Fostering Innovation in Developing Economies through SEZs
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Trade and FDI Flows Attracted by SEZs Constitute Major Channels for Tapping into Global Knowledge and Know-How Much of the economic and social progress of the past few centuries has been due to, or is associated with, technological innovation. As measured by TFP, the latter factor explains much of the differences in both the level and growth rate of income across countries (Easterly and Levine 2001; GEP 2008). In this regard, one of the problems faced by most developing countries is their inability to generate radical, new-to-the-world innovations. Overall, most of the world’s commercial technology and R&D remains highly concentrated in a small number of countries (France, Germany, Japan, the United Kingdom, and the United States), although the nonmember countries of the Organisation for Economic Co-operation and Development’s (OECD) share of the world’s R&D has been increasing rapidly (OECD 2010). Furthermore, a large share of the world’s commercial technology is produced by MNCs, most of which are headquartered in these same high-income countries. Given the shortage of advanced technological competencies in developing countries, the vast majority of technological progress needs to occur through the adoption and adaptation of preexisting but new-to-thedomestic-market technologies. In this respect, as an effective policy tool to attract FDI and boost trade, SEZs may dramatically increase developing countries’ exposure to foreign technologies, know-how, and knowledge. The main transmission channels of foreign knowledge and technology are trade (imports and exports), the acquisition of foreign technology licenses, and FDI. • Imports of goods and services that include embodied technology, and in particular capital equipment (Coe, Helpman, and Hoffmaister 1997), can be important conduits for the international transfer of technology and diffusion of innovation. The role of capital goods in particular has been supported by a number of empirical studies (Eaton and Kortum 2001; Keller 2004), as well as many case studies (Chandra 2006). • Export contacts, notably with more developed countries, which may include forced adoption of higher standards and new specifications, contact with more demanding consumers, and exposure to new ideas, can constitute a “learning by exporting” effect that may drive domestic innovation. Although empirical studies are ambiguous as to the existence of this effect,1 a wealth of anecdotal evidence addresses the topic.