The KBE in developing countries: resources concentration

The theoretical framework of the KBE presented in the first section of this review is the same for developing countries. Opposing ideas to the KBE model and its territorial innovation model –the learning region- have been articulated recently by authors from developed and underdeveloped countries. A critical review of the learning region model, clusters and regional innovation systems is an example of these ideas (Fernández et al, 2008).

Christopherson and Clark (2007) pointed out that many of the learning region examples are from areas with direct and indirect subsidies to multinational companies. They also remarked that the use of public resources to support learning regions or clusters is justified by governments because of the strengthening of local labour markets, with an important role for higher education institutions and government support. This is also the case of the free economic zones installed in many developing countries.

The paradox is that rather than promoting development, these regions have concentrated resources, generate few jobs, do not promote innovation and generate uneven development (Christopherson and Clark, 2007). This phenomenon has been studied deeply in the Latin American context. For instance Fernandez et al. (2008) pointed out that regional processes explained from an industrial district model (ID), are the result of the so-called flexible accumulation which promoted local fragmentation and high concentration of resources via vertical links between firms and regions but lacking horizontal integration.

Moreover, Cimoli and Correa (2002) studied the effects of the specialization mediated by the presence of technology transfer, productivity improvements and production cost advantages in some areas and the negative effects on the neighbouring areas.

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They explained that the dynamic generated is a low growth trap which is explicated by the asymmetry observed in the trade balance because of the imports of high value added products, while the production is based on non-high-value- added activities, promoting an imbalance in incomes. Simultaneously, the process of industrial specialization has been focussed in small territories. In absence of local chain, this concentration is destroying the traditional productive fabric.

In fact, the KBE is a multi-level phenomenon in terms of territories and in terms of government instances involved in this economic model implementation, because all local, regional and national levels are involve. Consequently, before explaining the KBE factors in regional and local governance, it is necessary to provide a reminder here of some characteristics associated with developing countries and their participation in the global economy.

Storper (1998) pointed out that intensive production of high technology continues to be located in a few places in the globe.

However, a new international division of labour operates nowadays, giving rise to three different groups of countries. That means, when the former country hierarchy that structured the relationship between countries almost disappeared, a new organization of countries was originated. This new organization of countries includes a group that operates with the new rules for core and periphery.

Routine production areas are usually simple production locations not requiring any wider links with core investing economies. The extreme manifestation of this is that in some industries, especially those with low fixed capital requirements, there is a nomadic division of labour, with companies alighting in a country or even most specifically, in a community for a few years and then moving on as soon as wages rise above the global minimum, with consequences for the local labour market. According to Storper (1998) Central America is an example showing the vulnerability of these economies.

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In contrast, the same author explains that other countries like Brazil and Mexico play an intermediate role in the new hierarchy, while a third group improve their technological capabilities and move close to advanced economies in the world, at least in terms of economic growth. This last group is an example of the KBE in terms of learning and knowledge-based activities within the economy and in terms of inter-firm networks that can consolidate the model. Storper (1998) also considers this last group, which includes Singapore and Korea, as examples of success in the KBE model which he labels as the latecomer countries. According to Storper et al. (1998), the distance between pioneer and latecomer countries is not corresponding to developed and undeveloped countries, because the dynamic is totally different. By contrast, he proposed that institutional frameworks must be studied carefully.

GLOBAL MARKET RULES: LABOUR MARKET AND VALUE CHAINS

The labour market during the welfare state model in Latin American countries was very important in terms of social configuration. Hudson (2000) pointed out that many European countries have had an employment crisis, given that the neoliberal model is not focused on full employment. Barrientos (2009) mentioned that formal employment was the way to organize social services and at the end, was a vehicle for social stratification in the Latin American context⁸. In the new economic model, full employment is not the rule anymore, because the new rules of production and distribution are not generating sufficient jobs.

At the same time, the labour market is increasingly fragmented because of the rise of small groups with very high incomes, exacerbating social differences. As was pointed out by Storper (1998), the international division of the labour market is extremely important, in particular for countries located in the last group of the hierarchy, like Central American

8 See information about unemployment crisis in Chapter 5.

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countries which compete in the global market as providers of workers with low salaries, rather than either highly skilled workers or specialized activities.

The strategy for small countries to compete in the global market as low wageworker providers has consequences. For example, low wageworkers are usually non-qualified people. Because of that, countries which base their participation in the global labour market with non-qualified workers are not prepared to move to a different economic model such as the KBE, because the unqualified population is not capable to be incorporated into more qualified and better paid jobs.

The particularities of the KBE have influence over poor countries, not only in terms of global labour markets but in internal markets as well. For example, the KBE is strongly oriented to research and development (R&D). According to Maskell (1999), at least six weaknesses are present in small countries’ attempts to compete on this basis. As he explains, these kind of activities are of high risk, high cost, the labour market is usually not sufficiently big to achieve specialization and generate jobs, endogenous growth is not absorbed by the national context and technological spill-overs are not domestic. On last point, Maskell (1999) explains that it is like fertilizing a field and the neighbours receiving the benefits. Another problem is that domestic markets usually do not consume R&D products on a large scale; and finally, “R&D-intensive industries seem to be dependent on continuous flow of science-based inputs, creating solid ties between science, producers and advanced users in these industries” (Maskell, 1999: 1). This point has been studied in the Latin American context (see for instance Cimoli and Correa, 2002) where the transferred technology has concentrating rather than being a generator for integral change in the economy. Technologies generate gaps in terms of the labour market, and destroy the traditional productive fabric without generating alternatives. This lack of alternatives happens because the focus promoted by the presence of technology in a specific place isolates it from the rest of the region, promoting internal fragmentation.

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In contrast, Maskell (1999) pointed out that “It may be entirely possible to keep up a high level of prosperity while retaining a low-tech industrial specialization. Actually, the Nordic countries have obtained higher GDP per capita close to other developed countries by doing just that” (Maskell, 1999: 2).This is important to developing countries in Latin America, where the primary sector has been ignored.

Finally, the KBE is usually associated with micro, small and medium (M-SMs) high technology companies. Those companies are promoted to generate jobs for high qualified people as a solution for unemployment. However, it is a big challenge for small business in general and high technology in particular to survive in developing countries context. (State of Nation Report, 2009)

The labour market of the M-SMs enterprises is also related to two important phenomena:

on one hand the informal economy of the labour market (Castells and Portes, 1989) and on the other hand, the promotion of value chains as a strategy to survive (Gereffi, 1999;

Humphrey and Navas-Aleman, 2010). These two phenomena will be presented below.

With regard to informal economy, this means the rise of an important informal economy sector in developing countries, not only for low-skilled workers but also for new professionals. As Castells and Portes (1989) explain,

“the informal economy is thus not an individual condition but a process of income-generation characterized by one central feature: it is unregulated by institutions of society, in a legal and social environment in which similar activities are regulated”.

(Castells and Portes, 1989: 12)

Informal economy is usually connected with the formal economy, through strong specialized networks of production and distribution. For Castells and Portes (1989) there is a problem when the informal economy is promoted as an expression of entrepreneurial spirit: “In Latin America, for example, a well-orchestrated and well financed campaign has

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promoted whole sell informal economy as the best solution to these countries’ endemic economic crisis” (Castells and Portes, 1989:20). For Scott and Garofoli (2007) the success of entrepreneurial initiatives is not based on individual creativities but on structural supports.

For those authors, individual entrepreneurs cannot survive if there is not a business climate supported by structural and institutional conditions, and promoted via public policies. It is proposed that the role for government (regional and national) has to be a strong one not only in terms of programmes to promote entrepreneurial initiatives but also in terms of supporting them as well. Small firms can play a positive role in the economy with government support, with basic knowledge about production and distribution processes, and also with strong social networks to support the activity as a whole. At the same time, it is necessary to define policies toward specific protection for small firms.

At the moment, the informal economy cannot be reduced just by implementation of rigid planning or by total deregulation. The informal demands public policies in order to solve its problems (Portes, Castells and Benton, 1989).

Regarding value chains, they has been intensely studied, for instance in the textile sector (Gereffi, 1999) and in the agro-industrial sector (Humphrey and Navas-Aleman, 2010).

Gereffi et al (2005:5) pointed out that there are two different dynamics for value chains:

producer-driven and buyer-driven:

“In producer-driven value chains, large, usually transnational, manufacturers play the central roles in coordinating production networks (including their backward and forward linkages). This is typical of capital- and technology-intensive industries such as automobiles, aircraft, computers, semiconductors and heavy machinery. Buyer-driven value chains are those in which large retailers, marketers and branded manufacturers play the pivotal roles in setting up decentralized production networks in a variety of exporting countries, typically located in developing countries”(Idem, 2005:5).

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The dynamic of value chains has an important effect on labour market definition. For instance buyer-driven value chains are labour-intensive where specifications of quality, prices and markets are defined differently to the local markets.

Díaz et al. (2009) concluded that value chains are complex processes comprising more than groups of producers and consumers. Value chains comprise a rich dynamic involving many social actors with political, financial, environmental and commercial dimensions. Based on the extensive experience of coffee value chain, those authors showed the complex mechanism for a vertical and horizontal integration in the chain.

According to Stopper’s classification of countries, small countries compete also by geographical position in the global labour market. That means that sometimes, geographical location can define the participation of a small country in a value chain.

The case is exemplified by multinational service companies having branches around the world.

In several sectors of the KBE, vertical integration is the rule. In emerging economies, KBE is closely related to the presence of FDI applied to high technology assembly plants. Paus (2005) also discusses the role of value chains. In summary, taking advantage of the global dynamics in general and in high technology in particular is a two–fold problem. One is related to the possibility of endogenous capabilities of the small country to compete. The second one is the option to create value chains around multinational companies, offering opportunities for local enterprises.

The dynamic of the labour market is an indicator of the economic performance of a territory. The new economy defines different rules, exacerbating internal differences between economic sectors and also inside each sector. This dynamic is evident in terms of territories as well.

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Hudson (2000) called eco-Keynesian the new economic model that could be the basis for a social-economic change:

“Eco-Keynesian seeks to create a regulatory regime which will facilitate fuller employment and a more egalitarian distribution of work (both unwaged as well as waged work in the formal and informal sectors) alongside enhanced environmental quality and environmentally more sustainable patterns of production and consumption” (Hudson, 2000: 301).

As was explained before, developing economies are based on the attraction of FDI. That means that they are very dependent economies and the implementation of a different economic model, like the model described in the quote above is difficult. Even so, it is necessary to explore the applicability of alternatives in order to solve uneven development, principally because a new interpretation of territorial innovation models is required.

Some concerns are presented in the next sections: the proposal of the social region as a model for regional development, the role of higher education institutions and the role of regional policies.