Enhancing Policy and Institutional support for Industrial Technology Development in Thailand

Transcription

1 TECHNOPOLIS Enhancing Policy and Institutional support for Industrial Technology Development in Thailand Volume 1 The Overall Policy Framework and The Development of the Industrial Innovation System Erik Arnold, Technopolis Martin Bell, SPRU John Bessant, CENTRIM Peter Brimble, Brooker Group December 2000

2 Executive Summary 1. The Origins, Scope and Purposes of the Study This is Volume I of a two-volume report on a study of the policy framework and institutional structure supporting industrial technology development in Thailand. The study has been funded by the World Bank 1. It has been carried out on behalf of the National Science and Technology Development Agency of Thailand (NSTDA), with the advice and support of a counterpart team of NSTDA staff. The terms of reference for the project called for a study with two main components. A review of the structure and functioning of the whole array of government policy and institutions that are concerned with industrial technology development; A more detailed examination of the role of NSTDA within that overall structure, and of aspects of NSTDA strategy and management. The results of the first of these components are provided in this first volume of the two-volume report. The results of the second are provided in Volume 2. The terms of reference also called for a focus on industrial technology development. Consequently, this report neglects other areas of technology that are extremely important for the country s social and economic development - in particular, a wide array of technology development issues in the fields of agriculture, medicine, public health and other services. The origins of the study lie in widespread concerns about the competitive weakness of Thai industry, and more specifically about the limited intensity of technology development in industry (the technologically shallow path of industrial growth) which has contributed to that competitive weakness. A central aim of the study has been to provide benchmarking comparisons of international practice against which the experience of Thailand can be assessed. These benchmarks do not consist of indicators of performance in technology development. These have been provided in several other studies. Instead the focus here is on benchmarking key features of the institutions, capabilities, management practices and government policies that underlie the technology development performance of industry. These benchmarks have been derived from experience in both the industrialising countries in the East Asian region as well as countries in the industrialised world. Among the latter, the study draws heavily on experience in Europe, especially the smaller, more agricultural and natural resource-based, or later-industrialising countries such the Scandinavian countries or Ireland. 2. Industrial Technology Development: Key Features of International Experience The framework provided in recent years by analyses of innovation systems (or technological learning systems ) is particularly useful for comparing institutional 1 Under a Policy and Human Resources Development grant made available by the Government of Japan for administration by the World Bank. i

3 structures, capabilities and policy regimes in different countries. A small number of key features seem to characterise these systems in more dynamic and competitive economies. In industrialised countries business enterprises are the core of industrial technology development systems. They themselves constitute both the demand side and the supply side for most of the technology used by industry. (Section 1.2.1) A large part of the process of technology development does not involve R&D. It is generated in an underlying structure of design and engineering activities. (Section1.2.2) Firms draw large proportions of the knowledge inputs to their own technology development from other firms. Those knowledge-centred interactions among firms are a critically important part of the whole technological learning and innovation system. (Section 1.2.3) Among these knowledge flows between firms, flows of knowledge embodied in people are centrally important, reflecting the role of firms themselves as creators, and not just employers, of human capital. (Section 1.2.4) The more advanced industrialising countries in Asia have moved through a fundamental transition during which this firm-centred structure of innovative activities and capabilities has been built up quite rapidly from a preceding phase when: (a) Most scientific and technological capabilities were located in public institutes, (b) Education and training institutes, rather than firms themselves, undertook most of the development of technological skills and capabilities. (Section 1.3) The initial development of these firm-centred technological learning and innovation systems in Asia, and their continuing development in the advanced industrial countries, has been underpinned by a dual structure of public policy, incorporating two main components: (a) Policy measures designed to strengthen the technological learning, technological capabilities and innovative activities of firms; (b) Policy measures designed to strengthen and support the capabilities and resources of scientific, technological and training institutions that are intended to undertake activities on behalf of industrial firms. (Section 1.2.5) Among the policy measures to support the technology development roles of firms, a substantial proportion are designed to strengthen and develop firms demand for improved technology, not just their ability to acquire it or supply it. (Section 1.4) The local affiliates or joint venture partners of multinational companies (MNCs) can be powerful vehicles for strengthening local technological capabilities and innovative activities, provided policies are pursued which actively engage them in playing these roles in the local economy. Increasingly, therefore, industrial policy regimes in many countries incorporate measures designed, not merely to attract foreign direct investment in the first place, but to influence: (a) The extent and depth of MNC s technology intensive activities during the long period after they have located locally, and ii

4 (b) The extent to which these activities yield technological spill-overs to local firms and other organisations. (Section 1.5) These emphases in policy seem to be going with the grain of trend changes in the technological behaviour of MNCs. In both industrialised and some industrialising economies the roles and strategies of MNC subsidiaries and JV partners seem to be shifting towards a greater localisation of technology development activities, and there appears to be greater flexibility in the extent to which they do so in particular locations. 3. The Industrial Technology Development System in Thailand Experience in Thailand over the last years contrasts sharply with that of the more technologically advanced industrialising countries in Asia that have moved through a fundamental transition by building up firm-centred structures of innovative activities and capabilities from preceding phases when most scientific and technological capabilities were located in public institutes. The development of this firm-centred structure of innovative capabilities and activities in Thailand has lagged far behind the experience of these other Asian countries - not just behind their current capabilities, but behind their earlier experience when they had similar levels and structures of economic development to those of contemporary Thailand. The magnitude of change now needed to catch up with those past levels can be illustrated by the case of comparison with Korea: The current intensity of R&D performed by business enterprises in Thailand lags around years behind the level in Korea in the early 1980s when that country had a similar level of industrial and manufacturing development as contemporary Thailand. The intensity of business-performed R&D in Thailand would need to be increased to around 20 times its present level in order to catch up with the intensity in Korea at that corresponding earlier stage of industrial development. (Section 2.2) At this stage, however, the most important thresholds of technological capability that firms need to cross are not concerned with formally organised R&D. For most larger firms and a few SMEs, they are about building their design and engineering capabilities as a basis for starting significant technology development activities. Only for a few firms that have already built that level of capability is the relevant threshold now about deepening it further to build up R&D capabilities and activities. For the majority of SMEs, especially in more traditional industries, the most important capability thresholds are concerned with increasing the efficiency with which existing technologies are acquired, used and operated. (Section 2.3) There are signs that very early steps in the transition towards an enterprise-based technology development system were being taken in the few years before the crisis, and these may have accelerated again in the last year or two. Market conditions and greater awareness of the significance of the technological dimension of competitiveness seem to be bringing a much larger number of firms towards iii

5 investment in their own technology development capabilities and activities. (Section 2.2.2) However, the required scale and intensity of investment calls for a deep and pervasive learning process in industry. This must occur at two levels: At the level of individual firms, the majority will have to abandon deeply rooted perspectives on technology that have dominated industrial investment behaviour for years, and they must learn about the costs, risks and returns involved in investment in types of technological activity and capability with which they have very limited familiarity. (Section 2.3) At the level of groups of firms in industries, clusters and value chains, it will be important to develop much more significant collective effort and technology development interaction between firms in order to enhance competitiveness, and also to increase the significance of those linked structures of industrial production within the Thai economy. (Section 2.4) As in other countries, but contrary to common perspectives in Thailand, the roles and strategies of MNC subsidiaries seem to be shifting towards a greater localisation of deeper technological activities. They appear to be playing a more positive technology development role than in the past, and this appears to generate significant spill-overs to the rest of the economy. More important, however, there appears to be much greater flexibility in the technological behaviour of many MNC subsidiaries, and hence a rising potential role in strengthening local technology development activities and capabilities. This flexibility seems evident in three areas: in the potential scope for capability deepening and for strengthening technology development activities in their own operations; in the potential scope for linking those activities more strongly to local institutions; In the potential scope for increasing the significance of technological spill-overs to the local economy. (Section 2.5) However, in contrast to many other countries, there has been very little shift towards policy designed to exploit these opportunities. Policy with respect to inward FDI in Thailand continues to concentrate very heavily on attracting investment in the first place, with very limited emphasis on seeking to influence either the technological behaviour of affiliates thereafter, or the extent to which that behaviour generates spillovers to local firms and other institutions. While the huge overall shift in technological behaviour that is needed in industry in Thailand must be driven primarily by change in locally owned firms of all sizes, the potential role of MNCs in contributing to this shift seems very substantial. But this will not be realised without a significant change in policy towards FDI and MNCs. This in turn will require an underlying change in attitudes and perspectives. Whether efforts to attract inward MNC investment are increased or reduced, perspectives on what happens after that initial investment will need to shift from: toleration, often coupled with suspicion and resentment, to pro-active exploitation of, and support for, the opportunities to strengthen technological learning and deepen technology development. iv

6 4 Policy: Strengthening Capability and Technology Development in Industrial Firms There are strong grounds for believing that significant public interests are served by subsidies for investment in technology and skill development by private enterprises in industry. These grounds are concerned with: the public benefits arising from increased diffusion of knowledge, skill and experience benefits arising as externalities that would otherwise be much smaller because of under-investment by firms in the face of imperfect markets ; the public benefits that arise more specifically in industrialising countries from assisting industry in making substantial shifts across structural discontinuities in building up a body of technological capabilities in industrial firms discontinuities where risks, market imperfections and under-investment are particularly great. (Section 3.2) There is also considerable evidence that, provided they are well designed for particular circumstances, mechanisms to provide such subsidies have had an important impact in many situations and, far more often than not, they have also constituted an efficient use of public finance. Although the available evidence on this point is scarce for the particular experience of industrialising countries like Thailand, there is every reason to believe that mechanisms can be designed that will be effective and efficient in those circumstances also. (Sections and mechanisms to support technology development in firms; Section3.3.2 mechanisms to support training and capability development in firms) In practice, however, there are virtually no such mechanisms available yet in Thailand. In this respect, Thailand again differs from several other countries in the region, which have implemented a variety of innovative mechanisms for these purposes for many years. (Section mechanisms to support technology development; Section mechanisms to support training and capability development) We therefore suggest that urgent consideration should be given to five courses of action. The existing tax incentive for R&D should be reviewed to consider further amendments in its design and administration that would increase its effectiveness in stimulating increased R&D by industrial and other firms. Among other issues, this review should explore (a) the need to continue operating the scheme on the basis of firms payments to approved R&D organisations, (b) the possibility of defining R&D in ways that come closer to meeting priorities at the current stage of technological development in Thai industry, and (c) the value of operating both the BOI and standard Ministry of Finance schemes in parallel. A study should be undertaken to examine whether and how a simple and flexible grant-based subsidy mechanism could be put in place to stimulate firms to undertake technology development activities involving forms of design and engineering work that would not meet the eligibility conditions of the R&D tax incentive system. This might be envisaged as a technology development apprenticeship scheme which, focusing on encouraging firms to deepen the early stages of their technology development activities, would only be available to individual firms for a limited v

7 period of time or for a limited number of projects. Thereafter, firms would be expected to graduate to meet the eligibility conditions required by the (modified) R&D tax incentive scheme. In parallel with that study, or perhaps in combination with it, another enquiry should examine whether and how a flexible grant-based mechanism could be established in order to assist firms invest in training and related capability building activities concerned with strengthening their human resources for design, engineering and R&D. This enquiry would consider two slightly different kinds of activity as outlined in the previous section both (a) straight training-related activities and (b) design/engineering projects with high levels of training/learning content. It would also consider ways of assisting investment in such activities by both individual firms and groups of enterprises with common interests. (Section 3.3.3) These linked studies should give as much attention to measures designed to stimulate firms demand for improved technology as to measures designed to strengthen their ability to acquire it or supply it. It should also give considerable attention to measures that would facilitate and support collective action in this area by groups of firms in particular industries, clusters and value-chains. (Numerous examples of such schemes are summarised in Annex 2, and also reviewed more briefly in Section 1.4) Consideration should be given to the organisational arrangements for administering such schemes. In particular, consideration should be given to arrangements that would: create a one-stop-shop covering the range of financial incentives to support advanced level training and learning, technology development at the design and engineering level, and more formally organised R&D; ensure close linkage between (a) activities and organisations providing consultancy, advisory and similar services to industry, and (b) organisations responsible for promoting these kinds of financial support for firms. At the same time, consideration should be given to ways in which public concerns about the possible misuse of grant funds might be met for instance by contracting private sector organisations to act as administrative and decision-making intermediaries between private sector claimants and public sector funding. Steps should be taken to move forward as fast as possible with defining and implementing the details of a broad and comprehensive training support system within the framework of the proposed Skill Development Fund. This is important in its own right, but is also important for helping to build a stronger structure of technology-using and assimilating skills to underpin the deepening of technology development capabilities. In defining these details considerable efforts should be made to avoid the bureaucratic costs of inflexible and over-extended aspects of schemes in other countries, while capturing those aspects of good practice and experiment that seems to have contributed most to strengthening skills and capabilities. Cutting across these studies and developments of policy, it will be important to bear in mind that the problem on hand is not about assisting individual firms to achieve their own private interests though that will usually be a necessary means. Instead, vi

8 the end at stake is about generating system-wide public benefits from both creating and spreading knowledge, skills and experience. Consequently the key issue is not about finding welfare mechanisms to support disadvantaged firms that need assistance though that might be an added dimension. Instead the key perspective is about finding ways to enhance investments made by firms to generate important areas of knowledge, skill and experience, and at the same time it is about finding ways to intensify the extent to which that knowledge, skill and experience spreads across and spills over into the rest of the industrial system. 5. Policy: Developing the Institutional Infrastructure to Support Industrial Technology Development There has been very limited change over the last ten years in basic features of the structure of institutions supporting industrial technology development in Thailand. These features include: the functional diversity and specialisation between institutions specialisation and diversity among government stakeholders in the institutional structure the effective involvement of private sector industrial stakeholders in the system complementarity between university and industry R&D people-centred modes of technology transfer from institutes to industry other modes of technology linkage between the institutional infrastructure and industry the basic mechanism for financing technology development activities in public institutions. (Sections 4.1 and 4.2) In other countries there has been considerable innovation and evolution in these and other features of the institutional component of industrial technology development systems. Consequently, there are quite wide gaps between aspects of the institutional structures that seem to be important in other countries and the arrangements now in place in Thailand. We therefore suggest that quite urgent consideration should be given to the following issues. Institutional specialisation There is an urgent need to push into a new phase of institutional development that will create a structure of more clearly differentiated institutions that can concentrate on playing more specialised roles within the overall system. In some areas, this will require clear decisions to separate functions and responsibilities that are currently collected in single institutions like NSTDA. It may also be appropriate to integrate some functions that are now separated for example, the R&D funding roles of NRCT and the TRF. However, it seems unlikely that centralised bureaucratic rationalisation will achieve the structure of vigorous specialised institutions that will be needed. To achieve this, it is also likely to be useful to foster competition between institutions. For example: (a) If the NSTDA national Centres are to continue undertaking basic and strategic types of research, considerable benefits will probably be achieved if they and Universities have to compete for public funding provided through a third-party organisation perhaps a strengthened TRF, or a re-constituted NSTDA that acts as a policy and funding organisation; vii

9 (b) similarly, in areas concerned with providing technology support for industry, the relevant parts of NSTDA, TISTR, the MOI Institutes and the DSS could be required to compete for the funding to operate particular kinds of programme. The consequence would almost certainly be a selforganised process of rationalisation, specialisation and integration. An important basis for this competition would be the organisation of a level playing field, involving similar funding arrangements for all the organisations and similar forms of organisational status. Stakeholder involvement in shaping developments and priorities The economic agencies of government (and the Ministry of Industry in particular) should take on direct responsibility for a much more substantial segment of the array of policy and institutional support for industrial technology development. The design and development of that role might be built on the basis of a detailed analysis of the experience of organisations like the Economic Development Board in Singapore, MOCIE in Korea, and several similar agencies in European countries like Ireland, the Netherlands and the UK. Industry groups and associations should be encouraged to increase their direct involvement in shaping both the direction of institutional development and the orientation of strategies and programme priorities within institutes. However, this should not be limited to the established representational bodies. Other groups, associations and clusters should be supported in taking steps to develop such technology-centred roles. Complementarity in university and industry R&D Steps should be taken to accelerate implementation of the planned project to create a number Centres of Excellence in R&D, involving collaboration between universities and industry in world class research and doctoral training? Links between technology institutes and industrial firms Incentives in universities and other institutions should be shifted to give greater weight to people-centred forms of linkage with, and technology transfer to, industrial enterprises. Extensive studies should be undertaken to develop a much more systematic understanding of (a) the nature and scale of industry s demands for different kinds of service product from supporting institutions, and (b) the factors that influence differences and changes in those patterns of demand. Financial mechanisms to raise performance and achieve social objectives Financing arrangements, competitive conditions and organisational re-structuring should be developed and implemented in order to bring greater pressure to bear on the operations of linkage-type technology institutes However, these new arrangements should incorporate mechanism to ensure that the achievement of social objectives and broad public goals is not undermined. 6. The Overall Government Strategy for Industrial Technology Development The terms of reference for the study asked us to review the overall framework of industry-oriented science and technology policy, and to consider the need for change viii

10 at a broad strategic level. The dominant conclusion from the study is that very fundamental change is indeed required. The scale of the country s technology development organisations, technology training and education institutions, and technology policy institutions has changed over the last years; and the location of some of these within the bureaucratic structure of government has also changed. However, as illustrated in the following examples, there has been remarkably little change in the broad aims being sought and the means being used to achieve them. The main vehicle for implementing government s industrial technology development policy is the complex of institutes assembled under NSTDA. The design of that institutional package was put together in the late 1980s and has changed little since then. Moreover, it is remarkable how closely the 1980s rationale and roles of NSTDA compare with those put forward in the design for setting up the Applied Scientific Research Corporation of Thailand in the The main difference is in size and resources, not in fundamental role and purpose. The rationale and purposes of the new National Science and Technology Policy Committee seem to echo very closely those put forward in proposals to set up the National Research Council of Thailand in 1959, and it is perhaps symbolic that its location in the structure of government, the Office of the Prime Minister, is exactly the same as the original location of the NRCT in the 1960s. Apart from the array of little-used tax incentives and credit schemes, very few new types of policy vehicle or mechanism have been added to the range that was already present by the end of the 1960 albeit in slightly different shapes and sizes. At a broader level of analysis, the overall balance in the orientation of industrial technology development policy has hardly changed at all over the last 40 years. On the one hand, the dominant orientation of policy and resource allocation for building industrial technology development capabilities in the 1960s was concentrated on the capabilities and resources of scientific, technological and training institutions that were intended to undertake technological activities on behalf of industrial firms. That remains the overwhelmingly dominant orientation of policy and resource allocation today. Conversely, policy measures and resource allocations designed to strengthen the technological learning, technological capabilities and innovative activities of firms themselves was in effect non-existent in the 1960s. They remain almost invisible or ineffective today. In short, Thailand has persisted with a mono-structural framework centred largely on public institutions as the vehicles for implementing industrial technology development policy. It has not developed a dual policy structure that gives similar emphasis to the role of firms themselves as the creators of technology and the generators of underlying skills and capabilities needed to do so. ix

11 In persisting with this unbalanced mono-structural policy framework, Thailand has differed from other countries in the region like Korea, Taiwan, Singapore and, to a lesser extent, Malaysia. It has also differed from the approach followed in most of the industrialised countries. We strongly suggest that radical change in this 40-year old approach is required. In large part, that re-balancing requires a shift in the underlying ideas and mental models guiding the design and development of policy. In particular, models that place public institutions at the centre of the technology development process need to be abandoned, along with images that identify such institutions as the supply side of technology development or human capital formation. In their place, industrial firms need to be placed in the centre; and their crucial role as creators and suppliers, not just users, of technology, skills and knowledge needs to be recognised. In addition, however, institutional changes almost certainly need to reinforce change in ideas and mental models. We highlight, in particular, two directions of institutional change. First, it is important to note that Thailand has been unusual in the extent to which control over industrial technology development policy, and associated resource allocation, has been concentrated in bodies that are closely identified with the scientific and technological community primarily the Ministry of Science, Technology and the Environment, and NSTDA. We believe that it will be important for economic ministries, primarily the Ministry of Industry, to take on a more direct responsibility for much larger parts of the array of policy mechanisms and resource allocations designed to support industrial technology development. The design and development of that role might usefully draw on a detailed analysis of the experience of organisations like the Economic Development Board in Singapore, the Ministry of Commerce, Industry and Energy in Korea, and several similar agencies in European countries like Ireland, the Netherlands and the UK. Second, greatly increased emphasis should be given to the role of industry groups and associations not just the formally organised and well-established representational bodies, but a wide range of less formally organised groups and clusters of firms. These should be seen not simply as clients to be served by the new system of support and incentives to strengthen their technology development and capability building activities. They should be seen as stakeholders in that system, and should be encouraged to increase their direct involvement in shaping the direction of institutional development, the orientation of strategies, and the priorities in programmes. x

12 Introduction Contents 1 Industrial Technology Development: Key Aspects of International Experience Industrial Technology Development: What are we Talking About? National Systems of Industrial Technology Development The Dominant Role of Industrial Enterprises The Importance of Non-R&D Knowledge Flows Between Firms People Flows in Technology Development Systems Balanced structures of industrial technology policy The Structural Transition of Technology Development Systems in Industrialising Countries The Demand for Technology Development: The Driver of Transition Competitive Environments Firm-level Awareness of the Role of Technology Development Policy: Incentives and Support for Demand at the Firm-level The structure of Industrial Production The Technological Role of TNC Subsidiaries The location of technology-intensive activities in TNC subsidiaries Spill-overs of knowledge and skill Questions about policy and the Technological Role of TNCs Ireland : A Case Study of the Interacting Evolution of Industrial and Technology Policy Thailand and Ireland: Some Commonalities and Differences The Evolution of Industry and Technology policy Support for Capability Development in Industry Policy Institutions: Changing Roles and Structures Benchmarking Highlights for Thailand 62 2 The industrial technology development system in Thailand: the business enterprise core Introduction: The Structure of the Chapter The Scale and Structure of the Thai System in its Regional Context Thailand as a Regional Laggard in Industrial Technology Development A more Qualitative Picture Emerging Structural Transition? Key thresholds in the accumulation of technological capabilities Technology Development and Industrial Structure: Links, Clusters and Value Chains The Technological Role of TNC Subsidiaries in Thailand The extent and depth of technology-intensive activities in TNC subsidiaries The Extent and Significance of Knowledge Spill-overs 86 xvi xi

13 2.6 Some Questions about Policy 90 3 Policy: Incentives and support for firm based technology development Introduction Tax Incentives and Other Support for Technology Development The Rationale Diversity in the Design of Policy Mechanisms Impact and Effectiveness Tax Incentives and Subsidies: The System in Thailand Incentives for Training and Capability Development The Absence of Effective Mechanisms in Thailand Incentive systems in Other Countries in the Region Towards an Incentive System in Thailand Broad Conclusions Policy: developing technology institutions Industrial Technology Support Institutes: Aspects of International Experience The Importance of Diversity, Flexibility and Institutional Innovation Some Common Features of International Expereince Development of the Institutional Infrastructure in Thailand The evolution of the system The Institutional Structure: links with Industry The Institutional Structure: some general characteristics Conclusions Institutional specialisation Stakeholder involvement in shaping developments and priorities Complementarity in university and industry R&D Links between technology institutes and industrial firms Financial mechanisms to raise performance and achieve social objectives Policy for industrial technology development a fundamental change in strategy The Need for Fundamental Change The Strategic Orientation of Policy for Industrial Technology Development Building capabilities: dual- and mono-structural policy frameworks Stimulating innovation: demand- and supply-oriented policy frameworks Policy Measures and Institutional Changes Policy measures and approaches Institutional changes: Technology development and support institutes Institutional changes: Policy, funding and governance 153 Appendix A Terms of reference for consulting services 155 A.1 Background and rationale 155 A.2 Objectives of consulting services 155 xii

14 A.3 Scope of work 156 A.4 Implementation arrangements 156 A.5 Qualification of consultant 156 A.6 REPORTING REQUIREMENT 156 A.7 OUTCOME OF CONSULTING SERVICES 156 Appendix B Policy mechanisms to support technology development and innovation 157 B.1 Introduction 157 B.2 Tax incentives 162 B.3 Grants and subsidies 167 Appendix C The Thailand research fund 190 C.1 Background 190 C.2 TRF basic research funding 190 C.3 TRF R&D funding 191 C.4 Empowerment R&D 192 C.5 Issues 192 Appendix D References 193 xiii

15 SECTION 1 Exhibit 1 Exhibit 2 Exhibit 3 Exhibit 4 Exhibit 5 Exhibit 6 Exhibit 7 Exhibit 8 Exhibit 9 Exhibit 10 LIST OF EXHIBITS Technology Development and Acquisition The Industrial Technology Development System: A Framework Proportions of Gross Domestic Expenditure on R&D (GERD) that are Funded and Performed by Different Actors in OECD Countries 1995 The Importance of Non-R&D in Technology Development The Relative Importance of Different Sources of Technology for Innovation by Firms in the Veneto Region of Italy ( ) Firms as Dominant Sources of Technology A Key Transition in the Structure of Industrial Technological Capabilities Transition in the Structure of the Korean Technology Development System Types of Firm-Level Demand for Technological Change Different Modes of Support for Industrial Technology Development Exhibit 11 Structural Transition in R&D: Ireland, Exhibit 12 Key Policy Actions in Irish Industrial Development Exhibit 13 Irish Company Support Portfolio, 1997 Exhibit 14 SECTION 2 Exhibit 15 Exhibit 16 Structures The Changing Structure of Irish Business and Innovation Support Institutions Competitiveness Rankings: Selected Technology Indicators for Thailand and Other S.E.Asian Countries Thailand and Korea: Relative Development of Economic and Technological Exhibit 17 Emerging Structural Transition in the Thai Industrial Innovation System? Exhibit 18 SECTION 3 Exhibit 19 SECTION 4 Exhibit 20 Exhibit 21 Thailand SECTION 5 Exhibit 22 Strategies APPENDIX B Key Thresholds in the Current Structure of Intra-firm Technological Capabilities Basic Features of a Skill Development Subsidy Scheme The Research and Innovation System in the (Federal Republic of) Germany Main Steps in the Development of Industry-Oriented S&T Institutions in Industrial Technology Development Policy in Thailand: Alternative xiv

16 Exhibit 23 Exhibit 24 Exhibit 25 Number of Selected European Programmes Addressing Various Types of Capability Numbers of Different Types of mechanism to Support Technological Capability Development in Selected European Countries Variations in Tax and Grant Subsidy Mechanisms xv

17 Introduction The Study and the Report This is Volume I of a two-volume report on a study of the policy framework and institutional structure supporting industrial technology development in Thailand. The study has been funded by the World Bank 2. It has been carried out on behalf of the National Science and Technology Development Agency of Thailand (NSTDA), with the advice and support of a counterpart team of NSTDA staff. The terms of reference for the project are attached as Appendix 1. In summary, these called for a study with two main components. A review of the structure and functioning of the whole array of government policy and institutions that are concerned with industrial technology development; A more detailed examination of the role of NSTDA within that overall structure, and of aspects of NSTDA strategy and management. The results of the first of these components are provided in this first volume of the two-volume report. The results of the second are provided in Volume 2. Both components of the study have concentrated on industrial technology development. In Volume 1 the implication is that the study neglects other areas of technology that are extremely important for the country s social and economic development - in particular, a huge array of issues about technology development in the fields of agriculture, medicine and public health. The Context for the Study: The Competitive Weakness of Thai Industry The context for this study is widespread concern in Thailand about the weak technological basis of the country s industrial growth. It is argued in many circles that the rapid growth of industry in general, and of manufacturing in particular, during the 1980s and early 1990s was technologically shallow. There was rapid growth of output, based on investment in increasingly technology-intensive fixed capital. Also increasingly advanced products were introduced in some industries (e.g. in the automobile and electronics sectors). However underlying competitiveness was not advancing as rapidly and, it is suggested, the limited intensity of technology development in industry (the technologically shallow path of industrial growth) has contributed to that. Various indicators have drawn attention to this issue in particular: a slow-down in total factor productivity growth during the early 1990s, Under a Policy and Human Resources Development grant made available by the Government of Japan for administration by the World Bank. Tinakorn and Sussangkarn (1998) suggest that total factor productivity was negative in the period in industry in general and manufacturing more specifically. While the measurement and interpretation of total factor productivity growth is subject to considerable debate, this result xvi

18 the mid-1990s slow-down in exports, contributing to the crisis in At the same time, the technologically shallow path of industrial growth is also suggested by the relatively slow rate of change in the structure of production and exports. Compared with other countries in the region, both production and exports have remained relatively heavily concentrated in resource-based and labourintensive/low-technology sectors, with slow expansion in medium and hightechnology sectors. Just as important, more impressionistic evidence suggests that manufacturing has been slow to move upwards to higher value-added products within existing sectors, and to expand to higher value-added stages in particular valuechains. Numerous factors in addition to the limited intensity of local technology development have contributed to this pattern of growth including weaknesses in the financial sector; trade policy and the limits it has created to intensity of competition; and various aspects of the regulatory regime for industry. While the relative importance of these cannot easily be demonstrated, issues to do with technology are clearly an important part of the picture. This study addresses only those issues The Broad Approach in the Study: Benchmarking comparisons At an early stage in the development of the project, it was agreed that one of the most useful things we might do was to outline aspects of international experience that would be particularly useful in Thailand, and that a good way of doing this would be to set up external experience as a benchmark against which to set our observations in Thailand. We have followed this approach in both parts of the study, drawing on experience in both the more advanced industrialising countries in the East Asian region as well as our knowledge of the industrialised world, especially in Europe. The Purpose of the Reports The project was designed from the start not to result simply in the production of a report. Instead, it was agreed that the final stage of the project should consist of two steps. The first would consist of a series of workshops and discussions designed to explore with different communities in Thailand the validity of our views and the approaches that might be taken to move towards action where those views appeared to be useful. Only then would there be a final report to summarise the key issues and the action plans to address them. The first step was undertaken early in September 2000, and involved both a large public workshop and a series of meetings with a wide range of smaller groups. The discussions and comments at that stage have had a significant influence in re-shaping the contents of our two reports. We hope they also helped to stimulate interest in the conclusions from the study that are included in our two reports. This is because it is the aim of the World Bank, NSTDA and the consultant team that these reports should not be the end of the project, but a contribution to further debate and follow-up action concerned with strengthening the policy framework and institutional support for industrial technology development in Thailand does suggest that efficiency in using rapidly rising inputs of labour and especially capital was at least not rising very fast. xvii

19 This continuing debate is critically important. One of the most important broad conclusions from the study is that there is an urgent need to intensify action-oriented debate about new approaches to policy, institutional development and institutional management to support technology development. We were surprised how often people in key influential positions did not recognise how far Thailand is behind international good practice in these areas, and hence how urgent the need is for innovative action. Moreover, as reflected in the common request that we should provide ready-made recommendations for instant adoption and implementation, there seems to be a very limited basis of analysis and prior experience that will be necessary for creatively absorbing policy mechanisms, institutional arrangements or management procedures that have been used elsewhere. Consequently much of what we offer in the two reports is concerned with strengthening that basis of analysis, understanding and experience. The Structure of this Volume In Section 1 we review key features of international experience in the overall organisation of technology development activities. In particular we highlight the core component of effective industrial technology development systems the technology development activities of industrial firms. We pay special attention to the process by which this core component has emerged in industrialising countries, especially in the East and South-East Asian region. In addition, the chapter includes an outline of the experience of Ireland an economy that predominantly agricultural until very recently, and which has built up a strong core of industrial technology development capabilities in a context of very substantial inward investment by transnational corporations. Then in Section 2 we set Thailand s experience against that comparative framework. This suggests that the country is lagging far behind others in the region in developing the core of an industrial innovation system that is located in the technology development activities and capabilities of industrial enterprises. In Section 3 we turn to aspects of the policy framework within which industrial firms undertake their technology development activities and build up their capabilities to do so. We focus on experience outside Thailand in two key areas of policy: the provision of financial incentives and support for (i) firms technology development activities themselves and (ii) firms training and skill development activities for creating their underlying capabilities for technology development. We examine policy systems in Thailand against that benchmark experience, indicating very large gaps between the two and suggesting directions in which policy systems might be developed. Illustrative examples of policy measures are reviewed in Appendix B. In Section 4 we outline aspects of the structure of institutions supporting industrial technology development in a range of countries. Again we start by outlining key features of experience in other countries. Setting a brief review of Thailand s experience against that framework raises a number of questions about the need to move ahead with quite radical further developments in the Thai structure, and also in xviii

20 the structure of governmental responsibility for supporting industrial technology development. Having reviewed the overall framework of industry-oriented science and technology policy, in Section 5 we return to address the related component of the terms of reference for the project that asked us to consider the need for change at a broad strategic level. Our conclusion is that fundamental change is indeed required. We emphasise that the overall strategic balance in policy is massively concentrated on building up technology development capabilities in public institutes in order to try and stimulate the supply of technology into innovation. That strategy needs to be fundamentally re-balanced, giving much greater weight to stimulating the demand for technology development and to measures that seek to build up technology development capabilities in industrial firms. That in turn requires the development of new policy approaches and measures, along the lines suggested in Section 3 and illustrated in Appendix B. At the same time, radical changes in the roles and structure of institutions will be needed, along the lines suggested in Section 4. These new organisational and institutional arrangements will be needed both to design, develop and manage the new policy measures and approaches in the first place; and then to undertake the new kinds of technology development and support activities. xix

21 1 Industrial Technology Development: Key Aspects of International Experience This chapter reviews aspects of international experience in the process of industrial technology development. It concentrates on issues that are particularly important in considering questions about policy and institutional support for industrial technology development in Thailand. It begins, however, by clarifying what we mean by industrial technology development. 1.1 Industrial Technology Development: What are we Talking About? We highlighted in the Introduction that the limited intensity of technology development has been widely seen as one of the main sources of the weak competitiveness of industry in Thailand. We also referred to the technologically shallow path of industrial growth in Thailand as the origin of this currently limited intensity of technology development. However, it is evident from our discussions during the study that people in policymaking and policy-influencing positions in Thailand attach widely varying interpretations to these ideas. In particular, the limited intensity of technology development is often equated with the limited intensity of investment in R&D, or with limited investment in adequately advanced new processes and products based on imported technology. While both these kinds of investment are extremely important, they are not what we mean here by technology development. Nor are they the key elements of the technological basis of industrial competitiveness in which Thailand is most significantly lagging. Some clarification may therefore be useful. Exhibit 1 summarises ten categories of technological activity that constitute the bases of industrial competitiveness in any economy industrialised or industrialising. These fall into two broad groups. The common characteristic of one of these groups (categories 7-10) is that they involve the introduction of more advanced technology embodied in fairly standard designs, specifications and machinery that have already been used elsewhere. This may involve investment in individual items of new machinery, the introduction of new kinds of materials and components, investment in complete new production plants, and the introduction of new products. Because they draw on the re-use (or re-application) of existing technology, all these ways of enhancing industrial competitiveness can be based on the acquisition of technologies from other firms that use them or produce them. In industrialising economies like Thailand, the capabilities to produce and implement most of these forms of technology are located in more advanced industrial economies, though some types of machinery or product designs may be locally available, along with engineering and project management capabilities required for implementation. The other group of technological activities underlying industrial competitiveness (categories 1-6) involve technology development. Their common characteristic is that the capabilities needed to generate and implement these kinds of technical change typically have to be located within the domestic economy. They can very rarely be based simply on the acquisition of imported technology though elements 20