Knowledge and Detour for Sustained Catch-up: Schumpeterian Analysis of the Asian Experience Numerous studies have focused

on the poverty trap, a highly relevant topic for low-income countries. By contrast, few studies seek methods with which to sustain growth beyond the middle-income level. Although several studies propose that developing countries can take off by targeting industries with comparative advantages, few discuss the issue of sustaining growth after the initial spurt of development, which tends to be short-lived. Thus, the questions that motivate this study are as follows: Which factors lead to sustainable growth? Which factors cause a short-lived catch-up, particularly for middle-income developing countries? The current study proposes technological capability as the key factor for sustainable progress. A detailed analysis of the innovation system at three levels (firm, sector, and country) is provided, using a neo-Schumpeterian perspective. We examine the diverse aspects of innovation systems, which include the localization of knowledge creation and diffusion, the concentration of knowledge creation among inventors or sectors, as well as the cycle times and originality of technologies. Empirical analysis shows that successful catching-up economies and their firms specialize in short-cycle technologies, thereby promoting the localization of knowledge diffusion and creation as well as enabling further development based on indigenous capabilities. This is a rational strategy because sectors with shorter technological cycle times see the frequent emergence of new technologies as existing ones rapidly become obsolete. Thus, latecomer economies need not master existing technologies dominated by the advanced economies,

which tend to be more active in sectors with longer cycle times. Additionally, a complementary relationship similarly exists between specialization in short-cycle technologies and the localization of knowledge creation, because using short-cycle technologies means relying less on existing ones dominated by advanced countries. The technological specialization described above (using short-cycle technologies versus long-cycle technologies) can be considered a detour strategy, because developing

economies do not attempt to replicate high-originality, long-cycle technologies common in advanced economies. Rather, the countries that successfully catch up with developed ones initially move in the opposite direction and use short-cycle or low-originality technologies. However, as these countries advance in terms of technological development, their own success affords or enables them to eventually move into more diverse fields that include high-

originality or longer cycle time technologies. This phenomenon has been occurring in East Asia since the 2000s. By contrast, a few less successful middle-income countries, such as Brazil and Argentina, adopted a direct replication strategy focused on high-originality technologies with longer cycles. This strategy may lead to continuous reliance on advanced foreign countries, which in turn creates few opportunities to localize knowledge creation. The analysis reveals the double-edged nature of short-cycle or frequently changing technologies: they can serve either as windows of opportunity or as additional barriers to entry. Although Korea and Taiwan achieved successful catching-up in short-cycle sectors, other lower-tier countries encountered difficulties. This has to do with the notion of truncated learning (Lall 1992, 2000), according to which frequent technological changes interfere with the effectiveness of learning, and acquired knowledge becomes obsolete or useless with the advent of new technologies. Latin American countries tend to register more patents in longercycle sectors, and their economic growth tends to be positively associated with specialization in longer-cycle technologies. The current study proposes a broad roadmap that recommends technological specializations for middle-income developing countries and trade-based specializations for low-income developing countries. The existing literature encourages low-income countries to follow trade-based specializations to exploit comparative advantages associated with their natural resource endowments. In this manner, such countries can command international competitiveness in certain industries that are typically inherited from higher-income countries, as predicted by the product life-cycle theory (Vernon 1962). Following this line, low-income countries may reach middle-income status. However, in countries that employ initial comparative advantages, labor-intensive industries depend on low wages and thus face medium-term risks associated with wage rate increases. Worse, new and lower-cost labor sites in next-tier countries always emerge to take over these countries positions in the global value chain. Thus, developing countries may be caught in the middle-income country trap associated with the so-called adding-up problem. Moving upward for higher value-added activities in the same industries, and/or gaining entry into newly emerging ones presents a longer-term challenge for developing countries. A developing country intending to move beyond the middle-income stage could implement technological specialization in short-cycle or emerging technologies, or establish upgraded niches in new value segments of current industries. However, these transitions require technological and design capabilities based on learning and local R&D effort. Initially,

latecomers attempt to enter mature segments in short-cycle technology sectors, as seen in the indigenous development of telephone switches in Korea, China, India, and Brazil. Upon successful entry, a more ambitious strategy of leapfrogging into emerging technologies may be attempted, for example, the development of digital TV in Korea or 3G wireless standards in China. Technological specialization involving leapfrogging may encounter more risks, particularly: 1) proper selection of technologies or standards, and 2) availability of the initial market for these technologies. Thus, gaining entry into new, emerging industries requires government assistance in the form of 1) technology policies that promote public-private

R&D consortia, and/or 2) exclusive standard policy, procurement, and user subsidies for initial market provision. These strategies entail much risk, but present the only available path toward achieving higher profitability, faster growth, and eventual high-income status. As such, the above method qualifies as a detour via niche strategy, which in hindsight may be viewed as a shortcut. Toward the end of this path, a latecomer economy can eventually become similar in status to high-income countries that focus on developing both long-cycle and short-cycle, and higher-originality technologies. One may question the rationality of all middle-income countries specializing in the same short-cycle technologies. Such an inquiry is analogous to the adding-up problem, which refers to the risks involved in the labor-intensive specialization practiced by all low-income countries. In other words, developing countries that compete against each other in the same area of specialization risk eliminating their initiatives and disrupting the industries. However, a specialization based on factor endowments is relatively fixed, with few opportunities for change. Specializing in short-cycle technologies does not entail a fixed list of technologies. Instead, the implication in sectors with short-cycle technologies is that new technologies always emerge to replace obsolete old ones. In other words, the criteria for technological specialization is less about the cycle length itself but more about the technological sectors that rely less on existing technologies and offer greater opportunities with newly emerging technologies. The short-cycle time variable is merely a proxy for such criteria. Continuous technological emergence suggests the availability to new entrants of fresh windows of opportunity that are not confined to old, dominant technologies. This concept is the exact opposite of the product life cycle, in which latecomers merely inherit old or mature industries or segments from incumbent economies.