Post 6: Emerging Markets and Technological Adoption, Part 1.
My previous posts described how nations can innovate to create new technologies and how that ties into economic growth. Yet, most economic growth comes from countries adopting technologies that was first used by others. This is likely to be the preferred method for developing nations, as they can achieve significant economic growth by simply emulating more developed countries. History has many examples of formally less developed nations that have grown quickly by adopting existing technologies. For example, Japan after World War Two, and China and most of Eastern Europe after the end of the Cold War. Yet, for every success story, there are many more less developed countries that don’t achieve rapid economic growth. For example, why has formerly communist Eastern Europe grown much faster than formerly communist Central Asia? Why have Africa and Latin America, with a few exceptions, not grown as rapidly? And why has East Asia pulled ahead over Southeast and South Asia, with the exception of Singapore? The next few posts attempt to answer these questions.
In previous posts, we discussed Professor Marc Zachary Taylor’s conclusion that technological innovation is usually driven by what he calls creative insecurity, the difference between external threats and internal discord. The idea is that technological innovation is both difficult and potentially disruptive to the status quo, so nations have incentives not to innovate. It is only when external threats outweigh these factors that nations have the incentives to take the complex steps that allow innovation to happen.
There is a lower bar to technological adoption than innovation, and nations can achieve this without creative insecurity. Still, facing an existential threat can encourage a country to adopt whatever technologies it thinks it needs to address its threat. For example, the Soviet Union was quick to industrialize, build world class universities, and become a space age power after the trauma of the Nazi invasion and the fear that a nuclear United States could be a threat after World War Two.
Similarly, all of the reasons raised in The Politics of Innovation that countries don’t innovate still work to discourage technological adoption. The big difference is that the benefits of adopting foreign technologies are mostly known when others are benefiting from them. Therefore, while the issues that work against innovation may also work against technological adoption, having known examples of others benefiting from foreign technologies may tip the scales towards adoption.
Our goal is to identify factors that encourage or discourage technological adoption. We will identify four factors, some of which encourage, and some of which discourage technological adoption. We will outline two factors in this post and then two more in next week’s post. After that, we will use these factors to provide a few predictions for Emerging Economies that are likely to develop in the coming decades and provide some suggestions for what a nation can do to generate economic growth.
Factor 1: Creative Insecurity
Creative insecurity is the main force behind technological innovation and a factor in determining technological adoption. If a nation faces an existential threat they are likely to do whatever it takes to address it, which is likely to include adopting relevant foreign technologies.
Factor 2: Institutions
In The Politics of Innovation, Professor Taylor identifies what he calls five institutional pillars that he claims are necessary for innovation, but are not sufficient to for a nation to innovate with just them. They are property rights, research and development subsidies, education, research universities and trade policy. The data that Professor Taylor reported in The Politics of Innovation show that each individual pillar has a weak correlation to innovation, but that this correlation becomes stronger when you combine all five pillars. Based on this, I believe there is a general quality of institutions factor, where the institutions are similar to Professor Taylor’s five pillars. I do not feel that the institutions must be precisely the five that Professor Taylor identified for two reasons. First, there was only a weak correlation between innovation and each pillar. Second, I was not aware of Professor Taylor ruling out other possible institutions.
Like creative insecurity, having strong institutions is not necessary for technological adoption, but is helpful in encouraging it. The more developed a country is, the more it becomes necessary to have these institutions in place to move to the next level in economic development. For example, I do not believe that it is a coincidence that all of the major developed countries in the world, such as Japan, Australia and most of Western Europe have done a good job maintaining institutions related to these five pillars. They may not be major innovators right now, but they are good at utilizing the world’s current suite of technologies and adopting those that are developed elsewhere.
I believe that the Institutions factor relates closely to the Middle Income Trap, a phenomenon where many middle income countries have difficulty transitioning to high income because they can not substantially increase their productivity rate. Many economists attribute this productivity lag to a poor development of human capital and poor institutions, implying that they need to improve these to increase productivity to catch up to the developed world.
Stay tuned for next week’s post where we will introduce the next two factors in detail.