Globalization and Technology Absorption in Eastern Europe and the Former Soviet Union

Pradeep MitraChief Economist

Europe and Central Asia RegionWorld Bank

Presentation at the plenary session of the conference on “Economic Modernization and Globalization” at the State University Higher School of Economics Moscow, April 1, 2008

Technological progress is at the heart of income growth and poverty reduction

Source: World Bank, Poncet 2006

* Data for Europe & Central Asia cover period 2005/1995

Average annual per capita income and total factor productivity growth,1990-2005

0

1

2

3

4

5

6

7

8

East Asia &Pacific

Europe &Central Asia*

Latin America& Caribbean

Middle-East &North Africa

South Asia Sub-SaharanAfrica

Per capita income growth

TFP growth

Technology gap: narrowing but still wide

0

20

40

60

80

100

120

High Income Upper MiddleIncome

Lower MiddleIncome

Low Income

Index of technological achievement

1990s

2000s

Source: World Bank, Global Economic Prospects (2008)

Diffusion across countries has accelerated but penetration within countries remains weak

0

1020

3040

5060

7080

90

1800s 1900-50 1950-75 1975-00

Years for technology to reach country

Percent of countries to reach 25% penetration threshold

Year technology invented

Source: World Bank using CHAT database (Comin & Hobijn, 2004)

Years to diffuse, % countries at 25% threshold

Technological progress in developing and transition countries is mainly about absorbing and adopting technologies developed elsewhere. Trade, FDI and international co-invention are channels for innovation and knowledge absorption.

Source: Globalization and Knowledge Absorption in ECA (World Bank, 2008), Global Economic Prospects (World Bank, 2008)

Exposure to foreign

technology

Capacity to absorb

=

+

Technological progress

Foreign Direct Investment Helped EU New Member States Participate in Producer-driven Global Commodity Chains and Export Skilled Labor and Capital-Intensive Products.

Turkey

Thailand

Philippines

MalaysiaMexico

Korea, Rep of

Indonesia

China

Chile

Brazil

Argentina

Ukraine

Slovenia

Slovak Rep

Russia

Romania

Poland

Moldova

Macedonia

LithuaniaLatvia

Kyrgyz Republic

Kazakhstan

Hungary

Georgia

Estonia

Czech RepublicCroatia

Bulgaria

Bosnia and Herzegovina

Belarus

Azerbaijan

Armenia

Albania

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

0 10 20 30 40 50 60 70 80 90share of skilled-labor and capital intensive products in total exports

FD

I st

ock

per

cap

ita,

U.S

. d

oll

ars

(lo

gar

ith

m)

Source: UN COMTRADE and IMF International Financial Statistics Database.

The structure of finance for fixed investment reflects greater reliance on retained earnings and banks at the expense of family/informal and other sources – a maturation of the business and financial sectors in the transition economies.

Source: Mitra, Muravyev, and Schaffer 2008, “Convergence in Institutions and Market Outcomes: Cross-country and Time-series Evidence from the BEEPS Surveys in Transition Countries.” World Bank, Washington, D.C.

The Structure of Finance for Fixed Investment Is Maturing but Has Not Converged to That in Developed Economies

0%

20%

40%

60%

80%

100%

WestGermany

Cohesion EU8 SoutheasternEurope

Middle income CIS Low incomeCIS

retained earnings banks family/informal other

Scores in science and mathematics in PISA 2006 were comparable to the OECD average in the countries that acceded to the European Union in 2004 and lower elsewhere.

0

100

200

300

400

500

600

Mean score in mathematical literacy, 2006 Mean score in science, 2006

OECD average in mathematical literacy

OECD average in science

Source: OECD PISA 2006

Inventions in the ECA 7 countries received more U.S. patent grants than did investors in China and India until the most recent years. However, there is a clear acceleration in India and China-based patenting in recent years.

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

ECA 7

India

China

Source: Authors’ calculations based on the U.S. Patent and Trademark Office CASSIS CD-ROM, December 2006 version. The graph compares counts of patents in which at least one inventor is based in one of seven ECA countries, India, or the People’s Republic of China. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

U.S. Patent Grants for the ECA7 vs. China and India

International co-invention (ECA 7 patent grants generated by international teams of inventors) has expanded greatly compared to purely indigenous patents (ECA 7 patent grants generated by inventors based within a single country).

0

100

200

300

400

500

600

700

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total Patents Purely Indigenous Patents

Indigenous Patents and Co-Inventions in the ECA 7, 1993-2006

Source: Authors’ calculations based on the U.S. Patent and Trademark Office CASSIS CD-ROM, December 2006 version. The ECA 7 are Russia, Hungary, Poland, Slovenia, the Czech Republic, Bulgaria, and the Ukraine.

Conclusions Trade, foreign direct investment and international co-invention

are channels for innovation and knowledge absorption in the global economy;

The effectiveness of those channels depends on a country’s business environment, viz., the state of competition, financial depth, governance, skills and infrastructure;

The EU new member states are deeply integrated into FDI-enabled network trade;

The structure of finance is maturing in Eastern Europe and the former Soviet Union. Countries which joined the EU in 2004 scored near the OECD average in the 2006 PISA in science and mathematics but other transition countries are doing less well;

Patents granted through international co-inventions have become increasingly important compared to purely indigenous patents and are more connected to global R&D trends.