Globalization and Technology Absorption in Europe and Central Asia is part of the World Bank Working Paper series. These papers are published to communicate the results of the Bank’s ongoing research and to stimulate public discussion.

Innovation and cross-border absorption of knowledge are central forces behind economic convergence and sustained growth. Absorption of technology is considered a necessary step to promote the development of human capital and the productive base, paving the way for innovations at the global knowledge frontier. Research and development, patents, trade, and foreign direct investment are major channels of technological absorption, allowing diffusion of new ideas and manufacturing best practices among countries and firms. These channels constitute the central focus of this study.

This study uses patent databases, surveys of enterprises, and case studies to investigate how the presence of specific channels of absorption molds decision making about technology. Trade and FDI flows show considerable promise as catalysts for the region to upgrade its technology and near the global technology frontier.
Econometric analysis using enterprise surveys from all ECA countries helps us understand the conditions and policies that induce firms to incorporate external knowledge and technology into their overall growth strategies.

We find evidence of learning by exporting, underscoring the importance of trade as a driver of absorption. A case study of several manufacturing firms in Serbia complements this perspective, providing a detailed picture of the positive dynamics that are produced by FDI, particularly in terms of investment and risk-taking incentives that are critical for technology absorption.

Examination of patent citations shows that cross-border knowledge flows need to be strengthened to foster closer connections between the region’s public sector R&D and global private sector efforts.

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Globalization and Technology Absorption in Europe and Central Asia: The Role of Trade, FDI, and Cross-border Knowledge Flows
Itzhak Goldberg
Lee Branstetter
John Gabriel Goddard
Smita Kuriakose

ISBN-13: 978-0-8213-7583-9
eISBN: 978-0-8213-7584-6
ISSN: 1726-5878

Copyright © 2008
The International Bank for Reconstruction and Development/The World Bank
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.

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Foreword:

This report on globalization and technology absorption in Europe and Central Asia is part of the Europe and Central Asia Knowledge Economy Flagship Studies produced by the Finance and Private Sector Development Department. Innovation and cross-border absorption of knowledge are central forces behind economic convergence and a more sustained knowledge-intensive growth. Absorption of technology is considered a necessary step to promote the development of human capital and the productive base, paving the way for innovations at the global knowledge frontier.

Research and development, patents, trade, and foreign direct investment are major channels of technological absorption, allowing diffusion of new ideas and manufacturing best practices among countries and firms. These channels constitute the central focus of this study, which is the second publication in this Knowledge Economy series. The first title in the series examined the public financial support of commercial innovation. The third title of the series aims to address the importance of the restructuring and/or exit of existing public R&D institutions, and to provide policy lessons on Research and Development Institutes restructuring.

This study uses patent databases, surveys of enterprises, and case studies to investigate how the presence of specific channels of absorption molds decision making about technology at the firm level.Trade and FDI flows show considerable promise as catalysts for the region to upgrade its technology and move near the global technology frontier. Econometric analysis using enterprise surveys from all ECA countries helps us understand the conditions and policies that induce firms to incorporate external knowledge and technology into their overall growth strategies.

We find evidence of learning by exporting, underscoring the importance of trade as a driver of technology absorption. A case study of several manufacturing firms in Serbia complements this perspective, providing a detailed picture of the positive dynamics that are produced by FDI, particularly in terms of investment and risk-taking incentives that are critical for technology absorption. Examination of patent citations shows that crossborder knowledge flows remain weak. Consequently, science and innovation policies should foster greater integration of the region’s substantial science and engineering resources with those of the rest of the world. These policies should encourage international collaboration and closer connection between the region’s public sector R&D and global private sector efforts.

Fernando Montes-Negret
Director, Private and Financial Sector Development
The World Bank

Executive Summary:

Improving the absorptive technology capability of countries—their ability to tap into the global technology pool—is an important mechanism for accelerating industrial development, raising productivity of workers, and increasing economic growth.Trade flows, foreign direct investment (FDI), research and development (R&D), and labor mobility and training are widely accepted as key mechanisms for knowledge absorption. Furthermore, the wealth of detailed information that patents and patent citations contain offer a useful window into the technological absorption process in Europe and Central Asia (ECA).

While patents are indications of new-to-the-world innovation,much of this innovation is incremental, building closely on technical foundations developed in foreign countries.

Patent citations connect ECA inventions to the prior foreign inventions upon which ECA inventions build, tracing pathways of international knowledge diffusion.

The process of knowledge absorption is neither automatic nor costless. It requires a favorable investment climate, as well good national education and research and development systems. This study analyzes the extent of knowledge and technology absorption for firms in ECA, as well as the factors that influence absorption, using statistical analyses of various data sources, including the World Bank Enterprise Surveys, patent databases maintained by the U.S. and European patent offices, and case studies.

The study addresses the following issues:
■ What can we learn from patents and patent citations about international knowledge flows and cross-national technological cooperation in ECA? (Chapter 2)
■ How does openness to trade, participation in global supply networks, and investment in human capital, via on-the-job training, enhance knowledge and technology absorption in ECA-region manufacturing firms? (Chapter 3)
■ How does FDI stimulate acquisition of managerial and technical skills, new machinery and equipment, and market development? (Chapter 4) ...

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