted within 4 years. The maximum amount of public support isDFL 5 million per project.

The application for this scheme is a procedure with several steps.After telephone contact with SENTER, the government agencyimplementing this programme, a first - one page - description can besent to a SENTER counsellor. He/she will decide whether the ideafalls within the programme’s criteria, after which the firms can goahead finalising proposals. Concept project plans can also bediscussed with the counsellor and meetings can be organised betweenthe project partners and the SENTER specialists. After these phases ofconsultation the final proposal is sent in and assessed. The pre-proposal consultation trajectory is not compulsory, but it is thought tobe helpful, especially for SMEs to improve their chances for winningthe proposed contracts.

CommentsThe BTS scheme has been launched in early 1997 replacing fourexisting schemes, which were more specifically for SMEs: theProgrammatische Bedrijfsgerichte Technologiestimulering Subsidies(PBTS, i.e. private R&D in biotechnology, new materials andenvironmental technologies), the Information Technology Scheme(mainly IT demonstration projects), the Supplier-Contractor Scheme(T&U) and the Bedrijfsgericht Technologisch Onderzoek doorCollectiviteiten (BTOC) programme. The programme reflects a coreelement in the philosophy of Dutch innovation policy: increasing theknowledge intensity of firms, through the improvement of co-operation between firms and between firms and knowledge centres.

Interesting is that the programme aims at increasing inter-organisational linkages as part of the mechanism to improve internalcapabilities and diffusion of knowledge at the same time. Thus itexcludes unilateral funding for single firms to perform R&D.

It now encompasses predecessor schemes, some of which were moreSME focused than the present programme.

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The T&U scheme aimed at bringing together one or more suppliersand their contractor with the objective to enter a technological co-operation through product development or process innovations. Theinteresting part of the scheme was that suppliers of the same contractorwith complementary assets were encouraged to jointly develop andsupply a system rather than separate components. The schemefinanced 40% of the project costs. The programme defined 9 product-market combinations that were eligible for support (i.e. automotiveand rail, energy-offshore, equipment for the process-industry,telecommunications- and office equipment, industrial supply for theconstruction industry, audiovisual products, electronics, machinebuilding, and aviation). The 1996 budget for this scheme was DFL 7.5million.

The BTOC scheme was similar as the new BTS scheme but specificallyfor collaborating SMEs. Firms from a particular sector, forming aconsortium, would be paid 50% of costs of R&D projects. At least 3firms should be in the consortium and pay for a minimum of a third ofthe project costs. The innovation project was obliged to be new to theNetherlands, be technologically feasible and have commercialpotential. It was allowed to have a two year embargo on disseminatingproject results. The budget for the scheme was DFL 5 million for 1996.An evaluation in 1994, revealed satisfaction of the users, but alsopointed out that the “newness” criteria should be assessed morecritically.

Name: Steinbeis Foundation for Economic Promotion (D)

Main Objectives:

• To promote intensive co-operation between academic,commercial, and political institutions.

• To stimulate the take of up new technology and to encourage foreignSMEs to collaborate in Baden-Württemberg.

Target Businesses• Mainly SMEs based in Baden-Württemberg in need of technical

advice and assistance.• Non- Baden-Württemberg or foreign SMEs wishing to

collaborate with Baden-Württemberg SMEs on technologyprojects.

• Regional authorities wishing to set up technology transferschemes.

MechanismThe Steinbeis foundation aims to encourage co-operation betweenacademic, commercial, and political institutions.

The Steinbeis foundation provides a bridge between sources oftechnical information and companies, mainly SMEs. Centres areoperated by full time staff who refer queries to technically competent

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experts, thus the Steinbeis foundation facilitates the provision ofconsultancy services by academia.

The Steinbeis foundation is a non-governmental institution run on anot-for-profit basis. Individual transfer centres are legally part of theSteinbeis foundation, but are independent and expected to be selfsufficient.

The Steinbeis foundation provides technological advice and may evengo as far as arranging technological development for a company. Italso addresses the organisational aspects of new technology (on a moreapplied level than business consultancies). They also provide start upadvice.

Companies interested in Steinbeis services can address themselves tothe headquarters in Stuttgart which arranges a contact to theappropriate transfer centre. It is possible to contact a transfer centredirectly.

The actual transfer takes place in the 300 odd local transfer centres.Each centre specialises in one particular technical field and works indirect contact with the company commissioning it.

Steinbeis administers three support measures on behalf of the Baden-Württemberg Government:

• innovation consultancy,• active short-term consultancy• external development management

The first scheme finances an initial Steinbeis consultation up to 5 hours.The consultation should help the SME to identify its problem and tofind approaches to their solution. This often leads to a paid-forconsultancy project.

The second programme has the objective to help SMEs in theautomotive parts and mechanical engineering industry to introducelean production techniques. The Land usually gives grants for 3-4 daysof free Steinbeis advice. In certain cases, support up to 10 days isavailable. This scheme defines the term “SME” in a very broad way.Companies with up to 1500 employees can apply for this programme.

Finally, the external development management programme aims tohelp SMEs in managing technical development projects through up to4 hours of free Steinbeis consulting per month. SMEs with an annualturnover of less than DM 200 millions can apply.

CommentsSteinbeis has a turnover of almost DM 100 M. 98% of this is generatedfrom its own activities. Thus Steinbeis appears to meet the target of aself-financing and sustainable system that helps SMEs increase theircompetitiveness.

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There is a question regarding the level of indirect financing thatSteinbeis receives from the Länder states since they do not differentiatebetween indirectly supported income (such as the three schemesmentioned above) and consultancy paid for by private companies. Weestimate that the indirect support does account for a substantialamount of Steinbeis income, nevertheless it is extremely important as apump priming mechanism in that it encourages firms to considertechnical consultancy.

For its focus on advice and consultancy instead of grants and loans, theSteinbeis approach differs from most other Länder support measures.Since the State grants often initiate a paid-for consultancy relationship,this approach promises high value-for-money.

The concept of the Steinbeis Foundation operates at a local or regionallevel and it has been difficult to expand the concept to other Länder.This is possibly because the scheme provides an interface betweenprivate sector demand and the existing technological infrastructureavailable in Baden-Württemberg. In other regions, the demand or theinfrastructure may not be available.

Name: Technologie-Transfer-Ring Handwerk NRW -TTH- (D)

Main Objectives:

• To help artisans innovate• To improve the technological standing of handicraft businesses through

information, supervision and further education

Target Businesses• Handicraft businesses in North Rhine-Westphalia

MechanismArtisans can get technical advice at their local chamber of handicrafts.Similarly to chambers of commerce, membership is compulsory, andthese organisations obtain contributions from their members. It is alsopossible to contact TTH consultants at certain handicraft associations.LGH, the handicrafts’ organisation for the promotion of business inNRW, coordinates the TTH activities. It is an association of the 7 localchambers of handicrafts and the 49 major trade associations in thisfield.

20 consultants offer initial consultancy services. Services vary butmainly cover product design, and quality management. In particular,they carry out product value analyses. TTH also aims to establishquality management systems at the company level. Furthermore, TTHcarries out database research in the fields of science and engineeringliterature, patents, usage and taste samples. 15 days of theseconsultancy services are available free of charge in any three yearperiod.

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This general free technical consultancy can help firms identify specificrequirements for technical consultancy which is then provided byexternal consultants (either self-employed or from academicinstitutions). Grants are available from THH partially coverconsultancy expenses. There is an upper limit of DM 1,000 per day andthe North Rhine Westphalia Land provides support which varies withthe length of the consultancy:

• day 1-4: 75% of cost• day 5-7: 50% of cost• day 8-10: 35% of cost

CommentsThese services are provided to low-tech SMEs to help them developbasic technological capabilities. The key feature of the scheme ismembership and free consultancy are provided to all memberorganisations. Unlike the Steinbeis foundation, the scheme provides ahigh level of free initial consultancy support followed by partial statesupport for external consultancy.

Name: Programmes In Advanced Technology - PATS (IRL)

Main Objectives:

• The Programmes in Advanced Technology (PATs) are designed to encourage theexploitation of university-generated RTD in industry.

Target Businesses• Technology-dependent Irish indigenous companies

MechanismThe Programmes in Advanced Technology were launched with statesupport with the aim of exploiting university-generated technology inindustry. The PATs were established in seven areas of technologyidentified in strategic study by the national science and technologyagency - EOLAS, now known as Forbairt :

• Biotechnology• Advanced Manufacturing Technology• Advanced Materials• Optoelectronics• Power Electronics• Software• Telecommunications

The programmes have provided funding for the establishment ofcentres within universities to encourage the exploitation of technicalexperience in the Irish third level institutions. One of which is a

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requirement to recover an increasing percentage of their cost fromindustry thus shifting towards industrial applied R&D.

In principle, each group forms an integral part of the overall researchcapability of the department, but focuses on industry rather thanresearch contracts.

The level of direct exchequer funding for the PATs is set to decreasegradually to around 20% of total expenditure five years after beingestablished. In addition, it is expected that at this time they will deriveat least 50% of their income from Irish based companies

The effect of these funding principles over time in the well-managedPATs is to force an evolution from supply-push to demand-orientation

CommentsThe PAT model is unusual. Unlike the normal Industry LiaisonOfficers at the Universities, the PATs are tightly focused on individualtechnologies and individual users. Their cost recovery requirementsare higher than other industrially-oriented research units or researchinstitutes. In cases where we have sought international comparatorsfor the PATs, few of these have a cost-recovery goal of as much as 50%.

The positive aspects of the PATs include• Life cycle oriented subsidy pattern, recognising that developing and delivering

capabilities are activities with differing economic requirements• Tight focus on a defined, manageable set of technologies and users• (With some encouragement) a strongly commercial approach to their work• Focusing university capabilities (and the enthusiasm of a young, recently-qualified

postgraduate staff) on R&D and innovation activities which industry sees asimportant

• Providing an industrial ‘training school’ which quickly gives young engineers abroad experience. Many then move on to existing companies or to establish theirown

• On a case basis, there is a proportion of the PATs’ work which has a clear impacton industrial and economic development

Weaknesses include• The high final cost-recovery targets force the PATs eventually to retreat from

focusing on the industrial development issues which they were set up to tackle• A proportion of the PATs’ work consists of routine development and

process improvement, where it is difficult to see any additionality• Success depends on implanting an alien, commercial culture within

universities• Universities are naturally tempted to turn to PATs as a source of finance

for their internal scientific agendas. This can lead to conflicts between theuniversity and the industrial sides of the PAT

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Name: Forschungskooperation in der Mittelständischen Wirtschaft - FMW(D)

Main Objectives:

• To facilitate co-operation between technologically competent SMEs by providingsupport for joint research and the exchange of personnel.

Target Businesses• SMEs with 500 or less employees. If companies with more than 1000 employees

hold more than 50 % of its share capital, the SME is not eligible.

MechanismSupports inter-industry collaborative research:

• between firms,• between firms and science and research establishments, and through the personnel

transfer between SME and research institutes.

The R&D co-operations grant aims to facilitate research and technicalco-operation between SMEs, including collaboration between firmsfrom different sectors. Support varies between 25-40% of eligible costdepending on employees and location. The upper limit for support isDM 300,000 (DM 400,00 in East Germany). There are additional grantsup to DM 200,000 available for international co-operation.

The grants support the salaries of technical personnel involved in thecooperation. The support rates vary with the qualification of theemployee. The maximum rate is DM 13,000 per month (forpostgraduate research staff).

The R&D-contracts grants aim to facilitate contract research betweenSMEs and research establishments. Support varies between 25-40% ofproject cost depending on employees and location. The upper limit isDM 100,000 (DM 150,000 in East Germany). Eligible costs are theexpenses for commissioning R&D (excluding VAT).

Personnel exchange grants support the transfer of researchers atuniversities to companies, and vice versa. Support does not exceed anupper limit of DM 100,000 (DM 200,000 in East Germany). In case ofindustrial researchers at universities, grants cover 40% (50% in EastGermany) of their gross salaries. The monthly flat rates for universityresearchers visiting companies are DM 3,000. Additional grants forinternational transfer are available up to DM 100,000.

CommentsThe programme is unusual in that it seeks to improve:

• the internal tangible technology base of firms

• the intangible capabilities of firms

• the ability of firms to network with other firms

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In addition the possibility of collaborating with firms from different sectorsincreases the diffusion capabilities of the programme.

Name: Innovation Vouchers (UK)

Main Objectives:

Many small businesses have difficulty in affording, or justifying thecost of external advice. Through the Business Link network (seeseparate description) Innovation Counsellors visit firms to help onimmediate issues. If further help is needed, to use testing services forexample, the business may not proceed without financial support.Innovation Vouchers were introduced so that Counsellors couldovercome this hurdle, or reluctance, to using help.

Target BusinessesSmaller businesses in any sector who can convince the InnovationCounsellor that they have difficulty in affording external help.

Mechanism• If a visiting Counsellor accepts that a business needs financial

support he/she can issue up to four vouchers, each with a valueof £250. A maximum of £1000 is available to any businessduring the life of the scheme.

• The business engages the services of a supplier on a normalcommercial basis.

• When the work is completed a copy of the invoice along withthe voucher(s) is sent to Pera as managing contractor for DTI.Pera then pay the business an amount equivalent to the vouchervalue(s) and claim the total amount spent on vouchers from DTIon a monthly basis. Annual DTI funding is approximately£600,000

CommentsThe vouchers are seen by Counsellors as a useful tool to persuade very smallbusinesses to take external advice. A single voucher would typically buy a halfday of advice from a local consultant or technology organisation, it istherefore a small token payment. Four vouchers would typically purchase ashort market survey from reference material, a supplier search or a briefphysical test of material.

Vouchers are available through Business Links on the same basis foradvice on Exports.

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Appendix C The Thailand research fund

The Thailand Research Fund (TRF) is a national research funding organisationfocused primarily on developing the university sector, though it is beginning to dealwith companies and rural communities.

C.1 Background

The TRF was established in 1993, based on the 1992 Research DevelopmentEndowment Act to fund both basic research and R&D. At that time, foreign aidincome for research funding was declining, and there was a need to establish anational funding body. TRF duplicates the role of the National Research Council and,to a considerable extent, NSTDA.

TRF answers directly to the Prime Minister. It has a staff of 45 (one third of themscientists). It is part of the government system but (unlike NRC) is not subject to thenormal bureaucratic civil service procedures. The Policy Board comprises tengovernment officials and nine academics. The Evaluation Board has a similarcomposition. It has defined its mission as to develop high-quality research andresearch funding. Its objectives are to

• Build up professional researchers and strengthen the research community.• Support research that is significant to national development, both for basic

research and research where results can be used directly.• Promote the dissemination and use of research findings.• Raise funds for the national research and development system.

The 2000 budget is some 850 million Baht, split in roughly equal proportions betweenbasic and R&D funding. There is also a small, new category of ‘empowermentresearch’ which accounts for less than 5% of the Fund’s expenditure but is expectedto grow in future. In 1999, for the first time, TRF was able to spend its full budget.“Because the absorptive capacity [of the university system] is low, there is moremoney than researchers, and we will not compromise on quality.”

The expected budget for 2001 is 1bn Baht, made up of a mixture of income from theFund’s endowment and additional funds from the government’s annual budget.

C.2 TRF basic research funding

Basic research grants are largely financed in response mode, and are intended tostrengthen selected areas of research among the in the universities. Assessmentcriteria for proposals focus on scientific quality. While in certain categories, less than50% of all applicants receive funding, TRF views the degree of competition involvedas low.

The grants are of five types• Research team Promotion Grant• Basic Research Grant

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• Research Career Development Grant• Post-Doctoral Research Grant• Royal Golden Jubilee Ph.D. Grant

The Royal Golden Jubilee programme aims to educate 25,000 PhD-holders over a 25year period starting in 1997. (This is believed to correspond to 10% of the nationalrequirement for PhDs in the period.) Phase I, 1997-2011, is expected to produce5,000 PhDs, who must be jointly supervised in a Thai and a foreign university. By2000, 1070 such PhD grants had been awarded.

C.3 TRF R&D funding

TRF has 70-80 R&D programmes which are more targeted to meeting national needs.These last 3 years and are designed by external reviewers, who work with academicsto define needs and identify clusters of researchers who could satisfy them.Assessment criteria for proposals focus on scientific quality and relevance to theprogrammes, though assessments are essentially made by academics. Theprogrammes are managed within five divisions

Programme on Transitional Relations and Development Options (Division 1). ThisProgramme’s primary foci are to develop a strong base for various social institutions;understand the situation of the country in relation to world wide economic, political,and cultural changes; and find new options for national unity and stability Programme on Science and Technology for Production, Marketing and Services(Division 2). This Programme’s primary focuses are to promote scientific andtechnological research which will increase the capabilities of the producers orservice providers in order to maintain and increase Thai competitiveness Programme on Science and Technology for Natural Resources Management,Environmental Balance, and Human Welfare (Division 3). This Programme’s fociare on multidisciplinary research in the areas of natural resources and on solvingenvironmental, energy, social welfare, and health problems Programme on Community Research (Division 4). This Programme’s focus is topromote and co-ordinate research and development which will strengthencommunity. Various aspects of social and economic research Programmes oncommunity development are under the responsibilities of this division Programme on Research in Industrial Sector (Division 5). This is the onlyprogramme to fund work in industry, and it has begun to do so only recently. It initialfocus is to promote research and development in industrial sector. In the beginning,emphasis will be on development of necessary technologies for small and mediumenterprises (SME). This will include improvement of processes, development ofnew products and quality improvement of existing products. Recently aProgramme to develop researchers for industry, similar to the Teaching CompanyScheme (TCS) in United Kingdom, has been launched by this division. The goalof this division is to make Thai industry more competitive

There is a wide variation between these divisions in the proportion of proposals whichreceives funding, ranging from 20% to 80%. Overall, about half of all proposalsreceived are funded – a very high proportion by western standards, even though TRFclearly makes important efforts to fund only high-quality projects.

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C.4 Empowerment R&D

In the last year, TRF has begun to provide small grants of up to 300,000 Bath for localrural community initiatives, for example: developing an Eco-tourism model; settingup agricultural co-operatives. TRF has plans to fund up to 1,000 such projects peryear in the future.

C.5 Issues

TRF regards its major challenge as to build up a university research infrastructurewith the areas of strength needed to underpin the development of the Thai economyand society. In many areas this means there is a start-up problem of insufficientcritical mass, so that it is hard for Thai university departments to absorb eitheradditional research money or PhD students.

In the absence of a national mechanism for co-ordinating research policy – or, for thatmatter, a system which co-ordinates research efforts between founders and theuniversities – TRF is tending to expand its role to fill vacant or contested areas ofR&D funding policy. This brings advantages in that it extend the fundingopportunities available to users. However, the lack of co-ordination also means thatthe overall availability of money to different parts of the research system becomesarbitrary.

Its mission, the composition of TRF’s Boards and its appraisal processes mean that itlargely focuses on developing the academic sector. It has few links to industry, and ispositioned neither to perceive nor to serve industrial development needs particularlywell.

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