77214 MAY 2013 • Number 115 From Imitation to Innovation: Public Policy for Industrial Transformation Pierre-Richard Agénor and Hinh T. Dinh What role does public policy play in helping countries accelerate the industrialization process? This note aims to answer this question by applying a framework to analyze the process of transitioning from imitation to innovation. Based on a dynamic model of growth, simulations suggest that learning through imitation may enable firms to improve productivity significantly in a first stage, and that this may eventually benefit innovation activity as well. The model also shows how failure to switch from imitation as the main source of productivity growth to broad-based, homegrown innovation could lead to the “middle-income trap� that has befallen some countries. After the failure of import substitution policies in the The Role of Industry in Economic 1960s and 1970s in Latin America and elsewhere, indus- Development trial policies were largely rejected during the 1980s and Recent debate on industrial policy has featured two main po- 1990s. However, debate on the role of these policies in de- sitions: the neo-liberal view, which remains critical of any type velopment has revived in recent years. Key issues being dis- of (selective) intervention, and the neo-structuralist view, cussed include ways to promote the manufacturing sector which argues in favor of a revival of selective industrial poli- and transitioning from an imitation regime, based on cheap cies (as well as other types of government interventions), in- labor and imported technologies, to a skill-intensive innova- cluding the protection for infant industries.1 It is interesting tion regime. to note that this debate on industrial policy has mostly been This note, which draws on Agénor and Dinh (2013), be- about how to grow this sector, and not about why. This is gins with a brief overview of the role of industry in economic probably because economists have long recognized the impor- development and then presents an analytical framework de- tant role of industry (mainly manufacturing) as an engine of signed to explore the role of industrial policy in the transition growth in economic development. In fact, throughout the from imitation to innovation. The framework is then applied world’s economic history, there has rarely been a country that to a variety of policy experiments involving increased provi- has become industrialized without engaging in manufactur- sion of infrastructure as well as subsidies to education and ing2—transforming first from a mostly agrarian society to one reform of property rights. The results are discussed in the that is more industry driven, before relying on services as an context of their broader policy implications. engine for growth and employment.3 This led Kuznets (1959) 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise to note that modern economic development is characterized ered an economy populated by individuals (grouped into by a structural shift in the composition of output away from families) with different innate abilities, firms, and a govern- agriculture and into manufacturing. Even in developed coun- ment. The “economy� has five production sectors: one pro- tries where the share of manufacturing in output and employ- ducing a homogeneous final good, two producing intermedi- ment has been stagnant or declining, there is evidence that ate goods (core and enhanced inputs from now on), and two manufacturing involves more production links with other creating designs, or blueprints used for the production of sectors and the transfer of more production skills than is the each of the two categories of intermediate inputs. The design case in nonmanufacturing sectors.4 Indeed, between 1950 sectors are “imitation� and “innovation� sectors, and their and 2005, the share of the manufacturing sector in gross do- relative importance—a measure of industrial diversification, mestic product (GDP) doubled in the fast-growing econo- as discussed later—varies in the course of development. The mies in Asia (the Republic of Korea, Malaysia, Singapore, and final goods are produced by combining both private and pub- Taiwan), whereas it stagnated in Latin America and Sub-Saha- lic inputs and are used for consumption, private and public ran Africa.5 Manufacturing provides employment opportuni- investment, and the production of intermediate goods. Public ties for workers with a great variety of skills, including those inputs consist of basic public infrastructure, which includes with little education as well as those highly educated, and in- roads, electricity, water and sanitation, basic telecommunica- stills discipline in the workforce. tions and advanced infrastructure, which consists essentially But another key channel by which manufacturing con- of high-speed telecommunications. Both types of infrastruc- tributes to economic development is through learning by do- ture services are provided free of charge, but are subject to ing, first through knowledge externality from imitation ac- congestion. Production in the design sectors combines public tivities, and later through innovation activities. This is how and private (labor) inputs as well, but in different ways. the industrial revolution spread from Great Britain to coun- Firms in the final good and design sectors are perfectly tries in Western Europe, the United States, Russia, and Japan competitive, whereas those in the intermediate good sectors (Chandra, Lin, and Wang 2012). By providing an ever greater are monopolistically competitive, each producing a differenti- variety of inputs (some of which are in the form of new capi- ated variety of goods. The total number of blueprints existing tal goods) with an ever greater degree of technological sophis- at a certain point in time coincides with the number of inter- tication, knowledge creation fuels the development and ex- mediate input varieties and represents the stock of nonrival pansion of the manufacturing sector. Initially, technological knowledge available in the economy. The composition of that knowledge can be acquired through mere imitation of foreign stock is used later on to measure industrial structure and to processes; but if imitation entails decreasing returns, whereas study its transformation over time. Most importantly, knowl- innovation occurs under constant or increasing returns to edge accumulated in the imitation sector creates an external- scale (at least for a while), over time the expansion of the man- ity that promotes productivity in both design sectors, but this ufacturing sector requires a shift from imitation activities to benefit is subject to diminishing marginal returns. Finally, la- true innovation. bor (both skilled and unskilled) is perfectly mobile between At the same time, this transition may require access to the final good and design sectors. highly skilled labor and other inputs, such as advanced com- Each family maximizes utility so as to determine the op- munication and information technologies, and these can be timal evolution of consumption expenditure over time. Indi- critical to move from “light� manufacturing activities, which vidual members also decide whether to enter the labor force tend to be associated with an imitation regime, to “heavy� as unskilled workers or (following a training period) skilled manufacturing activities, which require a broader and more workers. This decision depends on the relative skilled-un- sophisticated set of inputs. Thus, in this context, industrial skilled wage, adjusted for the cost of training. Thus, the op- policy should not only increase emphasis on innovation and portunity cost of becoming skilled is equal to the discounted knowledge or learning externalities associated with imitation, value of foregone unskilled wage income, because workers it must also increase emphasis on fostering local absorption earn income while training. In equilibrium, there exists a capacity and technological innovation for the development of threshold level of ability which is such that all individuals manufacturing. These key issues are addressed in Agénor and with ability lower than that value choose to remain unskilled, Dinh (2013). and all individuals with ability greater than that value choose to undergo training and then enter the labor force as skilled From Imitation to Innovation: workers. A Formal Framework Production of final goods requires the use of skilled labor, To study the process of transition from imitation to innova- unskilled labor, private capital, basic public infrastructure, tion, and the role of public policy in that context, Agénor and and the combination of core intermediate inputs and en- Dinh (2013) developed a dynamic framework. They consid- hanced intermediate inputs. There are two sets of intermedi- 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise ate good producers: those producing core inputs, based on imitation can be a “stepping stone� for true innovation. In- blueprints produced by the imitation sector, and those pro- deed, this exercise assumes that imitation enhances produc- ducing enhanced inputs, based on designs produced by the tivity in the innovation sector. This specification accounts for innovation sector. Each firm produces one, and only one, an efficiency gain associated with imitation—if only during a horizontally differentiated intermediate good. In both cases, transitory phase: the more a country engages initially in copy- production of each unit of intermediate goods requires one ing, the more its workers become familiar with existing inno- unit of the final goods. Each producer of core intermediate vations made abroad, and the easier it becomes for them to goods pays a one-off license fee to the firm that produced the innovate as well. Finally, in the innovation sector, a poorly relevant design in the imitation sector, before producing its functioning system to enforce property rights (namely, ad- own specialized goods. Thus, the license fee represents a fixed ministration of patents) creates inefficiencies, which translate entry cost. Once the fee is paid, each producer sets its price to into a lower ability of firms to appropriate the rents created by maximize profits, given the perceived demand function for their activity, that is, the profits of the intermediate good firm its goods, which determines marginal revenue. In equilibri- using their design. Finally, the government levies a tax on final um, the license fee must be set equal to current profits. good outputs, invests in both basic and advanced infrastruc- Each producer of enhanced intermediate goods must ture, and provides services free of charge. purchase an infinitely lived patented design from the innova- Figure 1 summarizes the production structure and sup- tion sector. Once the patent is paid, each intermediate good ply side of the model. The key result of the model is that it can producer also sets its sale price to maximize profits, given the be used to derive an index of industrial structure, defined as perceived demand function for its goods. The price of a pat- the relative ratio of the stocks of imitative to total knowledge. ent is equal to the present discounted stream of profits that During the transition, the index tends to fall if the economy is the potential producer could make by producing the interme- converging toward an innovation-based regime; the “modern� diate input. or “innovation-based� economy is achieved when the imita- Designs are produced in two sectors: an imitation sec- tion sector becomes a residual, so that the index takes a rela- tor, which employs only unskilled labor, and an innovation tively small value. sector, which employs only skilled labor. In the imitation sec- Calibration and Initial Conditions tor, local firms invest resources to absorb and adapt the infor- mation needed to replicate new products invented abroad, Because the model is complex, numerical techniques must be that is, “reverse engineering.� Thus, imitation differs from used to establish its properties and illustrate policy outcomes. innovation in that the number of goods that can be copied at For this exercise, the model is calibrated for a low-income any point in time is limited to the rate at which imitable Figure 1. Production Structure and the Supply Side goods are being discovered imitation sector innovation sector elsewhere. Both imitation and inno- vation create two kinds of license fee patents knowledge: private knowl- edge, which is acquired (for a designs designs price) by intermediate good unskilled core enhanced skilled firms to produce a new pro- labor immediate intermediate labor duction input, and public goods goods knowledge, which spills over to other firms in the imita- advanced tion and innovation sectors infrastructure and increases productivity there. In addition, the frame- work assumes that there is an basic �nal good externality from imitation infrastructure private capital for innovation—as agents relative wages learn to imitate, they also de- velop cognitive skills that help them innovate. This is labor supply decisions consistent with the idea that Source: Agénor and Dinh (2013). 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise economy characterized initially by: (i) a positive but low extent can public policy help to accelerate the transition? As growth rate in income per capita; (ii) an embryonic innova- noted earlier, this is the definition of industrial policy. tion sector and relatively more developed imitation sector; Public Policy Experiments (iii) high costs for acquiring skills;(iv) a large, unskilled labor force, employed in both the imitation sector and final good To illustrate the role of public policy in promoting industrial production (more so in the latter); (v) a small fraction of transformation in the model, three experiments were con- skilled workers in the labor force, employed almost entirely in ducted: first, on a policy aimed at promoting access to basic final good production (in line with the assumption that the infrastructure; second, on a training subsidy aimed at reduc- innovation sector is negligible in size); (vi) limited availability ing the cost of acquiring skills; and third, on a policy aimed at of basic infrastructure and almost nonexistent advanced in- improving enforcement of intellectual property rights. To frastructure; and (vii) a correspondingly relatively low share highlight the role of policy complementarities, the experi- of public investment in basic infrastructure and a much lower ment also considered a sequential, composite program that share of advanced infrastructure. At the same time, both involves combining some of these policies with investment in stocks of public capital are relatively small in proportion to advanced infrastructure. the private capital stock. Provision of basic infrastructure Figure 2 shows the evolution of the economy’s industrial Consider first a permanent, budget-neutral increase in the structure based on the above initial conditions. In the base share of spending on basic infrastructure, financed by a cut in case, the relative size of the imitation sector increases slightly unproductive spending. The first impact of this policy is to at first, and comes down fairly slowly, dropping to close to promote activity in both the final good sector and the imita- zero after about 80 years. By contrast, if the parameter that tion sector. Both effects tend to increase the marginal product measures the strength of the externality associated with imi- of unskilled labor and therefore the economywide wage for tation activities for the innovation sector is higher, the relative that category of workers. In the initial phase, this tends to re- size of the imitation sector falls at a faster pace; in the case duce incentives for workers to acquire skills, and therefore to shown in figure 2, the index of industrial structure drops to reduce the (effective) supply of skilled labor. However, the close to zero in about 60 years. Thus, the benchmark case con- increase in activity in the imitation sector enlarges the pool of sidered is still a rather mixed picture. The learning effect as- knowledge accessible to all workers and generates two types of sociated with imitation activities does have a substantial im- externalities: it raises productivity not only in the imitation pact on industrial structure, and the economy does become sector, but also in the innovation sector. In turn, this puts up- eventually a mature, innovation-based economy. That is, giv- ward pressure on skilled wages, which mitigates the initial en the set of initial conditions (as well as public policies) de- adverse effect on individual incentives to invest in education. fined, intrinsic economic forces are sufficient to eventually The net effect on economic growth depends on the extent to ensure that the economy moves from an imitation-based re- which these opposite effects on skilled labor supply offset gime to an innovation-based regime. However, left on its own each other. The results show that, as can be expected, the rela- (in the absence of additional interventions), this process tive size of the imitation sector increases at first; however, as would take decades to occur. The question then is, to what the spillover effects of imitation-related knowledge for inno- Figure 2. Index of Industrial Structurefor Different Values of vation begin to kick in, this increase is reversed. Knowledge ExternalityAssociated with Imitation Activities Training subsidy 1.0 Consider a policy aimed at permanently reducing training 0.9 costs. As discussed earlier, this cost is assumed to be propor- 0.8 benchmark tional to the skilled wage. For this analysis, assume that the 0.7 case higher knowledge policy is financed through a reallocation among components 0.6 externality associated of unproductive spending and is therefore budget neutral. 0.5 with imitation activities Naturally enough, the reduction in the training cost induces 0.4 0.3 more workers to invest in education. The increase in skilled 0.2 labor supply, at first, tends to lower wages in that sector; how- 0.1 ever, because the increase in skilled employment occurs both 0 in the final good sector and in the innovation sector, promot- 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 ing activity there as well, a secondary, indirect effect is also at years play: the increase in the variety of innovation-based (or en- Source: Agénor and Dinh (2013). Note: The index of industrial structure, which is between 0 and 1, is defined as the hanced) intermediate goods helps to promote activity in the relative ratio of the stocks of imitative to total knowledge. final good sector. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise In addition, because the shift toward innovation raises (iii) no training subsidy for the first few years, then a subsidy labor productivity in that sector, the initial effect is magni- that reduces the cost of training for several years, which is fied. At the same time, however, the increase in the supply of then reduced permanently thereafter; and skilled labor in the final good sector tends to raise the mar- (iv) there are no efforts to improve the enforcement of prop- ginal product of unskilled workers, which tends to raise the erty rights for the first few years, and then gradual im- unskilled wage—thereby mitigating the initial effect on incen- provements in the enforcement of property rights until tives to acquire skills. Numerical simulations show that the firms receive the full patent price associated with their impact of this policy on a country’s industrial structure de- innovations. pends on the strength of the effect of individuals’ abilities on Of course, there is a significant element of arbitrariness wages; the smaller this effect is, the weaker the impact, which in the timing of these policies. But this experiment is trying to means that individuals with lower abilities would earn less. capture a policy focusing first on improving access to basic in- Even though the quantitative effect of the training subsidy on frastructure (through a “big push� in public investment) and the industrial structure is relatively small, the net effect of the imitation activities; next, on efforts to promote human capi- training subsidy is a higher supply of skilled labor and higher tal accumulation through training subsidies and enforcement activity in the innovation sector, thereby explaining the initial of property rights; and, soon after, on improving access to ad- increase in the relative size of that sector. vanced infrastructure to promote innovation. This reflects the empirical finding from China, that the nature and depth Enforcement of property rights of government policies assisting manufacturing firms vary ac- Consider a reform of property rights that is designed to pro- cording to the business lifecycle of these firms (Dinh et al. mote innovation activities—such as improved functioning of forthcoming). the patent bureau, for instance. This is captured by assuming Numerical results suggest that this sequential reform that firms in the innovation sector earn a higher fraction of program has a significant impact on speeding up industrial the patent price. The economic effects of this policy are fairly transformation; its effect is stronger as the measure of the pa- intuitive. By increasing the ability of firms engaged in innova- rameter of the strength of the externality associated with imi- tion to secure the return to their activities, improved protec- tation activities for the innovation sector increases. Thus, if tion of property rights also tends to raise labor demand in that external learning effects are strongly associated with imita- sector—and thus wages as well. The increase in skilled wages tion, a sequential reform program that is front-loaded on ac- induces more workers to invest in skills, thereby promoting cess to basic infrastructure can speed up the transition pro- growth. Thus, the growth effect is unambiguously positive. cess to a mature economy. The reason for this, of course, is due to the fact that poor en- Put differently, in a low-income economy, where to begin forcement of property rights is assumed to create a dead- with unskilled labor is abundant, the imitation sector rela- weight loss; no one benefits from intellectual piracy. If, alter- tively small and the innovation sector embryonic, public in- natively, it is assumed that there are some benefits associated vestment in basic infrastructure yields higher marginal with poor enforcement (because some firms engage in piracy, growth benefits than investment in advanced infrastructure. and those firms employ a sizable number of workers, for in- The key reason is that expansion of activity in that sector stance), it is possible that the net effect would be ambiguous. would remain constrained by the lack of skilled workers in the Numerical results show that a policy aimed at securing prop- labor force. In a second stage, increased investment in ad- erty rights may have a significant impact on accelerating the vanced infrastructure—if preceded by a policy that induces process of industrial transformation—not only because it in- more individuals to acquire skills and accompanied by a poli- creases direct returns to innovation, but also because it pro- cy that helps to promote the enforcement of property rights— vides greater incentives for workers to acquire skills. would generate higher marginal growth benefits than invest- Sequential, composite reform program ment in basic infrastructure. The learning externality Finally, consider a sequential program, characterized by the associated with imitation activity in the first stage can help following components: magnify the benefits that can be generated in this second (i) during an initial period of years, the share of spending on stage. basic infrastructure is increased and then reduced gradu- Policy Implications ally over time; (ii) during an initial period of several years, the share of The foregoing discussion has important implications both for spending on advanced infrastructure is kept at its (small) growth-promoting policies in today’s poor countries in Sub- benchmark level, is then increased for a subsequent peri- Saharan Africa and, more generally, for understanding the od of several years, and finally reduced gradually and kept industrial transformation process whereby countries move constant afterward; from imitation to innovation. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise During the past decade, Sub-Saharan Africa’s GDP grew industry-specific vocational training programs—that may at an average of over 5.2 percent per year between 2001 to contribute to lowering the cost of acquiring skills and pro- 2010, compared to an average of -0.4 percent in the 1990s mote learning-by-doing effects. (Dinh et al. 2012).6 However, to a large extent, this outcome This approach would help channel scarce resources for was the result of booming commodity prices, rather than a infrastructure services to specific locations or industries, deep transformation of the industrial structure. Yet, as noted, thereby mitigating the adverse effect that the lack of access to such transformation is essential to generate sustained growth these services has had on production costs and labor produc- in output and employment—as illustrated by the experience tivity. As documented by Eifert, Gelb, and Ramachandran of East Asian countries during the 1960s, and more recently (2008) and Foster and Briceño-Garmendia (2010), for in- by China during the 1980s. Indeed, these countries initially stance, indirect costs related to infrastructure services con- followed a growth strategy that relied heavily on the develop- tinue to account for a relatively high share of firms’ costs in ment of light manufacturing, taking advantage of relatively poor African countries.8 If indeed the lack of access to infra- cheap labor and their ability to imitate foreign goods. The les- structure is the most significant constraint on the expansion son from East Asia’s experience in transitioning from low- to of labor-intensive light manufacturing industries, then it is middle-income status is clear: a sustainable growth strategy in important for African governments to focus their scarce re- Sub-Saharan Africa should focus initially on increasing the sources in that area, ensuring that economies of scale are productivity of medium and large formal firms and on allevi- properly exploited.9 ating these firms’ key constraints, namely, access to basic in- The model presented in this note, and the simulation frastructure (most importantly, electricity, see UNIDO results that it produced, strongly support this strategy. The [2011] and Andersen and Dalgaard [forthcoming]). As noted key features of the model’s calibration accurately capture by Dinh et al. (2012), as local producers increase the scale of some of the characteristics of a typical low-income economy their operations, improve the quality of their products, and in Sub-Saharan Africa: an embryonic innovation sector and a accumulate experience with technology, management and relatively more developed imitation sector (yet small in terms marketing, they become better positioned to take advantage of the size of the economy); the high costs of acquiring skills, of emerging export opportunities. As China’s competitive possibly due to a lack of tangible collateral for securing loans edge in the global export market in light manufactures con- to finance human capital accumulation; the small fraction of tinues to erode—as a result of steeply rising costs of land, regu- skilled workers in the labor force, and correspondingly large latory compliance, and especially labor (including both wages unskilled labor force, operating partly in the imitation sector; and benefits) in the country’s coastal export manufacturing and the limited availability of basic infrastructure and almost centers—the redistribution of cost advantages in labor-inten- nonexistent advanced infrastructure. The simulations help sive manufacturing presents an opportunity for Sub-Saharan emphasize that learning through imitation may enable firms Africa to start producing and exporting a wide range of light to improve productivity significantly in a first stage, and that manufacturing goods. this may eventually benefit innovation activity as well. Put This strategy is feasible because Sub-Saharan Africa has differently, imitation contributes to creating the knowledge two major potential advantages that could help increase its base necessary for fostering innovation: by doing so, it helps to competitiveness in light manufacturing. The first is a labor increase labor productivity and create incentives for workers cost advantage, and the second is an abundance of natural re- to invest in higher education. sources that can supply raw materials, such as skins for the The experience of East Asian countries in transitioning footwear industry, hard and soft timber for the furniture in- from middle- to high-income status also provides important dustry, land for the agribusiness industry, and so on. Even lessons for Sub-Saharan Africa. As noted earlier, these coun- with its relatively low-skilled workforce, Sub-Saharan Africa tries successfully relied on a growth strategy based on low wag- could become competitive in a broad range of light manufac- es and technology imitation. However, once the pool of under- turing sectors. In the apparel sector, for instance, small num- employed rural workers started to shrink and wages began to bers of managers and technicians can guide hundreds of rise, competitiveness deteriorated and productivity gains asso- workers.7 ciated with sectoral reallocation and technology catch-up be- For the longer term, upgrading to more complex pro- gan to disappear in many countries. Rising wages made labor- duction will undoubtedly require a better-trained workforce intensive manufacturing exports less competitive on world than is currently available. But the expansion of light indus- markets. At that point, some countries (most importantly Ko- try need not await increased school enrollment and better- rea) were able to switch from imitation as the main source of quality schooling. Industrial transformation can begin rap- productivity growth to broad-based, homegrown innovation. idly by targeting promising sectors with modest skill Other East Asian countries, however, were unable to requirements and then adopting policy measures—such as make that switch, and as a result ended up in a so-called mid- 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise dle-income growth trap, with a substantial decrease in growth vices between and within industries in the production pro- and total factor productivity. As discussed by Agénor, Canuto cess of manufacturing and nonmanufacturing industries. and Jelenic (2012), avoiding this trap requires timely imple- 5. In fact, Sub-Saharan Africa’s share in global manufacturing mentation of public policies aimed at improving access to ad- has even fallen in recent decades, see Dinh et al. (2012). vanced infrastructure; improved protection of property 6. These numbers may actually underestimate the region’s rights; reform of labor markets; and promotion of access to performance in recent years. According to Young (2012), finance. These policies have proved key to fostering techno- measures of real consumption based on a variety of nonstan- logical learning and attracting talented individuals into re- dard indicators suggest that living standards in Sub-Saharan search and development activities, and have allowed inventors Africa have risen three to four times faster than the rates indi- to finance the development of their ideas. The lesson from cated in conventional data sets. East Asia’s experiences for today’s poor countries in Sub-Saha- 7. As noted by Dinh and Clarke (2012), for instance, special- ran Africa is again very clear: governments in the region ists report that inexperienced workers can learn to operate should act early—rather than late—to take advantage of low sewing machines in less than two weeks. wages and the gains from imitating foreign technology to pro- 8. Although the survey results reported in Dinh and Clarke mote knowledge spillover and boost productivity. (2012) suggest that firm managers in the region are most con- The numerical results discussed in this note also support cerned about electricity, other areas of infrastructure may the view that, following a first stage where countries should also constrain firm performance in Africa. Eifert, Gelb, and invest significantly in basic infrastructure, policies aimed at Ramachandran (2008) highlight, in particular, the high cost promoting innovation must be put in place without delay; of transportation and communication in Sub-Saharan Africa. these policies include institutional reforms aimed at promot- 9. The successful experience of East Asia with industrial ing property rights related to research activities and the provi- parks is an example; instead of waiting to solve the infrastruc- sion of advanced infrastructure, which is essential to encour- ture problem for the whole country, they focused instead on age the buildup of national and international knowledge providing infrastructure for enterprises located inside the networks. Because of the long gestation lag, this second stage parks. should begin well before the benefits of low wages and imita- References tion of foreign technology begin to yield diminishing returns or are completely exhausted. 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Washington, DC: Institute facturing Industries in the U.S. Economy. Washington, DC: Office for International Economics. of Business and Industrial Analysis, Economics and Statistics Nuebler, Irmgard. 2011. “Industrial Policies and Capabilities for Administration. Catching Up: Frameworks and Paradigms.� Employment Work- Young, Alwyn. 2012. “The African Growth Miracle.� Journal of ing Paper Series 77, International Labour Organization. Political Economy 120 (August): 696–739. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 8 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise