This section gives six main conclusions on the relevance of innovation studies to developing countries. Issues that cut across these points are discussed in Section 1.4.2.

1.4.1.1 Strategies towards innovation

An obvious place to start is with the concept of the firm that emerges from innovation studies. This concept is quite sharply differentiated from the firm of standard Marshallian microeconomics. In innovative industries, firms compete primarily by introducing new products and processes, and not by simply adjusting to the optimum position on a given short-run cost curve. Firms may follow various strategies: they may seek to innovate; they may imitate products and processes brought in by innovating firms; or they may continue with older products and processes and seek other advantages (to compensate for their technological disadvantages), like lower material costs, or lower real wages.

Innovative and imitative strategies require that firms accumulate the appropriate technological capability. Firms' positions in this regard are (obviously) a function of their history: the capacity to innovate or imitate is 'path dependent'. Non-innovative firms try to compete on price-and since product markets are inherently imperfect (partly because of innovative competition), they may survive despite technological disadvantages. These ways of differentiating between firms (by history) might be the basis of a useful typology of industrial firms-somewhat similar to typologies of modes of production employed by agricultural economists. Such a typology would help industrial researchers in developing countries to distinguish the different responses there might be to particular policies - for example, to policies to encourage firms to import technologies from abroad, or to build up their technological capabilities. It would also help to specify which firms would follow technologically static, cost-reducing survival strategies.

1.4.1.2 Accumulation of technological capability

Innovation studies strongly emphasize firms' historic accumulation of technological capability as a basis for innovative competition (i.e., for attaining innovative leads and for successful imitation). There is a presumption that imitation usually calls on a subset of the technological capabilities needed for innovation. In industries in developing countries, imitative strategies, often based on licensing contracts or on deals with foreign machinery suppliers, will have priority. In more technologically advanced countries, there may well be some incremental adaptive innovations. Innovation studies point out the importance of policies to build up relevant capabilities for imitation in Third World industries. They also indicate that access to 'codified' (i.e., 'written') knowledge contained in licence agreements is not sufficient for a firm to imitate successfully, The transfer of 'tacit' knowledge about the new product and/or process is also needed, and this knowledge can usually be obtained from innovation firms. Although there is a consensus that accumulation of technological capability is an essential dynamic requirement for most strategies in innovative industries, knowledge of the underlying learning process is still imperfect, especially in developing countries. It is agreed that learning (including 'learning-by-doing') is not automatic but needs allocation of resources.

1.4.1.3 Changes in the global economy

As far as industries in developing countries are concerned, the need to confront innovative competition and the capabilities required to sustain it has become more pressing because of two important shifts in the international economy. First, there has been a shift away from import-substituting and other closed-economy approaches to industrialization, towards industrialization with a more open-economy emphasis, including, of course, export promotion. Second, new technological developments (in microelectronics, biotechnology, and other fields) have penetrated many sectors that were technologically stagnant during the 1970s and most of the 1980s.

The first of these shifts means that industrialization policies are increasingly concerned with the entry of domestic firms into industrially oligopolistic markets. The second means that innovative competition arises in an increasing number of sectors, including for example, textiles and garments. Third World industrialization policies need increasingly to take innovative competition into account.

1.4.1.4 Intersectoral variability

Despite the widening field of application of new technology and innovative competition, there are still considerable differences between sectors, in terms of the demands for technological capabilities for imitative strategies. Firms in developing countries naturally tend to enter international markets in technologically less demanding sectors. In countries where industrialization has been particularly successful (like some NICs for example), initial entry into technologically simple international sectors has been followed by subsequent entry into technologically more sophisticated industries with higher value added. This strategy (of climbing the technological ladder) has been associated - especially in South Korea- with highly successful learning processes and very rapid growth of exports, based on increasing value added per worker, and accompanied by rising real wages. Other countries, like Hong Kong, have been slower to diversify 'upwards'. Innovation studies, especially as they relate to imitative strategies, give a picture of the kind of learning processes involved in these alternative strategies.

There are, finally, other countries whose industries are initially able to export using relatively old product and process technologies, but whose ability to maintain their position in international markets comes to depend on other (i.e., nontechnological) means of cost reduction. In the longer run, the welfare implications of keeping firms in export markets despite static and backward technology can become unfavourable-for example, if real wages have to be forced down.

1.4.1.5 Intrasectoral variability

There are also intrasectoral differences in the incidence of innovative competition. In some sectors firms using older processes and products adopt strategies which allow them to survive despite rapid technological change in other parts of the sector. They are able to do this because a residual demand may remain for older, less sophisticated products in a part of the market. Firms in developing countries are sometimes able to exploit such 'niche' markets, which result from the high degree of market segmentation and imperfection which characterize innovative industries.

1.4.1.6 Nature of competition

The nature of competition in innovative industries - and the increasing range of industrial sectors experiencing innovation-raise special problems for firms in the least developed countries. It is widely presumed that firms are technologically backward, and, perhaps more important, technologically stagnant and therefore lacking experience in any kind of learning process. Very little research has been done on such firms. Thus, it is as yet not clear how far such strongly pessimistic assumptions are justified.