2.4 Knowledge capital and human capital
Understanding the policy challenge presented by technology diffusion from the global frontier to New Zealand requires an assessment of the extent that the diffusion is in the form of knowledge capital or human capital. The new growth theory divides into two strands of thought with different messages about technological progress and diffusion.
The first strand, which is associated with Romer (1986, 1990), has as its focus investment in R&D. Technological advances come in the form of new knowledge capital. There is a research sector in the economy which produces blueprints for new products and processes. The policy suggestion is that investing in more R&D may yield large social returns. A second strand of the new growth theories, most commonly associated with Lucas (1988, 1993, 2002) suspects that the relationship between technological improvement and economic growth is more indirect (see DeLong forthcoming).
For Lucas, the main advances in knowledge are not generated by processes that are rather unembedded in the rest of the economy. Human capital will increase as a by-product or bonus from learning how to utilise new types and new generations of capital equipment. Learning-by-doing is the knowledge that is the by-product of the experience gained in the production of goods. New human capital arises as a bonus from figuring out how to implement new capital goods, figuring out how the production process needs to be reorganised, and figuring out how the new capital goods need to be re-designed. The productivity of workers with a given amount of human capital depends upon the human capital of the workers that they interact with. It is reasonable to think workers' skills are augmented through learning, and that workers learn from those around them. Thus, moving a worker from a group where the average level of human capital is low to one where the average level is high will raise her productivity. More highly skilled workers are likely to learn new technologies faster than less skilled workers. Still further bonus increases in productivity have to come with the increases in human capital from on-the-job training: the best way to become skilled and productive at handling modern technologies is to work at applying them and these improvements in workers' skills and capabilities are major social benefits. For Lucas (1993, 2002), the increased human capital resulting from learning by doing is a strong driver of economic growth.
The implication for New Zealand of the two strands of the new growth theory is about ease in availability of new knowledge. The differences between Lucas and Romer are about the existence of a single global pool of knowledge which New Zealand can draw on. New technology that is transmitted widely (such as through new blueprints) is a force towards convergence. The technological isolation implied by human capital being vested in specific individuals and groups favours divergence in national growth experiences.
If technological progress is in the form of new knowledge capital, the associate blueprints for new products or processes should be globally available on commercial terms and may diffuse quickly to New Zealand. If the growth of knowledge is through the research sectors of the global leaders producing more and more knowledge capital, openness allows the importing of those new blueprints to New Zealand at the world price.
If a significant part of technological progress is often indirect through learning by doing, technology diffusion may be indirect and may require the repeating of the learning by doing in New Zealand. This is why global connectedness differs in important respects from openness. If learning by doing is important, openness is not enough to maximise growth. New Zealand may need to connect directly to the individuals and firms that best allow the learning by doing and human capital accumulation to be quickly repeated.
Taking Lucas and Romer together, there may be two sources of new knowledge. There is a global pool of knowledge capital whose blueprints may diffuse quickly from the World’s technological frontier to New Zealand. The human capital that is the by-product of learning by doing may not diffuse as rapidly because it is invested in specific individuals and groups. Access to this form of knowledge requires face-to-face contact and linkages.
2.5 Active and passive technology transfer
Two basic mechanisms for technology diffusion or transfer have been emphasised: active diffusion through direct learning about and applying of foreign knowledge; and passive diffusion by employing specialised and advanced intermediate products invented abroad (Keller 2001). If the cost of obtaining technological knowledge by active or passive means is less than the cost of its invention, including R&D costs, a spillover has occurred.
Employing specialised and advanced intermediate products and equipment that have been invented abroad is passive diffusion. For passive diffusion to happen, a purchase must occur, which is an arm’s length transaction. New technology is embodied in the product that is being used. Its use should make domestic production more efficient. In principle, no new knowledge is passed on to domestic inventors, and the productivity of the domestic R&D sector does not increase. When the technology transfer is via an arm’s length transaction, the price is attempting to capture the full value of the innovation. However, spillovers are still possible because competition from the ever expanding variety of inputs and displacement by the product improvements made by others means that the price premium is often short and less than the full value of the innovation. Other firms will take advantage of the new technical knowledge, eliminating the innovating firm's profits by producing goods that are similar or more advanced (Grossman and Helpman 1991).
Openness is important to passive technology transfer because barriers to trade in new intermediate products and capital equipment should restrict productivity in technology importing countries. Eaton and Kortum (2001) attribute 25% of cross-country productivity differences to variation in the relative price of capital equipment, about half of which could be ascribed to barriers to trade in equipment (see also Jones 1994).
The most common form of active diffusion is direct learning about foreign technological knowledge. This means learning about the blueprint of the new technology so that the recipient country can reproduce the technology. If the cost of obtaining this knowledge is less than the cost of invention, a spillover has occurred. Such spillovers should increase the productivity of domestic inventive activity. It becomes part of the domestic knowledge stock off which local inventors build. No purchase is necessary for active spillovers. They can be transferred via product blueprints. Such transfer can be low-cost. However, without licensing agreements, the inventor may choose to keep the blueprints secret.
Active technology diffusion or transfer does not always require access to the new product’s blueprints. There are many other channels of active technology diffusion: demonstration effects (which can lead to reverse engineering); personal instruction; provision of expert services; hiring workers away from the innovating firm; conferences; face-to-face contact; scientific journals; libraries and the Internet; and patents.
The active forms of diffusion may be more spillover intensive because, apart from patent licensing, the diffusion is often through observation and imitation rather than after a payment for a good, service or intellectual property licence. The policy challenge for New Zealand may be that it needs to connect better to these more active (and perhaps more spillover intensive) channels of technology diffusion. There may be information and institutional gaps to be narrowed, and loose on-the-job human capital to be captured. The necessary off-shore contacts are required for direct learning and imitation and New Zealand–based human capital is required to absorb and adapt the new technology. Trade can provide the elements of a new technology, but other elements must be in place domestically for technology transfer to be successful: production capabilities; investment capabilities—the ability to expand production facilities and build new ones; and absorption capabilities—the ability in New Zealand to learn how to use the new technology and then adapt, improve, and develop it to suit local conditions and market needs.
