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FOR
TECHNOLOGY CAPACITY BUILDING OF SMEs IN ASIA
PACIFIC REGION
By
DR. S.P.AGARWAL
PROF. & HEAD, CITT, INDIAN INSTITUTE OF FOREIGN TRADE,
NEW DELHI, INDIA
ORGANISED By
BEJING, CHINA
27-30 OCT. 2006
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An Innovative Policy Framework For Technology Capacity Building Of
SMEs In Asia Pacific Region
By
Dr. S.P. Agarwal, Professor & Head, CITT, IIFT, New Delhi
ABSTRACT
The policy marking for technology capacity building for SMEs is viewed as a
complex and multidimensional process, to be integrated with other policies and
mechanisms related to industry, trade, finance, and society. The enterprise level
strategies for business and technology also need to be integrated. The paper briefly
outlines the present status of R&D and innovation, technology trade competitiveness and
S&T indicators, FDI and related technology transfers, existing policy for SMEs etc.
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1. INTRODUCTION
1.1 A report, based on literature review, desk research, field visits to select
developing countries, and compilation and analysis of data, on strategies for enhancing
technological capabilities for competitiveness of SMEs in Asia Pacific region, was
prepared by the author for ESCAP, and presented in a regional consultative meeting held
by ESCAP at Seoul, Republic of Korea (RoK) in Jan. 2006. this paper is based on further
research work done by the author, essentially developing a theme that technology and
innovation capacity building policy framework, needs to be an integrated and coordinated
effort, with other policies and support mechanisms related to education, industry, and
commerce and society. The World Competitiveness Report 2006 has identified following
nine pillars for determining the competitive index of 125 countries.(23)
Institutions
Infrastructure
Macroeconomy
Health and Primary Education
Higher Education and Training
Market Efficiency
Technological Readiness
Business Sophistication
Innovation
1.2 Technology and innovation capacities are closely related to each other but may
not be sufficient by themselves for competitiveness and growth unless tuned with other
policies and mechanisms at enterprise and national levels, specially in the context of
globalisation and knowledge based economies under the emerging world trade rules.
1.3 Technology capacity building for SMEs is largely influenced by the overall
national S&T climate and policies, mechanisms and support structures, though there are
specific policies and mechanisms for SMEs, within the overall framework. SMEs would
continue to play a significant role in national industrial and social development, and are
presently passing through a transition phase and process of restructuring due to need for
enhancing global competitiveness and faster technological developments. The new world
trade rules and increasing operations of transnational corporations (TNCs) are opening
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business opportunities as well as posing challenges for SMEs, including an active role in
international supply chain management, rural development, innovation management,
services sector, etc.
1.4 This paper briefly discusses about the policies and mechanisms for technology
capacity building of SMEs in the Asia Pacific region, with special reference to
competitiveness, trade and economy. Indian experiences are illustrated through
developing technology capacity building (TCB) models for information
technology (IT) and auto components sectors, as examples. A few suggestions
are made for TCB of SMEs in Asia Pacific region, which is characterized by
varying levels of development in various countries, towards sustainable growth
and competitiveness of enterprises, keeping in view their strengths and
constraints.
1.5 The author is grateful to ESCAP, in particular to Mr. Xuan Zengbei, Director,
TID; and to Mr. park Pill-Hwan, NRL Expert on Investment and Enterprise
Development, TID; for supporting the studies and inviting as a resource person, in
an international ESCAP Workshop in China to be held in Oct. 2006 at Beijing.
2. TECHNOLOGY CAPACITY
2.1 Characteristics
2.1.2 A more formal characterization has been in the United Nations Development
Programme (UNDP)”technology achievement index” in which various countries are
grouped as(20)
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3. R&D AND INNOVATION
3.2 The total R&D expenditure and Business R&D expenditures for select countries
are given in Table I, which shows that Business R&D expenditures are substantial as a
percentage of total, in case of advanced countries and some developing countries such as
China, RoK, Singapore, while the same is small in case of other developing countries
such as Thailand and India. Similarly number of scientists per million of people is small
in case of India (157) as against 545 in China, 2319 in RoK, and 4097 in USA. The
number of PCT patents filed by India is only 678 in 2005 as against 2500 in China, and
4685 in RoK, in the same year.(4)
4.1 Annual percentage change in world output growth rate has increased from 2.9 in
1990-2000 to 3.6 in 2006, while that of USA decreased from 3.5 to 3.1, increased for EU
from 2.2 to 2.3, 4.9 to 6.2 for developing countries, and 7.0 to 7.3 for East and South
Asia(22). These growth rates do not show any correlation with the national S&T
capacities, while technology is regarded as a key driver for development. This indicates
that there are other factors too, along with technology, for development.
5. EDUCATION
5.1 The expenditure on higher education ranges from 1.41% of GDP (US $ 36,006
per capita) for USA to 0.5% for China ($ 989 per capita), 0.37% for India ($487 per
capita), most other countries are in this range. There is a strong correlation between
expenditures on education and technology capacities(14).
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5.2 It is important to note that formal and structured academic programmes at graduate
or post graduate levels in technology and innovation management are yet to be generally
appreciated by industry and policy makers, in most developing countries. A preliminary
study at Indian Institute of Foreign Trade (IIFT) under an EU supported research
programme, has revealed that technology intensive organized sector is keen to engage such
qualified people if available as per their needs, while most SMEs are yet to appreciate the
same. Field studies show that there are few takers for existing TM courses. The Department
of Scientific & Industrial Research (DSIR) and Asia Pacific Centre for Transfer of
Technology (APCTT) have taken some initiatives to enhance awareness and improve
course contents in India, but are far from satisfying the needs on ground level. The
developing countries in the region need to enhance the level and quality of education for
development of S&T capabilities.
6. GLOBAL COMPETITIVENESS
6.2 The UNCTAD report(22) on Trade and Development, 2006, has focused on private
capital formation, productivity growth, and technology upgradation, with the theme of
‘global partnership”, and has emphasized on the need for policy reforms towards this
objective. It has made several recommendations for R&D capacity building. In another
report on ToT,(21) financing of transfer of technology (ToT), FDI, matching and
information, training, venture capital, and international alliances, are identified as the
main issues for SMEs. The absorptive and technology capacity of a host country are
important, incase of FDI inflows with technologies. The World Bank has also mounted
several programmes towards technology capacity building of SMEs, and eleven facilities
have been set up around the world, with grant funds for innovation projects.(24) The
National Research Council in Canada has launched a programme “A National
Competitiveness Technology Intelligence Capacity Building” to help SMEs, with grater
focus on commercializing R&D, and promoting collaborations between SMEs and R&D.
An integrated management approach has been adopted in Japan.
7. FDI
7.1 FDI and technology capacity building in host countries has been discussed in a
large volume of literature, with really no conclusive experiences for developing
countries.(25) Nevertheless, FDI is considered to be an important mechanism for
technology and management capacity building, if domestic policies are appropriately
tuned. While China received US $ 79.1 b, and RoK received US $ 4.3 b.(26). The
outward FDI has been US $ 11.0B, as against that of China at US $ 49.6 b in 2005. (26).
The outward FDI from countries such as India is a relatively recent phenomenon. There
is a need to examine the changing needs and role of SMEs in this context as well in the
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context of increasing mergers and acquisitions since these are important players in the
supply chain management. For example, the cross border M&A purchases by India
increased from 1133 m in 2004 to $ 2110 m in 2005, while that of China increased from
$ 1302 m to $ 4083 m.(26)
7.2 A study of SMEs in India has revealed that the R&D expenditures of domestic
enterprises has generally increased in various sectors such as pharma, engineering, bio-
tech, while that of MNE affiliates was generally lesser than domestic enterprises in the
same sectors. (Table 2)(18)
8.2 India, China, and Thailand appear to be among the preferred destinations for
R&D for TNCs. Various studies tend to show that the R&D centres and international
linkages in R&D favourably impact the innovation and technological capacities in host
countries. This is illustrated through the examples of foreign R&D centres in India and
China. (4,15, 28)
8.3 India
8.3.1 It is estimated that there are more than 200 foreign R&D centres in various sectors
including ICT, drugs & pharma, auto, chemicals, and agro(4,15) . It is estimated that R&D
investment world of $ 1.3 bn has flown into India during 1998-2003, and planned
investment is at $ 4.65 bn. US is the biggest and wider investor followed by Germany.
22980 R&D workers are estimated in 100 FDI companies in R&D sector. Nearly half of
FDI companies are cases of relocation of in-house R&D in home country to offshore
location in India. FDI majors are working on latest technologies, at least 415 patents are
filed from India in US. It is also revealed that partnerships with local companies are
good at the start but partnerships are not forever. 56% of FDI companies prefer to work
alone in India, with 100% foreign equity, without local partners in equity.
8.3.2 IIFT studies(4) have revealed that availability of skilled manpower is most
frequently cited as the main reason for choosing India. Proximity of markets, S&T
infrastructure, and other infrastructural facilities including policy framework, are cited as
other reasons for R&D in India. These R&D centres seem to have helped in
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strengthening local innovations and technology capacity building, through contract
research, collaborative research, supporting their own manufacturing activities, and
training programmes for R&D employees. These studies have also made
recommendations to promote foreign R&D in India, which include setting up of
databases, more incentives for R&D, promoting development and education of highly
qualified including Ph.Ds in sectors such as computer science and biotechnology.
8.4 China
8.4.1 UNCTAD Report 2005 indicates that there are over 300 TNC R&D centres in
China, out of which 140 are located in Shanghai. However, a study for foreign R&D
centres or FDI in R&D in China since the mid 1990’s indicates that more than thirty large
multinational corporations (MNCs) have located their wholly-owned R&D centres in
Shanghai because of its rich knowledge assets, competitive market, agglomeration of IT
industrial cluster, and effective and flexible local governance.(28) More importantly, the
localization of these R&D centres does not result in an isolated high-tech colony, but
technology spill over in the form of new spin-offs, the mobility of trainer engineers
between MNCs and local firms, and the creation of a new technology research field
through MNCs-university joint research labs. This in-turn enriches and restructures
Shanghai’s existing innovation systems. The foreign R&D centres are : technology
driven, market driven, production driven, and cost driven. The study argues that the trend
of foreign R&D in developing countries is a possible way to actively intervene and
engage in global innovation networks dominated by MNCs.
8.4.2 Table 1 does not show any definite correlation between total R&D, business
R&D, and R&D expenditures of foreign affiliates in various economies, which are, in a
way, are the indicators of the technological and innovation capacities (29). Therefore, there
is a need to carry out more studies of this nature for major developing countries, and
evolve guidelines based on experiences and practices followed for foreign R&D centres,
as to how the technological capabilities and innovation systems could be strengthened.
ESCAP could consider to take an initiative in this direction and promote R&D
cooperation the region. These studies would also be useful in the context of GATS of
WTO.
9.2 Data for receipt & payment of royalty and licence fee of select countries in Table
4(24) for 2001, 2002 and 2003 indicates that the receipt decreased from $ 83 m in 2001 to
$ 29 m in 2003 for India, while the payment increased from $ 306 m in 2001 to $ 356 m
in 2003. In case of China, the receipts decreased from $ 110 in 2001 to $ 107 m in 2003
while the payments increased from $ 1938 m to $3548m This data tend to show that the
technology transfers to India and China have increased during the period 2001 to 2003
while technology transfer through licensing etc. decreased from India and China during
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the same period, though the magnitudes have been different. In other words, one could
interpret from the above data that the manufacturing technology capabilities, based on
imported technologies shows an increasing trend while the R&D capabilities or
development of indigenous exportable technologies have been rather given lesser
attention.
10. WTO
10.1 Various agreements of WTO including those related to TRIPs, GATs, TBT,
TRIM, SPS, Agriculture have wider technological implications for trade and business of
SMEs and corporates in manufacturing and service sectors. Since, there is a wide gap
between the technological capabilities of developing and advanced countries, the WTO
Agreements tend to favour the advanced countries with higher technological capabilities.
Various agreements include clauses related to capacity building, technology transfer,
information flows, etc. for developing and least developed economies. However, the
implementation has been far from satisfactory. On repeated representations from
developing and least developed countries, a technology transfer group has been set up to
identify the issues and take necessary measures, but again, it seems to yet take-off in
practice. At the same time, several new Free Trade Agreements (FTA), Regional Trade
Agreements (RTA), etc. are being made among various economies. The technology
transfer implications of these trade mechanisms are yet to be really understood and
studied for SMEs, and SMEs need to be prepared for the same. In post WTO, market
access and technical assistance are the main concern. National policies and mechanisms,
international support system, and MNCs strategies to promote growth and capabilities in
host countries, could be identified as major areas in post WTO scenario.
11. SMEs
11.1 Realising the role and importance of SMEs in national economies, almost all
countries have evolved policies, mechanisms, and incentives of varying nature and
varying degree of implementation, and the same have been discussed in detail in earlier
report submitted to ESCAP in Feb.2006. Therefore, only salient issues have been very
briefly mentioned here. It may be noted that international agencies such as ESCAP,
World Bank, regional development bodies, and aid or support programmes of developed
countries have catalysed and accelerated the technology capacity building of SMEs in
developing countries. However, there seems to be limited awareness about these
programmes among SMEs, and perhaps a relook is required to make them more useful.
11.2 An empirical study, based on field data, through 1869 questionnaire sent out to
mainly manufacturing enterprises in Malaysia, Singapore and Thailand in 1999-2000,
and 374 suitable responses, tends to establish that technological capabilities are correlated
to firm’s innovative activities and national or regional innovation system. (11)
Technological capacities at firm level for late industrialization strategies based on
imported technology, are classified as(11) :
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Production capabilities
Investment capabilities - knowledge and skills
Minor change capabilities
Strategies marketing capabilities
Linkage capabilities
Major change capabilities
Status(6)
10
ITES – BPO Industry
USA 59%
Europe 22%
Asia-Pacific 15%
12.1.2 IT industry in India has grown during last about three decades, essentially
driven by entrepreneurship innovation and export markets, complied with qualified,
pool of technical people. The initiatives of the entrepreneurs were then supported by
the government through various policies, mechanisms and infrastructural facilities
set up at central and state levels. Various fiscal incentives, tax concessions, setting up
of R&D and academic institutions, training and retraining facilities, etc. fuelled the
growth and competitiveness of this sector. The initiatives at state levels encouraged
geographical dispersal and growth. The IT activities however remained at lower
spectrum of technology and R&D, and the sector is dominated by the SMEs, some of
which have growth to global operations. Some of the major companies are now
increasingly developing strategies towards supply of services and products through
higher levels of technologies and innovations, mergers & acquisition, and FDI etc. for
growth and competitiveness. The domestic markets are also now opening up which
have encouraged IT companies for more efficient acquisition and up gradation of
technologies. Infrastructure and policy implementation continue to be road blocks.
Figure 1 shows emergence of Bangalore as a multi tech global centre – perhaps a role
model for innovations. Fig. 2 shows an innovation model for IT industry in India.
Fig.3 shows the emergence of Bangalore as a hub for IT industry mainly.
12.2 Auto-Components
12.2.1 Status
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centres, besides the in-house R&D activities of TNCs, and other R&D related
activities. Today, almost all major brands are operating in India or have planned to
do so. The R&D expenditures are at about 1.1% of annual turnover. About 20
companies, most in organized sector, have government recognized R&D units,
incurring expenditures more than Rs. 1 m per year. Table 2 shows that R&D
intensities of local firms in auto sector is 1.33, while that of TNCs affiliates is only
0.784 over the period 1992-93 to 1998-99.
The automotive industry in India, including the auto component sector, has really
grown during last about two decades, since the opening of the markets and
introduction of liberalised policies and other measures aimed at globalizing the
economy. The primary driving force appears to be the proactive policies, the support
mechanisms, large domestic markets, and improvement in infrastructural facilities
including ICT services. The capabilities and brand image in IT seem to have
catalysed the growth. These policy initiatives and support measures encouraged the
growth of entrepreneurship and innovations in the manufacturing, based on the
competitive pool of technical, research and management skills and human resource
for the industry.(13,16,19) The research and technology based continues to be weak in
the sector but there is a growing awareness in industry and government, to enhance
technology related capacities for competitiveness and growth. Non-availability high
level of technical and scientific skills is considered an area of serious concern, in
addition to training and re-training facilities. Figure 4 show a conceptualized
innovation system for auto component industry in India, based on the past
development and future strategies. The proposed innovation models for IT and auto
component sectors is only an effort to understand the process and are subject to
discussions.
13.1 Based on the additional research work, surveys, and studies, after
Jan.2006, a few suggestions have been made in brief, towards enhancing
technological capacities of SMEs in Asia Pacific region. Recent trends in growth
rates of developing economies tend to indicate the need for a relook at the various
aspects of technological developments and applications. It appears that innovation
capabilities and new business models are emerging important factors for growth and
competitiveness, mainly based on acquired technologies. SMEs in traditional sectors,
and new and high technologies as well as manufacturing and service sectors, may
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require differentiated policies for SMEs. Large R&D is likely to continue to be
mainly confined to advanced countries and large corporates at this stage, but would
be important when advanced levels of development are reached in fast developing
countries. Business research facilities for policy studies for SMEs would be
necessary, as in USA. At the same time, development of human resource , in general,
and particularly in IM/TM, through structured courses would need to be initiated in
many developing countries’ besides preparing SMEs for new world trade rules
including WTO. China and India should take a lead, and harness the cooperation
potential to mutual advantage through collaborations and partnerships, for technology
capacity building of SMEs in the Asia Pacific region.
• Policies
• Investment Policies
• Industrial & Trade Policies
• Financing Policies
• S&T Policies
• Sectoral Policies
• Central And Regional Or State Policies
• Other Policies
• Mechanisms
• Administrative Ministries And Departments, Commissions,
Councils
• Industrial Estates, Clusters, Growth Centres, Parks, Incubators,
Innovation Centres
• Design & Engg. Centres, Training And Prototype Centres,
Standardisation And Testing Centres Mechanisms
• R&D Institutions, TT And Advisory Services, IPR & Information
Services
• Marketing And Trade Facilitation Services
• Banks, VCs, Investors, Stock Exchanges, Micro Financing,
• Industrial Associations
• International Agencies
• Incentives
• Tax Concessions, Duty Exemptions, Subsidies, Priorities In
Services Loans, Govt. Procurement, R&D Services
• Grants For Tech. Dev., Diffusion, Upgradation, Acquisition,
Training Certification And Approvals, Export, Promoting
Collaborations High Tech And Start Ups In Advanced
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14. Suggested Policy Framework
• Policies
• Dual Track For Traditional And Hitech Or Emerging Areas
• Mechanisms
• Incentives
14
• Skills Upgradation
• Encourage Technology For Businesses And Technology Businesses
• Encourage Internationalisation And Collaboration With TNCs
• Sensitise To International Trends And Realities
• Recognition And Awards
• Encourage Academics And R&D Professionals To Interact With SMEs
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Table 1
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Table 2
Electrical 1.13 .923 1.08 1.13 .88 1.08 1.13 .90 1.08
181 55 236 330 92 422 511 147 658
Drugs and 1.69 1.06 1.57 1.74 1.12 1.58 1.72 1.10 1.55
pharma 128 48 176 220 80 300 348 128 476
Full Sample .90 .766 .868 . 831 .852 .835 .854 . 818 .846
1125 338 1468 2169 577 2746 3294 915 4209
Note : Parentheses show S.D.; the bottom figure represents number of observations
Source : Nagesh Kumar and A.Agarwal; Liberalisation, outward orientation, and in-house
R&D Activity of multinational and local firms; RIS, 2000, New Delhi
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Table 3
H IG H
18
Table 4
19
70
60
20
E m e rg e n c e
K
Fig. 2
N
O 21
Fig. 3
22
Fig. 3
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REFERENCES
12) Diana Hicks and Deepak Hegde; Highly Innovative Small Firms in the
Markets For Technology, Research Policy, 34(2005), 703-716
14) Draft Paper on Higher Education in India and GAT, Sept. 2006. Ministry
of Commerce & Industry, new Delhi, www.comm.nic.in
15) FDI in the R&D Sector – study for the Pattern in 1998-2003, TIFAC,
DST, Government of India, New Delhi, 2006
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16) Global Competitiveness of India Capital Goods Industry, Report of
Department of Industrial Policy and Promotion, Govt. of India, 2006
17) Mein Dieter Van Dijk and Henry Sandae; Innovation and Small Enterprises in the
Third World, Edward Elgar , UK 2002
19) The National Strategy for Manufacturing, March 2006, National Manufacturing
Competitiveness Council, Government of India
20) Postnote, Parliamentary Office of S&T, UK, March 2004, No. 216
27) www.nstmis.dst.org
28) Yun-chung Chen; Changing the Shanghai Innovation System : The Role
of Multinational Corporations’ R&D Centres; Science, Technology and
Society, 11:1 (2006), pp. 68-107
29) Agarwal, S.P. etal; Exportable R&D Service from CSIR System in India;
International Conference on Services, 4-6 Oct. 2006, New Delhi, FIEO,
pp. 121-126.
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