Technological innovation in Asia and the role of business groups

Technical change is fundamental to the process of economic development. The path dependency and the cumulative nature of technology together imply that a nation's technological capabilities are likely to be in the technological neighborhood of previous successes, Patent data are used to identify the areas of relative comparative advantage in technology for a sample of nine Asian economies. An index known as the Technology Revealed Comparative Advantage (TRCA) index is introduced to explore the profiles of sectoral specialization in technology within particular countries. In parallel, a Chi-square index is applied to measure technological specialization for the country as a whole. A framework is further developed to analyze the “quality” of a country's profile of technological specialization. The findings regarding the explicit role of knowledge creation behind the East Asian growth performance shed light on East Asia's ability to recover from the present economic crisis and sustain its economic progress. The widespread presence of business groups in developing economies implies a possibly important role in the process of technology accumulation. It is argued that market imperfections coupled with policy interventions justify viewing the share of a sector's output associated with business groups as a proxy for entry barriers in that sector. Using Korea as a case study, statistically robust evidence is found of an inverted-U relation between the sectoral share of groups and the sector's innovative performance. However, group structure is endogenous to the economic landscape. Group structure emerges in developing countries in response to various types of market imperfections and policy inducements. In the long run, as imperfections lessen and the inducements decrease, groups may have to decide whether to increase or decrease diversification. What strategy they choose could have important implications for their ability to innovate. Using a sample of 31 major business groups in Korea, the patterns of diversification over 1983–94 are studied. Particular attention is paid to: (a) whether there has been an increase or decrease in diversification, and (b) how uniform the shifts in diversification have been across groups of different sizes. Finally, the role of debt financing as well as a group's relative profitability is explored as determinants of changes in diversification over time.