Introduction

Research interest in the latecomers in economic development can be traced back to Gerschenkron (1962), who emphasizes the advantages of the latecomers, that is, these countries may adopt up-to-date technology after it has fully matured. However, the majority of the early literature has focussed on explaining how developing countries, including the newly industrialized economies, have attempted to catch up with advanced countries by assimilating and adapting the more or less obsolete technology of the advanced countries, as suggested by the so-called product life cycle theory of Vernon (1966). This view is consistent with the low road for development discussed in the preceding chapter, which refers to the situation of typical low- or lower middle-income countries specializing in low-value-added activities or low-end goods in long-technological-cycle fields. This strategy makes sense, and countries tend to achieve a certain degree of economic growth along this road. The next step is to initiate upgrading by switching to a middle road. The experience of successful catching-up economies indicates that switching to a middle road is accompanied by an increase in R&D effort and the arrival of a technological turning point of moving into short-cycle technologies and out of former specialization in long-cycle technologies.

Therefore, an intriguing question is why such a turning point does not occur in other middle-income countries, which continue to traverse the low road. One of the obvious causes of this situation is the weak R&D effort exerted by these middle-income countries. As presented in Figure 1.3, the R&D to GDP ratio of middle-income countries is as low as that of low-income countries, as the ratio does not increase proportionally to per capita income around the range of the middle-income level. An explanation for this weak R&D is market failure arising from the nature of knowledge as a public good. From this perspective, the actual amount of R&D is often less than the optimal amount that will prevail without market failure, such as flaws in capital and risk markets as well as market failure associated with imperfectly competitive industries and a spillover in learning. Therefore, government subsidies to support R&D are suggested, given the externality involved in the production of knowledge.