Knowledge-Intensive Activities vs. High-Tech Sectors: Learning Options and Traps for Central European Policy-Makers
THE KNOWLEDGE-BASED ECONOMY IN CENTRAL AND EAST EUROPEAN COUNTRIES: ECONOMIES AND INDUSTRIES IN A PROCESS OF CHANGE, K. Piech, S. Radosevic, eds., pp. 259-279, Basingstoke: Palgrave, 2006
Posted: 1 Jul 2010 Last revised: 15 Jul 2010
Date Written: October 1, 2005
Central European (CE) policy-makers have to work in a very demanding context: given the constant macroeconomic tensions since the early 1990s, they cannot devote sufficient intellectual and financial resources to address long-term issues. This is a genuine danger, indeed, since long-term drawbacks – stemming from neglecting the long-term issues – cannot be felt immediately, by definition.
Innovation can play a significant role in accelerating the catching-up process. However, the linear model of innovation and the closely related strong belief in high-tech are still influential. By criticising policy misconceptions derived from the linear model of innovation and the closely related ‘high-tech’ hypes, the chapter argues that CE policy-makers should understand the non-linear, complex relationships between (domestic) R&D efforts, innovation, and competitiveness. Then they can define appropriate goals for themselves in a broad innovation system framework, understanding the importance not only of knowledge creation, but also the exploitation of knowledge. In other words, they should focus on fostering knowledge-intensive activities across all sectors. It is strongly recommended, therefore, to avoid the trap of attracting ‘high-tech’ firms to invest at any rate, just because the weight of high-tech sectors is a commonly (mis)used benchmark. This misplaced policy would only reinforce the current structure in the CECs: a deceptively high proportion of seemingly technologically advanced sectors, which in fact are composed of firms performing low knowledge-intensive activities, hence paying low wages, and ready to leave at any time, whenever cheaper locations and/or more subsidies become available. However, the chapter does not intend to question the importance of domestic R&D activities. Rather, one of its objectives is to urge policy-makers asking fundamental questions: what types of R&D activities should be promoted, in which areas, for what purposes, in what sort of an innovation system?
Another snag of investment promotion is how to strike a balance between immediate, high-volume job creation and generating skill-intensive jobs. The former ones tend to pay low wages and indicate short-term plans of so called ‘foot-loose’ investors, while the latter ones are usually fewer in number, but offer higher wages, and signal longer-term commitment of the investors. Again, the actual activities to be performed are more important than the sectoral ‘label’ of the investor: investment promotion schemes should favour knowledge-intensive activities.
An even more difficult challenge is to avoid ‘rat race’ among CE countries for FDI by offering higher incentives. Yet, escaping this trap would be a highly advantageous development as the current practice inevitably and disproportionately favours foreign investors.
Keywords: knowledge-intensive activities, innovation policy, investment promotion, Central Europe
JEL Classification: O38
Suggested Citation: Suggested Citation