Technological Innovation, Entrepreneurship and Development

Industrialization has long been seen as the answer to underdevelopment and poverty. First this led countries to follow protectionist import substitution policies but as these failed developing countries have opened up to trade and FDI and tried to follow strategies of export driven industrialization. If we consider the share of non-OECD countries in global trade in manufactures, this has been a big success. But has it? Developed countries still retain their competitive advantage in the innovative and fast growing industries of the future and for every success story in Asia there are at least two tales of woo in Africa. In this paper we present a two region product life cycle model of global specialization and trade. In it we analyse the impact of three major shocks to the gradually globalizing and integrating world economy and show that these shocks have caused a transition in the global specialization pattern. The advanced and previously industrialized countries have arguable made the transition to an entrepreneurial economy in which innovation, creativity and high value added in early stage activity are the basis of competitive advantage, whereas the developing world by-and-large has absorbed mature industrial activities based on the Heckscher-Ohlinian competitive advantage based on cheap unskilled labour. The key exogenous shocks that have led to this shift are the collapse of communism, the introduction of information and communication technologies and the opening up of large, populous developing countries such as India, China, and Brazil. Our model predictions are very much in line with observed trends in developing and developed economies and as such provides insights in the possible underlying mechanisms at work.