STWR - Share The World's Resources

The direct rationale of why Africa may have a comparative advantage in production and trade of innovative goods is beguilingly simple.  High quality educational skills are rather easier to acquire and maintain in the region than physical capital.  The institutional and economic environment can put non-mobile capital at risk and may make acquisition of foreign spare parts difficult.  Goods which have a high level of technical knowledge compared to physical capital are likely to be favoured.  The argument is one based on comparative, not absolute, advantage.  A developed country may innovate more cost-effectively than much of Africa, but in terms of the relative prices of innovative and capital intensive goods, the region has the advantage. 

Reality reasserts itself when the detailed requirements of high technology industries are examined.  The Western countries where they have grown have generally had high levels of research and development expenditure, and large and liquid stock markets.  The research and development expenditure ensures that innovative products are produced.  The large and liquid stock markets ensure that entrepreneurs can sell companies or raise more finance once they have taken the initial risks and established the company’s success.  Both appear to be necessary for the establishment of an innovative industry with a noticeable effect on economy-wide growth.  A recent study (*) of the new technological sector in Europe found that research expenditures are a prime determinant of expansion in patent numbers, and stock market size does not particularly matter for the expansion.  It also found that the contribution of internet and communication technologies to growth is probably more determined by the size of the stock market than research expenditures.  To overstate the case, we find that no research money means no innovation, and that small stock markets mean small growth benefits.

In Africa, neither of these two requirements have generally been satisfied.  Sub-Saharan research and development expenditures frequently run to just a few United States cents per person per year.  Data is patchy, but in 1997 for example, Zambia spent ten cents per person per year, while the United States spent $778.  Outside of South Africa, most Sub-Saharan stock markets are small, and several have just a handful of stocks and occasional trades.  Nevertheless, the financial system in the continent appears to be moving closer to fulfilling the structural requirement.  Stock markets have grown substantially recently, and there is research indicating that already-quoted companies prefer to use the stock market as a means of finance in preference to bank borrowing.  The preference is likely to lead to expansion of the market and so greater opportunities for new quotation.  It represents a sign of confidence in stock markets, at least compared with the notoriously volatile banking sector in many countries.

The bridge to an innovative technological industry is completed by research and development expenditure.  The European study just mentioned found that where some initial tradition of patenting and innovation exists, the most certain effect of expenditure was made by industry through higher education institutions.  African universities are perhaps not generally in a position to channel large quantities of research funds through them.  Business in-house research and development expenditure potentially offers rather greater impact on the number of patents created, although its effect is less certain than university funding.  Business may find it preferable because it is more directly controllable.

A surprising result which emerged from the European study was the comparative ineffectiveness of government research and development expenditure in increasing the number of patents generated.  It is likely that government expenditure tends to augment the general quality of the research environment, so that direct effects are not observable.  The result warrants investigation further before it can be used as the basis for advice for government policy.  In any case, Sub-Saharan public expenditure is dictated by the limited size of budgets.  Large research and development expenditures are not the best way to spend public money.  Broadly speaking, Africa is a technological follower rather than an innovator, so transfers of existing technological knowledge from abroad will generate far more social and private benefits than new research and development, and at lower cost.  Innovation by the African private sector does not supplant the transfers but supplements them and boosts profits.

Government’s importance may arise in the provision of a system of customised intellectual property rights.  Profit motivated innovation is supported by the protection of new products as they are brought to market.  The benefit of support must be weighed against the underdevelopment of domestic markets.  It would be unsuitable for a least developed country to provide intellectual property rights to the same degree as a Western European country.  The private and social harm done by violation is far lower.  A tiered system of punishment may be appropriate, reflecting the origins of the product and the extent to which it clashes with national intentions for export promotion.  Such customisation demands government effort.  A government hoping to encourage intellectual innovation in industry should not give entrepreneurs a blunt tool to work with.

James Waters ~ STWR Member

James Waters is a research fellow at the Westminster Buisiness School, University of Wesminster  

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