Innovation Networks and Foreign Firms in Developing Countries: The Turkish Case Erol Taymaz & Aykut Lenger Middle East Technical University (METU), Department of Economics, 06531 Ankara Turkey 1. Outline There are two strands of the literature in development economics that have attracted substantial interest in the last couple of decades: the importance of technological change for long term economic growth and the role of foreign direct investment (FDI) in the process of economic development. Studies on technological change emphasize the fact that innovation (the development of new products, processes and organizations) is basically an interactive process. Recent advances in science and technology have led to, on the one hand, an increase in the knowledge content of products and processes, and, on the other hand, the importance of generic technologies that can be used in various products and processes. These two processes, that form two sides of the same coin, have increased the need to extend the knowledge base of industrial firms. As Rosenberg already suggested 20 years ago, the process of innovation cannot fit into the boundaries of a single firm. Therefore, firms can now innovate only within an intensive web of interactions with other firms (suppliers, buyers, and, even, competitors), consumers, research institutions, etc, i.e., they can be innovative, and, thus, competitive, only if they can form and be part of innovation networks (for a small group of studies, see Lundvall, 1988; Nelson and Rosenberg, 1993; Smith, 1995; OECD 1999 and 2000). FDI has been considered by many development economists as an important channel for transfer of technology to developing countries. It is suggested that modern, advanced technologies introduced by multinational firms can also diffuse to domestic firms through spillovers (imitation, demonstration effects, training local labor, vertical technology transfers, etc.). However, empirical studies show that host country characteristics, like industry and policy environment (Blomström and Kokko, 1998), the level of human capital stock (Borensztein, Gregorio and Lee, 1995; Noorbaksh and Paloni, 2001), and absorptive capacity 1
of domestic firms (Kinoshita, 2001) are important determinants of the net benefits the host country can enjoy from FDI. This paper contributes the existing literature by presenting new evidence on the interactions between domestic and foreign firm within innovation networks in Turkish manufacturing industries. The aim of this paper is three-fold: i) to analyze differences in innovative performance of domestic and foreign firms, ii) to investigate the types of interaction domestic and foreign firms are engaged in, and iii) to test if foreign firms play a role in developing innovative capability of domestic firms by participating in innovation networks (see also, Reger, 1998; Smith, 1995). This is an important issue, because as shown in an earlier study (see Ozcelik and Taymaz, 2001), innovativeness is an important determinant of international competitiveness in developing countries, too. 2. Hypotheses The paper aims to test three hypotheses: Foreign ownership, after controlling for all other factors, does not contribute to innovativeness because foreign firms tend to conduct innovative activities in their home countries. However, foreign firms rely more on transferring technology from the parent firm. Horizontal relations are more important for domestic firms, whereas foreign firms tend to focus on vertical interactions (suppliers and subcontractors). Foreign firms contribute, to some extent, the development of technological capability, specially production capability, in vertically related industries. The main data source to test these hypotheses is the Innovation Surveys conducted by the State Institute of Statistics (SIS). The surveys, the first one conducted in 1998 covering the period 1995-97, and the second one conducted in 2001 covering the period 1998-2000, adopted a questionnaire compatible with the Community Innovation Survey of the European Union, and used the concept of innovation as defined in the OECD Oslo Manual. The response rates were more than 50 percent in both surveys (2200 respondents for the first survey, and 3000 respondents for the second one). The surveys include questions about innovative activities, knowledge sources, interactions, etc. We use simple descriptive analysis 2
as well as discrete choice (multinominal logit), limited dependent variable and panel data models to test our hypotheses. 3. Implications and Conclusions The issue is requires a detailed analysis because technological change and FDI are considered to be essential for economic growth and generating employment opportunities. Developing countries adopt various measures to encourage Research and Development (R&D) activities and to attract foreign investment. Therefore, it is essential to understand the interactions between domestic and foreign firms if one wants to design effective technology and FDI policies. 4. Some Preliminary Results 3
Arellano-Bond dynamic panel data GMM Estimation (1983-2000) Number of obs = 1084 Number of groups = 78 Wald chi2(12) = 1815.86 One-step results Dependent Coefficient Std. Err. z P> z [95% Conf. Interval] Lagged dependent LD.3652949.036796 9.93 0.000.293176.4374138 L2D.1309364.0308087 4.25 0.000.0705525.1913204 L3D.1343169.0297221 4.52 0.000.0760627.192571 K/L(ln).1027074.0326733 3.14 0.002.038669.1667459 WAGE(ln).4005211.0344636 11.62 0.000.3329737.4680684 SIZE (ln) -.2573251.0586713-4.39 0.000 -.3723187 -.1423316 TRANSFER.6835617.2989714 2.29 0.022.0975886 1.269535 FSHARE.5962897.1316582 4.53 0.000.3382445.8543349 LABOR QUALITY.647766.121755 5.32 0.000.4091305.8864015 SUBOUT.1560111.3894215 0.40 0.689 -.607241.9192631 SUBIN -1.332625.6738762-1.98 0.048-2.653399 -.0118524 t -.0221485.0047611-4.65 0.000 -.0314801 -.0128169 Sargan test of over-identifying restrictions: chi2(130) = 312.94 Prob > chi2 = 0.0000 Arellano-Bond test that average autocovariance in residuals of order 1 is 0: H0: no autocorrelation z = -17.52 Pr > z = 0.0000 Arellano-Bond test that average autocovariance in residuals of order 2 is 0: H0: no autocorrelation z = -0.64 Pr > z = 0.5190 DEPENDENT K/L WAGE SIZE TRANSFER FSHARE LABOR QUALITY SUBOUT SUBIN t : Labor productivity (Value added per man hour) : Capital Intensity (Real electricity consumption per employee) : Payments to employee : Proxy for firm size (The average number of employee, employee/number of firm) : The share of firms with licence, technological agreements, know-how etc : Foreign ownership in industry : Proxy for labor quality (The share of administrative employee in the firm) : Subcontracted output value : Subcontracted input value : trend 4
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