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CHAPTER 1 The Globalization of Knowledge and Technology In the last decades of the twentieth century, knowledge has become an orga- nizing force in Western society, much in the same way that energy drove the industrial revolution. Knowledge takes the form of the fundamental science that underlies the new technologies transforming industry and commerce. It includes the data, news, and information generated at prodigious rates by firms, govern- ments, universities, and international organizations. It also encompasses the timely information about Made, standards, pnces, and business opportunities nec- essary for participation in competitive markets. Indeed, entire industries have been created to transmit, store, and organize knowledge and information, or to produce the devices that do. Computer technology, a tool only some 50 years old, is a vital part of these industries, and it also is affecting the everyday lives of a large fraction of the world's citizens through their communications, banking, health care, and workplace. Science itself has become an enormous enterprise, with billions of dollars invested in research and development worldwide, and research is constantly generating new knowledge that may be vital to human survival and prosperity. In response to these developments, every county is challenged to prepare a strategy to generate, evaluate, disseminate, and act on the knowledge that is This chapter draws substantively on the invited papers by Baruch (technological innovation and services), Brooks (technology transfer), Bugliarello (generation, transmission, and diffusion of knowl- edge), Chaudhari (materials and critical technologies), Colwell (biotechnology), and Mayo (informa- tion technology), as well as the discussions of the break-out groups. These four chapters, summariz- ing the findings of the symposium, were drafted by Michael Greene of the National Research Council's Office of International Affairs and Kristin Hallberg of the Private Sector Development Department of the World Bank. 17

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18 Marshaling Technology for Development needed today. Presently, many international, regional, national, and private enti- ties are dedicating themselves to this question. For example, the Intemet was created by the U.S. National Science Foundation and the Advanced Research Projects Agency (ARPA) of the U.S. Department of Defense precisely to provide a means of disseminating scientific and technical knowledge. With the additional efforts of thousands of universities and private entities, it has become the single most effective medium connecting scientists, engineers, and, increasingly, ordi- nary people in the world, often at no (perceived) direct cost to the user. The World Wide Web, which appears to represent the next generation of global knowledge resources, was a creation of the European Organization for Nuclear Research (CERN). It too is available to anyone with a computer and a modem, with no direct charge for the documents available on the system, most of which have been prepared by universities and private sources. A series of meetings of the heads of the industrialized countries is planned to coordinate development and expansion of these networks. A second and perhaps greater challenge concerns the remedial role of knowl- edge and technology in ensuring continued human survival. Two hundred years ago, the Reverend Thomas Malthus noted that populations growing without con- straint tended to increase exponentially, and he predicted that in a few genera- tions the human population would exceed and exhaust the available food supply. That this has not yet happened is largely the result of a package of technologies known as the green revolution which has increased food production beyond any predictions, and of other technologies that have extended, found substitutes for, or protected threatened resources. Even so, hundreds of millions of people are malnourished, forests and per capita arable land are declining annually, and the world's population continues to follow an exponential curve. It is expected to double in about another four decades, and no one yet knows how food production will keep pace this time, how jobs and services will be provided, how territorial wars will be avoided, and how the environment will be protected. Also unknown If the human race is to have a future, the global improvement of economic and social conditions through better knowledge is imperative. This is a problem that both developing and developed countries must address jointly. It simply does the world no good in the long run if individual countries succeed in addressing their socioeconomic problems at the cost of neglecting such global problems as the growing depletion of the ecosphere or the potential for international conflict. {lEORGE BUGETAREEEO

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GLOBALIZATION OF KNOWLEDGE AND TECHNOLOGY 19 is whether the resources for a growing population will always be found in the future, whether population can be contained possibly through a combination of a higher standard of living, new contraceptive technologies, and social changes- or whether the cycle of crisis and technical fix will repeat itself until finally the fixes can no longer keep pace. Ultimately, of course, human population growth will cease. PATHWAYS TO TECHNOLOGICAL INNOVATION For developed and developing countries alike, a country's ability to realize gains in knowledge-based productivity depends on its capacity to tap the global system of generation and transmission of knowledge through technology transfer, generate indigenous knowledge through research and development, put that knowledge to productive use through engineering, ensure equitable and effective use of that knowledge through social and behavioral research, and organize and diffuse information. Technology transfer the mechanism for bringing a tech- nology from one research area of industry to another or from an advanced to a developing country and putting it into operation in its new environment and research, development, and engineering the process of conceiving or adopting a new idea, developing a technology, and adapting it for practical use are gener- ally considered separate and distinct processes. In reality, however, they are interconnected. There is a much smaller difference than is generally supposed between introducing a technology that is new to the world and one that is merely new in a particular sociotechnical context characterizing a particular manufactur- ing site and market. For this reason, the process of creating a production system at a new site can be considered, at least in part, an innovation. The process is fundamentally similar in developed and developing countries, whether one is replicating something that has been done before elsewhere or doing something that has never been done before anywhere. It is the absorption of knowledge into a system of product or process realization involving design, production, and marketing to clients and customers that is critical. Yet beginning with the knowl- edge that the technology has "worked" elsewhere lends a significant advantage. This view is reinforced by the finding that even in the developed world research and development represent only a small fraction 10-15 percent-of the resources required to bring to market a new product incorporating substan- tially new technology. The other 85-90 percent is so-called downstream invest- ment-design, manufacturing, applications engineering, and human resource de- velopment. In fact, about 65 percent of the scientists and engineers in the U.S. national work force are not even engaged in research and development, but in a broad spectrum of activities related to these downstream elements. The same is true in most developing countries, where scientists and engineers carry out little research and development, and the downstream elements represent an even larger fraction of the total effort.

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20 Marshaling Technology for Development One of the important trends of the last 30 years in the developed countries has been the increased importance of sources of technical information and ideas external to the producer, including institutional alliances and "innovation net- works" (links between users and producers), some of which cross national bound- aries. The result has been a complex intermingling of competition and coopera- tion, with some firms cooperating in selected projects while at the same time competing in others. These alliances also have brought into relief the roles of the two faces of technology development, the supply side and the demand side or, put most sim- ply, "solutions in search of problems" and "problems in search of solutions." Solutions in search of problems relate to fundamental research and development, which are the basis of much of our understanding. Problems in search of solutions are what industry, society, and design engineers encounter in practice. The pro- cess of technological innovation matches solutions in search of problems, whether found in the laboratory or the library, to problems in search of solutions. Devel- opment activities, too, can yield important new technologies. The closer these activities are to applications, the more productive they may be in the near term. The proportion of resources dedicated to each type of activity depends on the technical capacity of a country and the level of fundamental knowledge already available on the problems of interest. In agriculture and in health, the problems may be inherently local, requiring substantial fundamental research to produce enough knowledge to support applied research and development on specific prob- lems. In industrial technology, the proportion might be changed. Japan in the twentieth century and the United States in the nineteenth century reached a high level of technological development with a minimum of fundamental research; the United States, adopting a different strategy in the twentieth century by increasing its investment in fundamental research, became the world's leader in both science and technology. Another important distinction in technology development is between radical and incremental innovation. Radical innovation produces new ways of doing things and ultimately leads to new services or industries the computer and the flat-screen display are good examples of such innovation. Incremental innovation is a term applied primarily to relatively small improvements in existing products and processes or to relatively small extensions of the scope of existing applica- tions of the product design or technology, which over the long term accumulate to produce major changes. Most technological innovation is of this type, and much of it takes place on the factory floor (or clinic or farm) by the users of technology. In fact, steady productivity growth and the expansion of both the size and techno- logical scope of markets primarily stem from the cumulative effects of many apparently minor incremental innovations. Because such innovations are just as important to economic success in developing countries as in developed countries, it is important that Third World firms build their technological capacity and . . . . engineering capability.

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GLOBALIZATION OF KNOWLEDGE AND TECHNOLOGY 21 This being said, why is radical innovation a concern at all of developing countries since most such innovations are created in the industrialized countries that possess the necessary science and technology infrastructure? The answer is that both types of innovation, the radical and the incremental, generate new business opportunities that do not necessarily require the same level of advanced knowledge and capacity that was needed to create the radical innovation in the first place. Developing countries with a minimum level of basic education in their work force and minimum industrial experience may be able to capitalize on these opportunities quite successfully, often at lower cost than developed countries. This has been demonstrated many times by the success of several of the newly industrialized countries in finding niches in the computer and information tech- nology markets. In all the niche-type opportunities . . ., the aspiring entrant must have a fairly thorough understanding of the technological system in which a potential new niche may lie. This is one reason why imitation can be said to be the first step towards innovation but only to the extent that it provides a real window into an entire technological system. HARVEY BROOKS Many of the radical innovations that have the potential to reshape the world originated in scientific advances made over the last few decades. Some of the most important advances from the point of view of international development have been in three specific scientific and technological fields: information and communications, biotechnology, and materials science. Advances in these fields have led to technologies that are basic to many different products. Information and Communications The rapid rate of progress in information and communications technology over the past few decades has been called a revolution. The key technologies underlying this revolution are computing, fiber-optics communications, software, and silicon chips. Progress in computer technology is measured by processing speed and memory, progress in fiber optics, and cost per unit of bandwidth. The costs of computer memory and bandwidth have dropped by a factor of two over the last five years. Even software-once considered a bottleneck technology because of quality problems is beginning to advance rapidly in such major areas as telecommunications, thanks to advanced programming languages and

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22 Marshaling Technology for Development reuse of previously developed software modules instead of writing and debug- ging new ones. The power of silicon chips is measured by the number of transistors that can be placed on a chip; a typical chip measures about 1 square centimeter. Each time the number of transistors on a chip has increased by a factor of a thousand, integrated circuit functions have radically advanced. The earliest chips held only one transistor. When research and development placed 1,000 transistors on a chip, engineers were able to replace analog with more powerful digital circuitry. About a decade ago, the number of transistors reached 1 million, enabling micro- computers to perform functions that approximated the mainframes of only a few years earlier. The present goal is 1 billion transistors per chip, and some people in the industry predict that will lead to another revolution: the merger of communi- cations, computers, consumer electronics, and entertainment. For the greater part of this century, the telecommunications industry and information highways were paced by the availability of new technologies. But today, with a wide array of multimedia and information technologies available, the telecommunications industry is being driven increasingly by customer de- mand, leaving many possible innovations unexploited. And in another important trend, the global transfer and assimilation of information technology are com- bining with political, economic, and regulatory forces to produce, for example, the move toward privatization of telecommunications in both developed and developing countries. The result is increased global competition in the provision of communications products and services, which should result in lower prices, new products, and response to market pressures, as occurred in the computer industry. At the same time, however, there is a worldwide push for common standards and open, user-friendly interfaces that encourage global networking and maxi- mum ~nteroperability and connectivity. The evolving international standard for photonics or lightwave transmission devices such as optical fibers is called syn- chronous digital hierarchy or SDH. It will enable users to purchase equipment from many different vendors without worrying about compatibility, and it will This reengineering of the communications industry appears to be the next to the last step in the information revolution brought on by the invention of the transistor. The last step, and one that may go on forever, is the reengineering of society-of how people live, work, play, travel, and communicate creating a whole new way of life. JOHN S. MAYO

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GLOBALIZATION OF KNOWLEDGE AND TECHNOLOGY 23 allow vendors in developing countries to compete on an equal basis. But it may well be that the opportunities opened up by these developments will not fully appear until the present fluid situation, characterized by intense competition among large numbers of small suppliers and uncertainty about future directions affecting many different sectors, crystallizes into a mature industry. Biotechnology Biotechnology is defined by the U.S. government as "any technique that uses living organisms to make or modify products, to improve plants or animals, or to develop microorganisms for specific uses." It has been employed successfully for hundreds of years to manufacture medicines, to improve agricultural production, to produce drugs, and, in the form of fermentation, molds, and bacteria, to pro- duce food products. Over the last two decades, however, a "new" biotechnology has been defined as the use of recombinant DNA and other genetic engineering techniques to produce new organisms and new products. This biotechnology has enabled researchers to accelerate the rate of innovation and apply new and effec- tive techniques to new areas and new problems. Genetic engineering was born in 1944 with Avery, MacLeod, and McCarty's paper revealing that DNA is the genetic material. This discovery was followed in 1953 by the landmark paper by Watson and Crick describing the helical structure of the DNA molecule. In 1973, the work of Cohen and Boyer showed how to transfer a gene from one species to another. Confirmation of genetic engineering as an industrial technique came only seven years later in the 1980 Supreme Court decision of Diamond v. Chakrabarty, which allowed microorganisms to be pat- ented. In 1994, the 1,300 biotechnology companies located in the United States alone invested $7 billion in research and development. In addition, nearly 400 companies are located in Europe, 300 in Canada, and a few hundred more in the rest of the world. A novel feature of the new biotechnology industry in many countries is the proliferation of small, entrepreneurial start-up companies. But many of these eventually fail or merge or are bought up by larger companies because of the unexpectedly slow progress and high cost of bringing products to market. This competitive situation may prove to be a benefit for the developing countries, where biotechnology companies have begun to appear, enabling them to form strategic alliances with more technologically capable foreign companies looking for new markets. Biotechnology has a potential impact on many areas of agriculture, health, industry, and environmental protection. In the United States, biotechnology has found its greatest use in health and biomedical applications mostly recombinant drugs, enzyme-mediated diagnostic kits, and designed pharmaceuticals. Some of the new products likely to affect developing countries are test kits for such infections as HIV and malaria and recombinant vaccines for some of the world's

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24 Marshaling Technology for Development major diseases. Another promising application is gene therapy, which presently is extremely expensive but could eventually solve such problems as Parkinson's disease and sickle-cell anemia. In the developing countries, biotechnology will likely be predominantly ap- plied to agriculture in the form of transgenic plants, produced by combining the genetic material and therefore the characteristics or nutritional benefits of more than one species; biological pest control, in which the pesticide is produced directly by the crop plant itself; tissue culture for mass generation of desirable cultivars (and its counterpart in livestock, in vitro fertilization); disease preven- tion and control in crops and livestock; and new agroindustries for the produc- tion of fuel or industrial raw materials. At the same time, biotechnology in the hands of the industrialized countries will produce substitutes for commodities now providing income or subsistence for developing countries. Marine biotechnology accounts for only a small fraction of the world bio- technology market, but it has a high potential for benefiting the developing coun- tries. Although the oceans presently provide less than 1 percent of the world's food calories, the demand for seafood is expected to increase by about 70 percent in the next 40 years. This demand comes, however, at a time when many fisheries are declining because of overexploitation driven by new harvest technologies. To meet the increased demand while natural stocks are in decline, world aquaculture production would have to increase by more than seven times. Biotechnology could play a vital role in efforts to improve captive management, promote faster reproduction of species and the production of healthier organisms, and improve the food and nutritional qualities of the organisms, including the introduction of new "crops," such as algae and seaweeds, for their nutritional properties. It must be remembered, however, that aquaculture is energy-intensive by nature, and its efficiency will be related to the cost and availability of energy. Among the environmental applications of biotechnology, bioremediation uses both naturally occurring and genetically engineered organisms to clean up polluted sites by transforming toxic and other undesirable materials into more benign or volatile substances. Bioremediation is applied, among other things, to oil spills, industrial wastes, soil contaminated with TNT or heavy metals, raw sewage, and polluted bodies of water. Test kits and sensors for environmental monitoring also are becoming available. This technology is demonstrated quite visibly in the main square of Jakarta, Indonesia, where a prominent electronic billboard indicates levels of atmospheric contaminants. Mining, forestry, energy, and bioelectronics applications of biotechnology are expanding. Engineered microorganisms to remove ores may increase the efficiency of mineral extraction while reducing pollution at mine sites. Tissue culture will assist forest restoration, and the development of alternative biofuels will slow the destruction of the world's forests while providing an alternative to petroleum-based fuels. One area in which it is particularly hard to predict future developments is biologically based electronic components, including computer

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GLOBALIZATION OF KNOWLEDGE AND TECHNOLOGY 25 chips. Recent work indicates that biological systems might be designed to operate more efficiently and rapidly than semiconductors for some applications. Materials Over the last century, science has learned not only how to identify the prop- erties and structure of materials existing in nature but also how to combine the atomic elements to produce artificial materials. Using a recently invented scan- ning microscope, scientists can image individual atoms on a surface and even move them, one by one, to new locations. This requires resolution and manipula- tion on a scale of less than a billionth of a meter, the order of the width of one atom. Similarly, scientists are now able to observe phenomena that span a mil- lionth of a billionth of a second. Great advances are being made in developing materials that have the desired thermal, optical, and mechanical properties, are easy and less costly to manufac- ture, and are durable or biodegradable. Some of the most promising are found in those areas where materials science touches informatics and biotechnology. Two examples are the magnetic resonance imaging (MRI) used in medical diagnosis and the "intelligent" materials being used in modern prosthetics. In these ex- amples, the behavior of the materials is controlled by computer or chip so that they can interact with a living entity. These technologies, which are among the most sophisticated and expensive in use, have little application at the moment in most developing countries, mainly because of their costs, but they probably will be used widely in the next century. Other advanced materials are now finding application in developing countries as cost-effective replacements for earlier tech- nologies for example, the use of shape memory alloys for affordable automatic control, amorphous silicon solar panels for roof-top power supplies, and ad- vanced magnetic materials for small motor actuators. No major nation can avoid facing the questions associated with its semiconductor chip design and! production. Their use will be pervasive from feedback control in prosthetics to voice recognition devices used to control such mundane subsystems as locks in houses, radios, television, scooters, cars, and computers. Every human family, in some form or fashion, will own a silicon chip in the near future. P. CHAUDHARI

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26 Marshaling Technology for Development Also promising for developing countries are the technologies at the intersec- tion of materials and informatics or communications. The steady evolution of the integrated circuit and silicon chip over the past few decades provides a measure of improvements in materials technology. The global importance of these tech- nologies stems from their use in hundreds of applications and their falling costs and size over time. Even as the earth's human population grows, a future in which silicon chips are so cheap and ubiquitous that every family owns at least one is not improbable. Indeed, the size of the markets in number of units could exceed those for nearly every other manufactured commodity. A companion product is the flat display, a quickly evolving product employing a wide variety of alterna- tive technologies. No one yet has dominance in this market, which could embrace one out of every four families within a decade. Thus advances in materials science and technology, especially where com- bined with biotechnology or informatics, will lead to further radical innovations and will yield new classes of products that will have enormous markets in the near future. Countries not making these products will be buying them. And, like many radical innovations, these advances will create a large number of niches in the market for component and materials suppliers and technical services that may be filled by developing country firms positioned to compete. TECHNOLOGICAL CHANGE AND THE GLOBAL ECONOMY Even though much uncertainty still surrounds the technology revolution, one thing is highly probable: the speed of innovation in information and communica- tions, as well as biotechnology and materials technologies, will reshape the world economy, creating new industries, changing the nature of markets and the sources of comparative advantage, lessening the importance of geographic boundaries, and changing the way business is done. Many developing countries will encoun- ter new opportunities to increase their productivity, incomes, and participation in world trade. Yet at the same time, these same countries will have to adjust to the economic and social change brought about by the new technology. Countries that fail to adjust and use technology to their best advantage probably will fall behind those that do. At the level of the individual firm, a knowledge-based global economy will put a premium on speed; a rapid pace of technological change means that current knowledge, including the knowledge embodied in human and physical capital, becomes quickly outdated. Workers may find that the knowledge learned in school or in early years on the job is not sufficient to deal with new advances. And as physical capital also becomes obsolete more quickly, firms failing to keep up with technological advances may find themselves lagging behind their com- petitors. Some say, in fact, that in the new global economy there will be two types of firms: the quick and the dead. Goods previously thought to be nontradables, such as services, will become

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GLOBALIZATION OF KNOWLEDGE AND TECHNOLOGY 27 commodities via new information and communications technologies. Transborder services already are the fastest-growing component of both international trade and foreign investment, opening new export opportunities for developing coun- tries. For example, many Caribbean countries are exporting services to the United States, including financial (check clearing, insurance claim processing), commu- nications (toll-free line answering), and tourism (hotel reservations). In India, the software industry has been able to take advantage of its low-cost, highly skilled work force and international communications links to become a major exporter of software. Even the service components of manufacturing, once embodied in manufacturing production (for example, design, mapping and geological ser- vices, and accounting), can be outsourced. In fact, this unbundling of services, by increasing the measured domestic production and trade in services, largely ex- plains the rising share of services in the U.S. economy. In the changing global economy, the new technology will increase competi- tion and contestability in markets by lowering barriers to entry, reducing the minimum efficient scale of production, and providing alternative production tech- niques. Information technology will increase the contestability of service indus- tries by improving consumer access to information and by opening opportunities for long-distance services. Some estimates suggest that as much as 10 percent of the 88 million service jobs in the United States could be contested by long- distance suppliers under the right set of circumstances. Industries long considered natural monopolies, such as telephone services, already have become more com- petitive with the entry of new service providers using new technologies such as cellular telephones. Eventually, these new market structures will erode existing regulatory frameworks, making them ineffective, inefficient, or irrelevant. As barriers to entry and scale economies are reduced or become ineffective, smaller-scale firms will find that they can compete with larger ones, potentially flattening the size distribution of firms in both national and international mar- kets. Information technology can be used to level the playing field among mar- ket participants for example, by reducing information asymmetries between buyers and sellers and eliminating the need for middlemen. An example of the latter: on-line catalogues are beginning to appear on the Internet, and the Home Shopping Network has been valued at over $1 billion. Another example of this trend toward exploiting the latest information and communication technologies is The Limited, a chain of clothing stores for fashion-conscious women in their twenties and early thirties. Using real-time information from its cash registers, this firm restocks its stores by automatically ordering garments from suppliers in China via a satellite communications link. As a result, the firm has dramatically reduced its turnaround times to about eight days, keeping inventory costs at a minimum and posing a challenge to its competitors. In industries like The Lim- ited, then, the mass production of customized products has been made possible by technology. In this and other industries, firms that have not gone through the large-scale, mass-production phase of industrial development may find that their

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28 Marshaling Technology for Development existing business structures give them a competitive advantage in external markets. The world economy, therefore, depends greatly on technological change. Indeed, many of the leading industries today were unknown or vastly different a century ago. Also today, for the first time in history, the world is able to produce enough food to feed all its present inhabitants, even though for a variety of complex reasons pockets of hunger still linger. Effective health care is reaching populations that never before have benefited from modern medicine and is a major factor in the burgeoning population growth the world is experiencing. To encourage technological innovations, most industrialized countries have estab- lished national research and development institutions and devised systems or programs to incorporate innovations, whether domestically generated or not, into the national productive sector. Many developing countries, however, lack both. How then can these countries tap into this rich vein of technological change? This question is the subject of the next chapter.