Globalization and its Potentials and Challenges for National Innovation Systems. A Technology Policy Perspective

Essay , 2022 , 7 Pages , Grade: 1.7

Politics - Topic: Globalization, Political Economics

Globalization enables goods, services, and cultural and social influences to be gradually similar across the world. This could have both positive and negative consequences, such as the increased knowledge spillovers between countries or the outflow of natural resources from less developed countries to more developed countries at low prices. Technology plays a crucial role in globalization because it fosters competitive advantage and economic growth. This motivates governments to enact technology policies to supports research and development (R&D) activities as well as innovation activities, e.g. by allowing firms to form joint research ventures without the threat of antitrust enforcement, by granting an individual or firm a limited right to exclude others from using its ideas (i.e. in form of a patent on its invention) or encouraging private R&D spending via tax credits and/or subsidizing R&D projects. National innovation systems (NIS) are constructed to achieve this goal. Some globalization-related potentials or challenges for NIS include tax policies, migration, and intellectual property rights (IPR).

Globalization and its potentials and challenges for national innovation systems (technology policy perspective)

By: Christian Yonathan Wiratmo

The world we live in is getting ever more connected. This is due to globalization, defined by the Cambridge Dictionary as a situation in which available goods and services, or social and cultural influences, gradually become similar in all parts of the world (1). Globalization has economic, social, and political dimensions (2). In this paper, the term “globalization” focuses on the economic dimension of globalization, which refers to the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies (3). Theoretically, globalization has many positive effects on growth via various mechanisms such as increased knowledge spillovers between countries, greater economies of scale, innovation potentials due to specialization, effective allocation of domestic resources, diffusion of technology, improvement in factors productivity and augmentation of capital (4). However, globalization could also have negative impacts on global economy, such as the outflow of natural resources from less developed countries at low prices and reduction of countries’ revenues in form of taxes and fees due to transnational companies using free economic zones with privileged tax treatments regimes (5).

Technology is one of the main globalization encouragements because the world is moving towards competition in global technologies and is therefore the strongest foundation for competitive advantage acquisition in the world (6). Both technological progress and globalization in turn drive economic growth (7). Given the crucial role of technologies as means of fostering competitive advantage and economic growth, it is of upmost importance for governments to respond adequately. This is done among others by means of technology policy, which is defined as any type of selective government intervention or policy that attempts to alter the structure of production in favor of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention in the market equilibrium (8). This means that the government supports research and development activities as well as innovation activities, e.g. by allowing firms to form joint research ventures without the threat of antitrust enforcement, by granting an individual or firm a limited right to exclude others from using its ideas (i.e. in form of a patent on its invention) or by encouraging private R&D spending via tax credits and/or subsidizing R&D projects (9).

In order to implement this policy, a system has to be made. This system is called the national innovation system, defined as a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies (10). The actors and their relationship to each other in a national innovation system are shown in the following illustration:

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Figure 1. Players within a national innovation system (NIS) (11)

There are however certain factors in connection with globalization that could disrupt or enhance national innovation systems – depending on how governments respond to them, namely:

1. Tax Policies

A 2016 report from the Organization for Economic Cooperation and Development (OECD) confirms the role of taxes for risk-taking innovators and their companies, stating that tax rates matter to the location of inventors and their patent registrations (12). Governments may then try to attract capital, workers or consumers from other countries by lowering general tax rates or by offering special regimes targeting a specific part of the tax base or taxpayers (13). This tax competition could result in some countries acting as “tax havens” to gain the upper hand – as shown in the following illustration:

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Figure 2. Increase of FDI flows into tax havens and the economic growth rate in the OECD area (1980-2018). While the economic growth in the OECD area has been weak for the last couple of decades, the amount of foreign direct investment (FDI) to countries considered as “tax havens” has been skyrocketing (14)

International organization such as the European Union (EU) and the OECD have devised counter-measures to address this problem, for example the Anti-Tax-Avoidance Directive (ATAD) and the Directive on the automatic mandatory exchange of information for multinational companies in the EU Member States or OECD's Base Erosion and Profit Shifting (BEPS) initiative and the OECD Black List of non-cooperating countries (15).

2. Migration

A paper from the Global Knowledge Partnership on Migration and Development (KNOMAD) in 2017 reported that high-skilled migrants come from every corner of the world, especially from poorer, smaller, and isolated economies, and move to larger, wealthier, English-speaking OECD countries – a phenomena known as “brain drain” (16,17). An example of this is the pattern of migration from Southern and Eastern Europe toward the Western and Northern Europe, especially Germany, after the 2008 economic crisis (18).

Brain drain could also occur within a country, where universities in less populated areas lose their students to metropolises during the transition between bachelor and master degrees due to the metropolises offering a wider spectrum of master study programs, better labor market and a more attractive living place (19). Nevertheless, this disadvantages the sending regions, such as by reducing the stock of human capital, labor/skills shortage, limited capacity to innovate and adopt more advanced technologies, labor market changes (e.g. reduction of wages), fiscal consequences (e.g. reduction of tax income), market-size (e.g. reduction of consumption), reduced economic growth, reduced productivity, higher costs of public goods, and the loss of investment in human capital formation while benefiting the receiving regions by increasing their innovation potential, economic growth, competitive advantage and the consumption of and demand for services (e.g. housing). (20).

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Figure 3. Top 20 destinations (left) and origins (right) of international migrants in 2020 (numbers in millions) (21)

3. Intellectual Property Rights (IPR)

In their research article, Archibugi and Filippetti made the following statement.

“Creative activities are in fact time consuming and costly while it is always uncertain if they will produce something that will generate economic returns. Once the inventor has discovered a new device or a musician has written a new symphony, it becomes easy for others to exploit their outcomes at very low costs. Without legal protection, inventors and authors are not in a position fully to exploit their works and appropriate the economic returns. As a result, in the absence of public regulation there would be an under-investment in creative activities that would be below a socially desirable level.” (22)

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• College: Brandenburg University of Applied Sciences
• Grade: 1.7
• Author: Christian Yonathan Wiratmo (Author)
• Publication Year: 2022
• Pages: 7
• Catalog Number: V1354154
• ISBN (PDF): 9783346868039
• Language: English
• Tags: globalisation, technology policy, national innovation system, innovation, R&D