On Wednesday, Nov. 11, Eric Verhoogen, professor of economics and of international and public affairs and co-director of the Center for Development Economics and Policy at Columbia University, delivered a talk at Swarthmore College on the process of upgrading technologies in developing countries. The lecture, hosted by the Swarthmore economics department, was this year’s Clair Wilcox Lecture.
Verhoogen began the talk by explaining how common economic measures can often underestimate innovation in the context of developing countries, and hide their progress. “In lower-middle-income countries, firms are typically not trying to push the world frontier. They’re trying to catch up to the world frontier,” he said. “I want to think of that as innovative behavior, but it’s not going to show up as patents, and it may not even show up in the form of [research and development] spending.”
In addition, while firms in developing countries are often expected to be able to take advantage of technological advances in the developed world, this can prove much more difficult in practice.
“[Developing countries] can look and see the technologies or the products that exist already out there. That should be the easier process,” Verhoogen explained. “But for many firms in developing countries, these advantages have remained elusive. Many firms don’t seem to be able to take advantage of the fact that advanced technologies and advanced products already exist. And so that’s really the puzzle here.”
Verhoogen characterized the innovation, or upgrading, done by firms in developing countries as four specific types: gains in capabilities, gains in product quality, the use of new techniques, and the production of new products. While these types of upgrading often coincide in developed countries, this is not always the case in developing countries, where different conditions can inhibit some forms of upgrading.
“Many times, when firms in poor countries are selling domestically, if consumers are not very willing to pay for quality, then it’s not going to be optimal for the firm to produce high quality, because what their customers want are low-quality [goods].” he said. “Another issue is that firms [across countries] often face different input supply curves or prices. For instance, high-quality inputs or high-skilled workers, often, for many firms, are relatively expensive. They may not be more expensive in absolute terms, but often it’s hard to find skilled engineers in many developing-country contexts.”
Additionally, access to buyers in richer markets can enable firms to upgrade. For example, in a controlled experiment Verhoogen cited, Egyptian rug producers who were given access at the start to buyers in developed countries eventually sold higher-quality products. Verhoogen explained that these rug producers gained new capabilities in the process of upgrading their products’ quality.
“It wasn’t just that [the rug producers] started doing something that they already knew how to do, but in the process of fulfilling these export orders and producing the higher-quality rugs, they learned how to produce [high-quality rugs] better,” he said.
Similarly, in Costa Rica, firms that sold goods to multinational corporations eventually upgraded more than comparable domestic exporters, allowing them to sell more even to other buyers in the long term.
“In the first year, there’s a capacity dip when they start selling to Intel [a multinational buyer]. They can’t sell as much to other firms, so the sales to others drop. But then … not only do they recover, but actually their sales increase relative to the other firms,” Verhoogen said. “These firms are learning something from selling to multinational corporations. Now, a complete explanation would say that they’re maybe learning something, and it also may be possible that there is a sort of positive reputational effect.”
At the same time, inefficient incentives can prevent firms in developing countries from effectively upgrading. In Pakistan, firms create soccer balls by cutting pentagons and hexagons, but due to inefficiencies in the process of cutting pentagons, there was often a significant waste of material. However, when an experiment introduced a more cost-effective method for cutting pentagons to firms producing soccer balls, it was largely not adopted due to worker resistance.
“It’s about 8% more pentagons per sheet… [and] we thought this was going to spread immediately, but within fifteen months, we had six adopters out of the 135 firms in town,” Verhoogen said. “And it turned out the reason is because the cutters … were paid per pentagon or per hexagon or per ball, and they just wanted to go fast. They had no incentive to reduce waste.”
Verhoogen emphasized that while firms in developed countries often behave differently from those in developing countries, this does not mean that the firms in developing countries are inefficient or acting incorrectly.
“There’s a little bit of a tendency, at least among development economists in the literature now, to say firms [in developing countries] are making mistakes, [and] that firms are poorly managed,” he said. “If we see firms behaving in a different way than U.S. firms are behaving, we shouldn’t automatically jump to the conclusion that they’re not behaving optimally. Maybe [they are] under different constraints that we need to understand.”
