Governing the Global Knowledge Economy: Mind the Gap!

Governing the Global Knowledge Economy: Mind the Gap!

Dieter Ernst (East-West Center, ErnstD@EastWestCenter.org)
David M. Hart (George Mason University, dhart@gmu.edu)

Prepared for 2007 Atlanta Conference on Science, Technology and Innovation Policy
Georgia Tech, October 20, 2007

Abstract
Globalization now extends beyond markets for goods and finance into markets for technology,
knowledge workers, and innovation finance. This paper asserts the existence of a widening gap
between the rapidly growing global knowledge economy and the woefully inadequate
institutional framework that supports and regulates it. This gap threatens to undermine the
potential gains and could slow or even stop the growth of the global knowledge economy in its
tracks. In addition to describing key features of the emerging global knowledge economy, the
paper highlights the asymmetric relationship between corporate strategy and government policy
that results in the governance gap. We conclude with a preliminary discussion of design
principles for bridging the governance gap and generic policy suggestions.


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Governing the Global Knowledge Economy: Mind the Gap!

Dieter Ernst (East-West Center, ErnstD@EastWestCenter.org)
David M. Hart (George Mason University, dhart@gmu.edu)


0. Introduction
A restructuring of the innovation process is underway around the globe. New national
and regional centers of knowledge work are emerging. As a result, global interactions,
information flows, and knowledge sharing are accelerating, diversifying, and deepening. These
changes have increased the pace of innovation and created opportunities for innovation in new
locations. They rightfully evoke optimism, even utopian visions. It is expected that, once a place
becomes part of the expanding global knowledge economy, it will have better chances to
increase its share in productivity-enhancing innovation, high-wage jobs and economic growth.
The emergence of a global knowledge economy means that globalization now extends
beyond markets for goods and finance into markets for technology, knowledge workers, and
innovation finance1. An increasing division of labor in innovation has accelerated the creation of
markets for disembodied (intangible) intellectual assets and for the skills and money needed to
produce and use these assets effectively. The globalization of these markets is driven by
fundamental changes in the economics of innovation and the resultant adjustments in corporate
strategies and government policies.

1 ‘Knowledge workers’ are defined to include science and engineering personnel, as well as managers and
specialised professionals (in areas like marketing, legal services and industrial design) that provide essential support
services to research, development and engineering.
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Like other observers, we are optimistic about the potential of these developments to
improve living standards and the quality of life of many millions, if not billions, around the
world. Yet, the payoffs are not guaranteed. This paper asserts the existence of a widening gap
between the rapidly growing global knowledge economy and the woefully inadequate
institutional framework that supports and regulates it. This gap threatens to undermine the
potential gains and could slow or even stop the growth of the global knowledge economy in its
tracks.
The important point to emphasize is that these adjustments have been asymmetric.
Corporate strategies shape the pace and contents of the global knowledge economy.
Governments have been content to facilitate this process, while searching for ways to enhance
local and national advantage. They have spent much less effort tackling broader issues of equity
and economic sustainability.2 The underlying assumption of policy has been that, similar to free
trade, free markets for knowledge economy inputs will enhance global welfare. Yet, as Karl
Polanyi concluded in his classic analysis of an earlier era of globalization, free markets can sow
the seeds of their own demise. (Polanyi 1944) The emerging global knowledge economy will
not thrive over the long term unless it is embedded within a supportive institutional framework
of global governance3.

The knowledge economy governance gap has not received sufficient attention in the
literature on science, technology and innovation policy4. We know too little about what kind of

2 The growth of the global knowledge economy also has important implications for environmental sustainability,
cultural vitality, and moral principles (as in the case of human genetic engineerng). In this paper we leave aside
these issues, critical as they are, in order to focus on political economy.
3 Following Ruggie (2006, chapter 1: p.31), we define ‘global governance as a combination of “treaty-based and
customary international law, shared norms, institutions, and practices by which the international community as a
whole seeks to manage its common affairs.”
4 An enormous amount has been written about global governance gaps in important policy areas, such as
environmental and resource management, product safety, human rights, international security, and financial market
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governance structures and processes might limit “systemic friction” that pits competing nations
unproductively against each other. (Ostry, 199X: ) We also need to explore how to better supply
the global public goods upon which the knowledge economy rests. And, as in any market, there
are externalities that are not accounted for by transacting parties, notably for our purposes
externalities that may produce a backlash from those who perceive themselves to be losing out.

One public good that that the global community has begun supply to support the
knowledge economy is intellectual property rights (IPR).5 Protection of property rights is
obviously a necessary element of the required institutional framework, but hardly sufficient, and,
indeed, without complementary institutions, may be counterproductive. Thus far, debates have
been dominated by concerns in the US, the EU and Japan on how to recreate their competitive
edge. But this narrow focus may no longer be possible, as new entrants to the global knowledge
economy are seeking to adjust the rules in their favor6. If no solutions are found to this
conundrum, we may well witness a vicious circle of technological and scientific protectionism.

In short, it is time to study the challenges that the global knowledge economy poses for
the governance of science and technology and the resultant distribution of opportunities for
innovation. This paper is a think piece that seeks to outline a new research and policy agenda.
We highlight imbalances in the forces that are widening, deepening and accelerating the
globalization of the knowledge economy. We also emphasize the increasing diversity of actors
who will seek to shape its governance. As a first step toward devising a governance framework ,

regulation. Considerably less attention, however, has been devoted to governance gaps that could slow-down or
derail the growth of the global knowledge economy.
5 Governance processes organized for other purposes also bear on the global knowledge economy. Export control
regimes, for instance, that aim to limit the proliferation of advanced weaponry, and restrictions on immigration,
travel and communications that were introduced to fight the so-called ‘war on terror’ could stifle growth. Although
not our focus here, these issues also warrant close attention from the global public policy community.
6 China and India are the most prominent nations in this group, but the list includes both large countries like Russia,
Brazil, Argentina, Mexico, South Africa, Indonesia, Egypt, Vietnam, and many smaller countries, like Korea,
Taiwan, Malaysia, Singapore, Israel, the Gulf states, Poland, the Czech Republic, Hungary, and the Baltic states.
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we seek to identify, for specific governance domains, conceptual building-blocks and generic
policy suggestions. The evidence used to support our arguments draws on the authors’ original
research as well as secondary literature.

The first section of the paper describes key features of the emerging global knowledge
economy. The next sections highlight the asymmetric nature of driving forces that result in the
governance gap, confronting corporate strategies and government policies, and analyze the most
pressing issues and the risks of non-action. The paper concludes with a discussion of objectives,
design principles for bridging the governance gap, and generic policy suggestions.

1.0 The Rise of Global Innovation Networks
Only a decade ago, research on the geographical distribution of patents demonstrated that
innovative activities of the world’s largest firms were among the least internationalized of their
functions (Patel and Pavitt 1991). This finding gave rise to the proposition that innovation, in
contrast to most other stages of the value chain, is highly immobile: it remains tied to specific
locations, despite a rapid geographic dispersion of markets, finance and production (e.g.,
Archibugi and Michie 1995). Attempts to explain such spatial stickiness of innovation have
highlighted the dense exchange of knowledge (much of it tacit) between the users and producers
of the resultant new technologies (e.g., Feldman et al.1999; Porter and Solvell 1998; Jaffe et. al.
2000).
Yet, even as this research was in progress, the world was changing, with the emergence
of global innovation networks (GINs) in the 1990s and 2000s that carry out design and product
development as well as applied and basic research. GINs share important characteristics with the
global production networks (GPNs) that preceded them. (Ernst 2006). For instance, like GPNs,
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GINs combine the geographic relocation of innovative activities (‘offshoring’) with increased
reliance on external partners (‘outsourcing’). (Feenstra 1998; Jones and Kierzskowski 2000).
Similarly, most GINs, like most GPNs, involve lead firms (‘flagships’) that dominate control
over network resources and decision-making. (Ernst, 2007a)
GINs help flagships to gain quick access to skills and capabilities at lower-cost overseas
locations that complement the flagships’ core competencies. As the flagship integrates
geographically dispersed innovation clusters into GINs, this may well produce cost savings.
Yet, the real benefits of globalization result from the dissemination and exchange of knowledge
and complementary capabilities. Network flagships increasingly rely on the skills and knowledge
of specialized foreign subsidiaries and suppliers to enhance their core competencies.

1.1. The Measurement Problem
There is a dearth of adequate data, indicators and methods to assess and analyze the
internationalization of innovation. Samuel J. Palmisano, the IBM chairman and CEO, argues
that, ”ironically, the measurement of innovation is one of the least innovative of all our
measurement systems.” (Palmisano, 2007: p.5)7
Innovation statistics remain strongly focused on tangibles and technological innovation,
neglecting intangible intellectual assets and innovation in services (Graham, 2007). In addition,
most quantitative measures are lagging indicators (often by a number of years) and they fail to

7 Existing measures have focused on the familiar easily countable inputs and outputs, such as
trade and foreign direct investment in hi-tech industries, and the geographic distribution of R&D
expenditures and personnel, patents and citations. Yet, as Albert Einstein observed: “Everything
that can be counted does not necessarily count; everything that counts cannot necessarily be
counted.” (quoted in Calaprice, 2005).
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trace the growing exchange of technology, information and knowledge across borders that are
critical for most innovation projects8.
Nevertheless, we can highlight a few proxy indicators. The scattering of the innovation
process across borders, for example, shows up in IMF Balance of Payment data as a rapid growth
of international payments for intangible intellectual property, especially technology licensing. A
recent survey, to take another data point, shows that the world’s leading R&D spenders are
increasing both offshoring and outsourcing of innovation activities to Asia, especially to China
and India (UNCTAD 2005).9 By 2004 China had become the third most important location for
overseas R&D affiliates, after the United States and the United Kingdom, followed by India (6th )
and Singapore (9th ). More than half of the responding firms have at least one R&D facility in
China, India or Singapore.
The same survey projects that the pace of R&D internationalization will accelerate,
especially among U.S., Japanese, and Korean headquartered firms. As many as 67 percent of the
respondents to the UNCTAD survey stated that the share of foreign R&D will increase; only 2
percent indicated the opposite.
A third way to measure the rise of the global knowledge economy is to examine what
happens to engineering jobs. A recent on-line survey of US electronics engineers, conducted by
the respected Electronic Engineering Times, finds that 50% of US respondents (up from 46% in

8 There are now attempts to improve the quality of collected innovation data. In the US, the Department of
Commerce has established an Advisory Committee on “Measuring Innovation in the 21st Century”. One notable
initiative is that, in July 2003, the National Science Foundation, the Bureau of Economic Analysis, and the US
Census Bureau have established a data sharing and data linkage project related to the globalization of industrial
R&D. But so far the only result is that a feasibility study has established that the data reported by the different
agencies are comparable and could be linked (Jankowski and Moris, 2007). Similar attempts by the European
Commission are still at a very preliminary stage (as reported in ProInnoEurope, 2007)
9The UNCTAD sample consists of the first 300 firms of the R&D scoreboard of the 700 top worldwide R&D
spenders, published by the UK Department of Trade and Industry. And a 2006 Economist Intelligence Unit survey
of 300 senior executives of leading global corporations finds that India and China are the 2nd and 3rd most
important offshore R&D location (after the US and ahead of the UK).
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2005) report that their company has sent electronics design work offshore. And job security and
unemployment are the dominant concern of US-based engineers (69% of respondents), together
with offshore outsourcing (67%).

1.2. Qualitative Findings
Case studies of company-specific global innovation networks (GINs), in our view,
provide a richer, more current, and more persuasive source of data than statistics. (e.g., Ernst,
2005). Take Intel as an example. Its U.S. labs in Santa Clara, Folsom and Austin remain primary
locations for core technology development and applied research, while Haifa, Israel (established
in 1974) is focused on processor research and Nishny Novgorod, Russia, on software
development. Intel has established seven R&D labs in Asia (outside of Japan), and it is planning
to expand rapidly both the number of labs and their headcounts. Bangalore, India, Intel’s largest
lab outside the United States, conducts leading-edge dual processor development. With a
workforce of around 2700, management plans a substantial expansion in India, most likely in
second-tier cities that have lower labor costs than Bangalore. In Shanghai, China, Intel has
recently expanded its R&D team to focus on applied research to identify new applications for
China and other emerging markets.
The offshoring done by global firms is complemented by outsourcing of some stages of
innovation, especially those related to product development, to specialized suppliers. For
instance, global brand leaders for laptops and handsets use design services provided by
specialized contractors, the so-called ‘original design manufacturers’ (ODMs), mostly from
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Taiwan, for new product development (Ernst, 2007 b) 10. In addition, global system companies
(like IBM) and integrated device manufacturers (like Intel) are outsourcing to Asian fabless
design houses the development of specific design building blocks and design implementation
services (Ernst 2005).

1.3. New Entrants from Asia
Over time, an increasing diversity of GINs has emerged, bringing together R&D teams
from companies that drastically differ in size, business model, market power, location, and
nationality. The flagship companies that control key resources and core technologies, and hence
shape these networks, are still overwhelmingly from the US, Japan and the EU. However, there
are also now network flagships from Asia (outside Japan), led by Korea’s Samsung and
Taiwan’s Acer,11 and companies from China and India are following close behind.
Take Huawei, China’s leading telecommunications equipment producer, which has
pursued a two-pronged strategy (Ernst and Naughton, 2007): it is building a variety of linkages
and alliances with leading global industry players and universities, while concurrently
establishing its own global innovation network. In fact, Huawei has developed a web of project-
specific collaboration arrangements with major suppliers of core components, such as Siemens
(as part of China’s TD-SCDMA project), 3Com (with a focus on sales and joint product
development), as well as Intel and Qualcomm. And Huawei’s own global innovation network
now includes, in addition to six R&D centers in China, five major overseas R&D centers in the

10 ODMs either implement a detailed set of design specifications provided by a global brand leader or they provide
their proprietary integrated ‘turnkey’ solution to basic performance parameters requested by the brand leader.
11 On Korean overseas R&D, see Youngsoo Kim (2000), Sachwald (2001) and Ernst (1994). For Taiwanese firms,
see Chen, 2002 and Ernst, 2001.
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US (Plano/Texas and San Jose/California), Sweden (Kista/Stockholm), Moscow and the UK (as
part of British Telecom’s list of eight preferred suppliers for the overhaul of its UK fixed-line
phone network).

1.4 Mini-GINs
Finally, an important new development is that smaller U.S.-based high-tech companies,
and even start-ups, are facing considerable pressure to engage in innovation offshoring. In fact,
venture capitalists in Silicon Valley now require start-ups to present an “offshore outsourcing”
plan as a precondition for receiving funding. The emerging business model is to keep strategic
management functions like customer relations and marketing, finance, and business development
in Silicon Valley, while increasingly moving product development and research work to offshore
locations.
This shift has given rise to new models of innovation offshoring that frequently involve
foreign-born engineers from Taiwan, China, and India. A typical example is a start-up company
in Shangdi Information Industrial Base in Beijing’s Haidian District that specializes in mixed-
signal chip design (Ernst, 2007c). Chinese engineers who hold Ph.D. degrees from leading U.S.
universities and have worked as senior project managers in leading U.S. semiconductor
companies founded the company. It has received venture capital funding for developing chip
designs in both China and Silicon Valley12.
Multinational open-source technology development networks comprised primarily of
individuals represent the most extreme version of this phenomenon. A small team lies at the

12 A fully integrated design team in Beijing develops decoder chips customized for the new Chinese AVS (audio-
video signal) standard. Of the more than 60 engineers at the Beijing facility, 90 percent hold at least Masters
degrees. Five senior managers based in Santa Clara handle customer relations and provide design building blocks
and tool vendors for design automation, testing, and verification.
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