Innovation economy: Conversion of knowledge into economic outputs

Upon reaching middle-income status by adding labour and raw materials to imported technology, many developing countries have been aspiring to attain high-income status. And they have rightfully identified that upgrading factor driven economy to innovation economy is the means to meet this goal. But how to build innovation economy is a question.
Innovation economy primarily focuses on the acquisition and conversion of knowledge into economic outputs. In market economy, firms are the primary entities for transforming knowledge into wealth. In factor driven economic stage, firms in developing countries do not focus on adding knowledge to process and product to increase profit. Rather their business model has been to add labour and raw materials to imported machinery to replicate existing products, whether for export or domestic consumption. Creating the appetite and capacity among firms for acquiring knowledge and translating it into the process and product features for increasing the profit appears to be a key area to focus on for building an innovation economy.
As Nobel Laureate Paul M. Romer observed that more or less we are using the same set of materials what we were using before, say 50 years ago. But our knowledge of processing, combining and shaping them in forming different products have been continuously improving. As a result, we have been deriving more benefits from the growing consumer base and producer surpluses, thereby creating increased wealth. High performing firms have developed the capability in acquiring useful knowledge, both from external and internal sources, and translating it into a process and product features for improving the quality and reducing the cost of production of existing products, and also innovating new ones. In a well-performing market economy, firms are virtually competing in increasing their capacity for knowledge acquisition and transforming it into product and process features for maximising profits. Creating the demand of knowledge among firms for increasing profit appears to be at the core of building an innovation economy. Some of the areas to focus on for improving learning and knowledge conversion capacity of firms in developing countries into economic outputs are follows:
CREATE AWARENESS ABOUT KNOWLEDGE AS A MEANS FOR INCREASING PROFIT: So far, firms in developing countries rely on the supply of low-cost labour and raw materials to increase their revenue and profit. They also rely on government incentives and protection in the form of taxes, import duties, cash subsidy, infrastructure investment, interest, and subsidised utilities to improve as well as sustain competitive advantage. Firms in the production of import substitutions are relying on high import tariff of finished products and very low duty on imported intermediary inputs for ensuring as well as increasing profitability. To benefit from technology through productivity improvement, they virtually rely on imported capital machinery, often labour saving, but killing factory jobs. To these firms, the acquisition of knowledge through the internal operation and also from external sources and turning them into the process and product innovation for improving profitability does not appear to be high on the agenda. For this reason, developing countries have very low rankings in relevant global indices. For example, in the Competitiveness Index prepared by World Economic Forum, Bangladesh's (a newly emerged low middle-income country) position in production process sophistication is 79 among 137 countries. Similarly, in the global innovation index, Bangladesh's position is 126. The awareness of turning good firms into great ones through the acquisition and translation of knowledge into productive outputs for increasing profit should be nurtured for creating the underlying demand of knowledge for growth through innovation.
LIMIT AND REDUCE CONVENTIONAL INCENTIVES: In market economy, the primary purpose of firms is to generate profit. A firm has diverse means of addressing profit-making agenda. If the government keeps providing conventional incentives such as tax reduction, import duty adjustment, currency depreciation, cash subsidies and so on, why should firms undertake the more challenging path of knowledge acquisition for pursuing innovation in reducing wastage, lowering emission, minimising defects and reworks, and improving product quality? To migrate towards innovation economy, governments should keep reducing conventional incentives giving a clear signal that knowledge should be harnessed to pursue innovation for increasing profit and revenue.
REDUCE CORRUPTION, CREATE LEVEL PLAYING FIELD AND ADDRESS FRAUDULENCE IN BANK FINANCING: There have been reports that many firms in developing countries are basically in a business of manipulating rules to make money. Such practices appear to be insurmountable barriers to the creation of innovation economy. If those practices provide a easy window to make money, why should firms concentrate on a more challenging option?
PROVIDE INCENTIVES FOR IMPROVING QUALITY AND REDUCING COST THROUGH LOCAL INNOVATION: Incentives should be linked to firms' progress in acquiring knowledge and translating it into quality improvement and cost reduction. For example, Chinese government's incentive to local electric battery producers are tightly linked to the progress firms are making in improving the key performance factors of battery and reducing the cost through assimilation of foreign technologies and acquiring new knowledge through internal R&D, and transferring them into the innovative product as well as process features.
ENHANCE MANAGERIAL COMPETENCE FOR LEARNING AND INNOVATION MANAGEMENT: Research reveals that managerial capability of domestic firms in developing countries to innovate is scarce and hard to compete internationally. Management practices in developing countries is weak in setting long-term targets, introducing new technologies, developing internal knowledge-acquisition capacity, and infusing best practices in operations, and developing human resource policies in pursuing innovation. This creates a gap, as active innovation requires dominance of best practice and a multiyear strategy. Management quality thus becomes an important tool towards stimulating innovation as a means for increasing profitability.
There is no denying that countries reaching middle-income status must focus on the transition from factor driven economy to innovation economy so that the role of total factor productivity (TFP) keeps growing. Due to the lack of competence and availability of unsustainable means of addressing profit-making agenda, firms in developing countries appear to be not focusing on knowledge acquisition as a means of attaining desired growth. Insufficient R&D funding, inadequate intellectual outputs and poor quality of graduates are critical barriers for such uplifting. However, once firms succeed in developing the internal capacity of acquiring knowledge and translating it into process and product innovation in increasing profit, they will increasingly allocate resources for Research and Development taking the economy on a sustainable growth path.

M Rokonuzzaman Ph.D is academic and researcher on technology,
innovation and policy. [email protected]