Industrial Development Report 2016

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Industrial Development Report 2016 The Role of Technology and Innovation in Inclusive and Sustainable Industrial DevelopmentCopyright © 2015 United Nations Industrial Development Organization e Th designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. Designations such as “developed”, “industrialized” and “developing” are intended for statistical convenience and do not necessarily express a judgment about the state reached by a particular country or area in the develop- ment process. e m Th ention of firm names or commercial products does not imply endorsement by UNIDO. Material in this publication may be freely quoted or reprinted, but acknowledgement is requested, together with a copy of the publication containing the quotation or reprint. For reference and citation, please use: United Nations Industrial Development Organization, 2015. Industrial Development Report 2016. The Role of Technology and Innovation in Inclusive and Sustainable Industrial Development. Vienna. Cover image: iStock. UNIDO ID/447 Sales Number: E.15.II.B.47 ISBN: 978-92-1-106454-4 eISBN: 978-92-1-057637-6Contents Page xiii Foreword xv Acknowledgements xvii Technical notes and abbreviations xviii Glossary 1 Executive summary Part A T he role of technology and innovation in inclusive and sustainable industrial development 21 Chapter 1 Moving towards inclusive and sustainable industrial development 21 Pursuing rapid, long-run and stable growth 27 Manufacturing development and structural change 34 Technological change within manufacturing 39 Structural change and inclusive and sustainable industrial development 46 Notes 49 Chapter 2 T echnological change, structural transformation and economic growth 49 Wanted: Technology and innovation to drive productivity and economic growth 54 Making technology and innovation work together 60 Building technological capabilities in global trade and global value chains 74 Notes 77 Chapter 3 Sustaining economic growth 77 Specialization or diversic fi ation —d on’t put all your eggs in one basket 81 Manufacturing is still vital for sustaining growth 86 Technological opportunities within manufacturing and beyond 91 Creating the conditions for technology to sustain economic growth 99 Notes 103 Chapter 4 Promoting social inclusiveness 103 Inclusiveness and industrialization 108 General trends in social inclusiveness 116 Getting technology to drive social inclusiveness 120 Notes iiiContents Page 123 Chapter 5 Moving towards greener structural transformation 123 Change in the production process 130 Change in the production structure 139 Conditions facilitating the adoption of environment-friendly technologies 139 International agreements 143 Notes 145 Chapter 6 Designing and implementing inclusive and sustainable industrial development policies 145 Managing trade-offs 148 Policy framework and taxonomy 148 Technology policies — early, middle, and late stages 149 Industrial policies for innovation 156 Competitiveness policies and global value chain integration 161 Complementary policies 162 Good practices in formulating policy 165 International cooperation on technology and innovation policies 168 e 2 Th 030 agenda for sustainable growth 169 Notes Part B T rends in m anufacturing valued added, manufactured exports and industrial competitiveness 173 Chapter 7 Industrial trends: manufacturing valued added, exports, employment and energy and resource efficiency 173 Trends in manufacturing valued added 182 Trends in manufactured exports 188 Manufacturing employment trends 192 Resource eci ffi ency and energy intensity in manufacturing 197 Chapter 8 The Competitive Industrial Performance index 197 e Th index 198 Definition of sub-indicators 199 e 2 Th 013 CIP ranking 202 e i Th ndustrial competitiveness of nations by industrial comparator 208 Changes in industrial competitiveness, 1990–2013 and 2000–2013 210 From short-term and zero-sum to long-term and win-win 212 Annexes 212 A1 World Bank country and economy classic fi ation 216 A2 Classic fi ation of manufacturing industries by technology group 217 A3 Sectoral disaggregation and definition of modern market activities iiv vContents Page 218 A4 A stochastic frontier approach for Figure 5.9 219 B1 Country and economy groups 224 B2 Indicators of competitive industrial performance by economy 228 B3 I ndicators of manufacturing value added and exports by industrialization level, region and income group 232 B4 Summary of world trade, by industrialization level, region and income group 235 B5 Technological classic fi ation of international trade data 236 C1 Data appendix 243 References Boxes 2 1 Dimensions of innovation 25 1.1 Real income growth based on household surveys 28 1.2 Types of deindustrialization 32 1.3 Sector-specic p fi urchasing power parity 55 2.1 Radical innovations drive disruptive change 57 2.2 A tiger leaps from its lair: The Republic of Korea’s structural transformation 61 2.3 Bridging the technology gap depends on the type of value chain 62 2.4 Macroeconomic accounting of production’s fragmentation 73 2.5 High-tech global value chain development in Morocco —t he automotive industry 92 3.1 Human capital and the aerospace industry in Querétaro, Mexico 95 3.2 Upgrading in Kenya’s furniture industry 96 3.3 Special economic zones in China 97 3.4 SME growth in the Indian auto components industry: Hybrid filtration systems 98 3.5 Nicaragua in the apparel manufacturing global value chain 105 4.1 Woman empowerment through improved shea butter processing in Ghana 117 4.2 Examples of appropriate technology in developing countries 118 4.3 Education for jobs that do not yet exist 119 4.4 Basic conditions remain as important as ever 127 5.1 Zero liquid discharge system and chromium recovery in the tanning industry in India 127 5.2 Some process innovations and technologies 129 5.3 e i Th mportance of resource policies 129 5.4 Policies for geothermal production in Kenya 130 5.5 Solar photovoltaic in China 133 5.6 Apportioning the abatement costs in international agreements for emissions reduction: does it matter what countries produce or what they consume? 135 5.7 e su Th stainable modernization indicator 142 5.8 South–South offshoring of environmental services: An opportunity for Costa Rica 146 6.1 Synergies between social and environmental gains: Solar drying of fruit and vegetables in Uganda 152 6.2 Key elements to creating an aerospace system of innovation in Brazil vContents Page 153 6.3 Recommendations for catching up in the palm oil industry 156 6.4 Options to improve measuring, monitoring and evaluation of innovation in developing countries 163 6.5 Establishing Singapore as a biotech hub to catalyse transitions towards a sustainable, knowledge-based economy 164 6.6 Market-based industrial energy ec ffi iency policy in India 167 6.7 Intellectual property rights for developing countries Figures 3 1 Shares of developing and developed regions in global value added of low-, medium-, and high-tech manufacturing industries, 1972 and 2012 7 2 Conceptual framework: Technological change for inclusive structural transformation 8 3 Conceptual framework: Technological change for environmental sustainability 13 4 World manufacturing value added, by country group and worldwide, 1990–2014 15 5 Share in world manufactured exports by country group, 1990–2013 22 1.1 Manufacturing-related employment in Germany, 1995–2008 23 1.2 GDP per capita and growth rate, 1998–2013 23 1.3 Quintile distribution of GDP per capita, 1950–2008 27 1.4 Structural change and GDP per capita growth, 1995–2011 31 1.5 Manufacturing value added shares, worldwide, current prices, 1970–2013 31 1.6 Manufacturing value added shares, worldwide, constant prices, 1970–2013 34 1.7 Manufacturing employment share of total employment, worldwide, 1970–2010 36 1.8 Shares of developing and developed regions in global value added of low-, medium-, and high-tech manufacturing industries, 1972 and 2012 36 1.9 Changes in technology structure in manufacturing by developing region, 1972 and 2012 (percent of total manufacturing value added) 37 1.10 Patterns of employment, labour productivity and value added growth (large countries), 1963–2010 38 1.11 Patterns of employment, labour productivity and value added growth (small countries), 1963–2010 39 1.12 A nnual average manufacturing growth and factor contributions, high-income and developing countries, 1995–2007 39 1.13 Selected low-tech, labour-intensive industries, 1995–2007 40 1.14 S elected medium-tech, resource-based industries, 1995–2007 40 1.15 Selected high-tech, technology-intensive industries, 1995–2007 41 1.16 M anufacturing inclusiveness 42 1.17 Equity-adjusted wage 42 1.18 E mployment intensity 43 1.19 Changes in the level of employment in manufacturing industries, 1963–2010 43 1.20 Changes in the value added of employment in manufacturing industries, 1963–2010 44 1.21 Manufacturing environmental sustainability 44 1.22 Real value added per unit of CO emission in various manufacturing industries, 1963–2010 2 v viiContents Page 45 1.23 ISID index and GDP per capita—a shallow U shape 50 2.1 Total factor productivity growth as a source of structural change, nine-sector breakdown of total economy, 1995–2007 51 2.2 Total factor productivity growth as a source of structural change, 14-sector breakdown of manufacturing, 1995–2007 52 2.3 Rates of growth of labour productivity and value added against level of development, low-tech manufacturing sectors, 1995–2009 53 2.4 Rates of growth of labour productivity and value added against level of development, medium-tech manufacturing sectors, 1995–2009 53 2.5 Rates of growth of labour productivity and value added against level of development, high-tech manufacturing sectors, 1995–2009 58 2.6 Index of innovation system and institutional capabilities versus GDP per capita, 2013 58 2.7 R&D spending (as share of GDP), 2011, and GDP per capita, 2013 59 2.8 GDP per capita and average rate of GDP growth conditioned on capabilities, 1998–2013 60 2.9 Latent trade capability and GDP per capita, 1998 62 2.10 Gross and value added trade as a share of GDP, worldwide, 1995–2011 63 2.11 Growth rates of share of global GDP, and GDP per capita growth, by country block and origin of demand, 2001–2011 65 2.12 e r Th ise of globalization, by producing sectors, 2001–2011 66 2.13 G rowth of value added produced for foreign markets, by sector and country group, 2001–2011 67 2.14 Growth of value added produced for foreign markets, by sector, bilateral relationship— China and developed countries, 2001–2011 68 2.15 Growth of value added produced for foreign markets, by sector, bilateral relationship— post-communist and developed countries, 2001–2011 69 2.16 Growth of valued added produced for foreign markets, by sector and selected bilateral relationships, 2001–2011 70 2.17 Backward linkages—where value added for each region’s manufacturing output came from, 1990 70 2.18 Backward linkages—where value added for each region’s manufacturing output came from, 2011 71 2.19 Forward linkages—how regions generated manufacturing value added, 1990 72 2.20 Forward linkages—how regions generated manufacturing value added, 2011 73 2.21 Upstream global value chain involvement, African countries, by sector, 2010 78 3.1 Conceptual framework: Technological change for sustained economic growth 79 3.2 Specialization and the rate of growth 80 3.3 Specialization and the duration of growth episodes 80 3.4 Change in specialization and the duration of growth episodes 81 3.5 Inverted U-curve: Manufacturing and GDP per capita, 2009 82 3.6 e m Th arginal effect of manufacturing shares on growth, 1950–2005 83 3.7 e m Th arginal effect of manufacturing on growth, selected periods, 1950–2005 84 3.8 Initial shares of manufacturing in GDP and duration of growth episodes 85 3.9 e e Th e ff ct of the size of manufacturing on the hazard rate for ending a positive growth episode 85 3.10 S tructural modernization landscape viiContents Page 86 3.11 Modernization trajectory of the Republic of Korea, 1960–2009 87 3.12 Share of the modern sector and industry in GDP, by per capita income, 1950–2009 104 4.1 Conceptual framework: Technological change for inclusive structural transformation 109 4.2 Main trends in social inclusiveness indicators, by developing region, 1980–2014 110 4.3 Inclusiveness indices by share of manufacturing in total employment, 1970–2010 112 4.4 Job growth by skill percentile (ranked by occupational mean wage), selected periods, United States, 1979–2007 113 4.5 Pattern of job growth, by labour income groups, selected European countries, 1993–2010 113 4.6 Change in income for various skill groups, United States, 1964–2008 114 4.7 Rates of return on tertiary education and income inequality in selected emerging economies, 1992–2012 115 4.8 Average difference in penetration of signic fi ant technological innovations between developed and developing countries, 1780s to the present 119 4.9 Gini index, before and after taxes and transfers, 2009 120 4.10 Income inequality and trade union density, United States, 1960–2011 121 4.11 Income inequality and unionization, selected developing countries, 2000–2011 124 5.1 Manufacturing CO emissions and real manufacturing value added per capita, by country 2 income, 1970–2010 124 5.2 Domestic materials consumption and GDP, per capita and by income group, 1980–2009 125 5.3 CO emission intensity and GDP per capita, worldwide, 1960–2011 2 125 5.4 Conceptual framework: Technological change for environmental sustainability 126 5.5 Change of global energy consumption, energy intensity, total emissions and emissions intensity, by sector, 1995 and 2009 126 5.6 Decomposition of manufacturing energy consumption, 1995–2009 131 5.7 Environmental productivity in the manufacturing sector (value added/CO emissions), 2 worldwide, by technology class, 1970–2010 132 5.8 Pollution intensity versus abatement costs for different technological categories of industrial sectors 134 5.9 CO emissions inec ffi iency across selected countries, 1995–2009 2 136 5.10 Sustainable modernization indicator analysis for the United States, the Russian Federation, China and India, 2009 136 5.11 Adjusted sustainable modernization indicator analysis for the United States, the Russian Federation, China and India, 2009 136 5.12 Relationship between GDP per capita and exports of environmental goods, 2013 137 5.13 Main destinations of environmental goods exports from high-income countries, by income group, 2013 138 5.14 Cumulative average growth rate of waste trade, 1993–2012 140 5.15 Prices of carbon permits, 2011–2014 149 6.1 Policies targeting inclusive and sustainable industrial development 166 6.2 I nternational cooperation on technology and innovation policy v viii iiiContents Page 173 7.1 World manufacturing value added, by country group and worldwide, 1990–2014 174 7.2 e 1 Th 5 largest countries by manufacturing value added, 2014 174 7.3 Annual growth of manufacturing value added, by country group, 2007–2014 175 7.4 Trends in manufacturing per capita, by country group and worldwide, 1990–2014 176 7.5 Economic and industrial growth trends by country group, 1990–2014 177 7.6 Manufacturing value added share of the five largest countries in developing and emerging industrial economies’ group total, 1990, 2000 and 2014 182 7.7 Regional shares in total world manufacturing value added, 1990, 2000, 2010 and 2014 183 7.8 Regional trends in manufacturing value added, 1990–2014 184 7.9 Share in world manufactured export by country group, 1990–2013 185 7.10 Technology composition of manufactured exports, worldwide, 1990–2013 186 7.11 Average change in world market share of manufactured exports, by technology level and country group, 2005–2013 186 7.12 Growth trends in manufactured exports per capita, by country group and worldwide, 1990–2013 187 7.13 Technology structure of manufactured exports in developing and emerging industrial economies, 1990, 2000 and 2013 189 7.14 World manufacturing employment, 1991–2014 189 7.15 Share of manufacturing employment in total employment, worldwide, 1991–2014 190 7.16 Share of female employment in total employment by sector, 1991 and 2014 190 7.17 Manufacturing employment and its share of total employment in industrialized countries, 1991–2014 190 7.18 Manufacturing employment in the top five industrialized economies, 1991–2014 191 7.19 Manufacturing employment and share of manufacturing jobs in total employment in developing and emerging industrial economies, 1991–2014 192 7.20 Manufacturing employment in the top five developing and emerging industrial economies, 1991–2014 193 7.21 Resource ec ffi iency in manufacturing, 1995–2011 193 7.22 Changes in resource ec ffi iency, selected countries, 1995 and 2011 194 7.23 World final energy consumption by sector, 1990–2012 194 7.24 World final energy consumption per capita by industry, 1990–2012 195 7.25 World manufacturing energy intensity, 1990–2012 195 7.26 Global trends in manufacturing value added, manufacturing energy consumption, and manufacturing energy intensity, 1990–2012 195 7.27 Manufacturing energy intensity growth, selected industrialized and developing countries, 1990–2012 197 8.1 Components of the CIP index 202 8.2 T rade and production structure in China and the Republic of Korea, selected years, 1995–2013 205 8.3 Trade and production structure in Germany, 1995, 2000 and 2013 210 8.4 Changes in the CIP index for countries in the top quintile, from 1990 to 2013 and from 2000 to 2013 ixContents Page Tables 13 1 Manufacturing value added in developing and emerging industrial economies by development group and region, 1990, 2000 and 2014 14 2 World exports by product category, 2005–2013 16 3 World manufacturing exports by development group, region and income, selected years, 1995–2013 (billions, current ) 24 1.1 Annual growth rates at selected percentiles of the world income distribution, 1950–2008 (percent) 26 1.2 Duration and volatility of growth episodes, by income group, 1960–2008 33 1.3 Manufacturing value added share in GDP by region, current prices, 1970–2010 (percent) 35 1.4 Manufacturing employment share in total employment by region, 1970–2010 (percent) 63 2.1 e r Th ise of globalization, by sector, 2001–2011 64 2.2 e r Th ise of globalization, by country groups, demand and supply, 2001–2011 (percentage points) 71 2.3 Manufacturing output shares in world total, 1990 and 2011, and gain or loss (percent) 88 3.1 Distributions of growth in total factor productivity within sectors, 1995–2007 (percent) 89 3.2 R&D expenditures, by income group and sector, 2011 90 3.3 Inward greenfield foreign direct investment projects in manufacturing sectors, by group of economies, 2003–2011 (percent) 111 4.1 Role of industrialization in different inclusiveness indices, Hausman-Taylor estimates, 1970–2010 128 5.1 Impact of a global 300 per ton carbon tax versus baseline, 2010–2030 (percent change) 131 5.2 Distribution of manufacturing value added across technological and income groups, selected years, 1970–2010 (percent) 134 5.3 Leading carbon dioxide emitter countries from fossil fuels, 2013 136 5.4 Share of green goods exports at different levels of GDP per capita, 2003 and 2013 (percent) 150 6.1 Taxonomy for innovation policy (including technology and non-technological industrial policies) 150 6.2 Innovation for different stages of development for developing and emerging countries 155 6.3 Input indicators and measurement 155 6.4 Output indicators and measurement 156 6.5 Measuring international cooperation 158 6.6 Factors affecting developing country competitiveness in global value chains 161 6.7 Learning mechanisms within a global value chain 176 7.1 Manufacturing value added in developing and emerging industrial economies by development group and region, 1990, 2000 and 2014 178 7.2 Share of manufacturing value added, by industry group within country groups and worldwide, 2000, 2005 and 2013 (percent) 179 7.3 Share of manufacturing value added, by industry group within country groups, 2000, 2005 and 2013 (percent) 179 7.4 Medium- and high-tech industry group x xContents 181 7.5 Technology composition of manufacturing value added, by development group, region and income, 1990, 2000, 2010 and 2013 183 7.6 World exports by product category, 2005–2013 184 7.7 World manufacturing exports by development group, region and income, selected years, 1995–2013 (billions, current ) 188 7.8 Average annual growth rate by development group, region and income, 1990–2013 (percent) 191 7.9 Share of manufacturing employment in total employment, selected countries, 1991–2014 (percent) 192 7.10 Share of manufacturing employment in total employment, selected countries, 1991–2014 (percent) 199 8.1 CIP index, 2013 203 8.2 Industrial competitiveness ranking and selected indicators for industrialized countries and world ranking comparison, 2013 205 8.3 Industrial competitiveness ranking and selected indicators for emerging industrial countries and world ranking comparison, 2013 207 8.4 Industrial competitiveness ranking and selected indicators for other industrial countries (excluding least developed countries) and world ranking comparison, 2013 209 8.5 Industrial competitiveness ranking and selected indicators for least developed countries and world ranking comparison, 2013 212 A1.1 World Bank countries and economies by income classic fi ation (gross national income per capita) 214 A1.2 World Bank countries and economies by region classic fi ation 216 A2 Classic fi ation of manufacturing industries by technology group 219 B1.1 Countries and economies by region 221 B1.2 Countries and economies by industrialization level 222 B1.3 Countries and economies by income 224 B2.1 Competitive industrial performance, 2008 and 2013 228 B3.1 Medium- and high-tech manufactured exports share in total manufactured exports, 2009–2013 (percent) 228 B3.2 Manufacturing exports per capita, 2009–2013 (current ) 229 B3.3 Impact of a country on world manufactures trade, 2009–2013 (percent) 229 B3.4 Impact of a country on world manufacturing value added, 2009–2013 (percent) 230 B3.5 Medium- and high-tech manufacturing value added share in total manufacturing, 2009– 2013 (percent) 230 B3.6 Share of manufacturing value added in GDP, 2009–2013 (percent) 231 B3.7 Manufactured exports share in total exports, 2009–2013 (percent) 231 B3.8 Manufacturing value added per capita, 2009–2013 (constant 2005 ) 232 B4.1 Total exports, all commodities, 2009–2013 (current , billions) 232 B4.2 Primary exports, 2009–2013 (current , billions) 233 B4.3 Resource-based manufactured exports, 2009–2013 (current , billions) xiContents 233 B4.4 Low-tech manufactured exports, 2009–2013 (current , billions) 234 B4.5 Medium-tech manufactured exports, 2009–2013 (current , billions) 234 B4.6 High-tech manufactured exports, 2009–2013 (current , billions) 235 B5.1 Technology classic fi ation of exports, Standard International Trade Classic fi ation, Rev. 3 236 C1.1 Background papers used for producing Industrial Development Report 2016 figures and tables and their datasets 237 C1.2 Classic fi ations used for producing Industrial Development Report 2016 figures and tables and their datasets 238 C 1.3 List of datasets used for producing figures and tables of the Industrial Development Report 2016 x xii iiForeword Technological change is create social inclusiveness and environmental sus- recognized as one of the tainability. The substitution of labour with capital main drivers of long-term induced by structural change may reduce employment. growth. In the coming Technological change also requires the labour force to decades, radical innova- be prepared to use increasingly complex machinery tions such as the mobile and equipment, which widens the inequality between internet, the Internet of highly skilled and unskilled workers in terms of wage Things and cloud com- distribution. Industrialization has historically been puting are likely to revo- accompanied by increasing pollution and the deple- lutionize production pro- tion of natural resources. Economic growth also cesses and enhance living standards, particularly in entails a rise in the use of inputs, materials and fos- developing countries. The Sustainable Development sil fuels, which generate environmental pollution and Goal 9 Build resilient infrastructure, promote inclusive degradation, especially in low income countries. and sustainable industrialization and foster innovation The Lima Declaration approved during the 15th adopted on 26 September 2015 implies that without session of UNIDO’s General Conference clearly states technology and innovation, industrialization will not that “Poverty eradication remains the central impera- happen, and without industrialization, development tive. This can only be achieved through strong, inclu - sive, sustainable and resilient economic and industrial will not happen. It is undebatable that technology makes produc- growth, and the effective integration of the economic, social and environmental dimensions of sustainable tion processes more efficient, thereby increasing the competitiveness of countries and reducing their vul- development”. UNIDO strongly promotes paths of economic growth and industrialization that reconcile nerability to market fluctuations. Structural change, i.e. the transition from a labour-intensive to a tech- all relevant dimensions of sustainability. The Industrial Development Report 2016 addresses nology-intensive economy, drives economic upgrad- ing. Low income countries thus acquire the necessary a challenging question: under which conditions do technology and innovation achieve inclusive and sus- capabilities to catch up and reduce the gap with per capita incomes in high income countries. tainable industrial development (ISID)? The main finding of this report is that technology can simulta - Catching up, unfortunately, does not occur fre- quently. In the last 50 years, only a few countries were neously serve all three dimensions of sustainability. Rapid inclusive and sustainable industrialization can successful in rapidly industrializing and achieving sus- tained economic growth. Technology was always a key be achieved provided that policymakers resolutely facilitate and steer the industrialization process, driver in these cases and they successfully developed an advanced technology-intensive industry. Though which requires sound policies and avoiding the mis- takes other countries have made in the past. there is clear evidence that technological change con- tributes significantly to the prosperity of nations, the From an economic point of view, globalization and the fragmentation of production at international debate about the underlying factors deterring coun- tries from promoting technology and innovation more level have facilitated the diffusion of new technologies through the intensification of trade in sophisticated intensively continues. Though technology is linked to sustainable manufacturing goods. However, this diffusion of tech - nology has in many cases not translated into concrete growth, it is uncertain whether it can simultaneously xiiiForeword growth opportunities due to the lack of technological transition from medium tech industries towards high- capabilities and the capacity of countries to promote tech industries is beneficial from a macro perspective, innovation systems. Innovation needs to be supported as it implies a lower level of environmental pollution. by appropriate interventions that strengthen the pro- Despite these positive dynamics, the current trend of cess from technology invention to adoption by firms technological change does not guarantee that we will as was the case in benchmark countries such as China follow a sustainable path in the future. Global con- and the Republic of Korea. certed action is indispensable to reduce greenhouse From a social point of view, industrialization con- gases and to stimulate the creation and diffusion of tributes to the improvement of many indicators such environmentally friendly technological progress. as the Human Development Index and the poverty It gives me great pleasure to present this report rate. Even though technology and automation gener- as Director-General of UNIDO. I am particularly ally improve people’s working conditions, the number pleased that the Industrial Development Report 2016 of jobs may decrease as a result, with workers being emphasizes the critical need for international coop- replaced by machines. A key point highlighted in this eration to promote technological change and achieve report is that technological change itself can miti- ISID, and that it reaffirms the commitment of my gate this effect. New technologies also generate new Organization to fulfil its unique mandate in support markets, for example the waste and recycling indus- of this effort. I am grateful to the UNIDO staff and try, reduce the prices of consumer goods and provide the international experts who joined hands to produce opportunities for new investments with higher levels this report, and look forward to seeing it become a key of profitability. Most importantly, the expansion of component in the development debate. new technologically-intensive industries absorbs those workers who have lost their jobs to machines. From an environmental point of view, there is a natural tendency of firms to seek efficiency in the use of resources. Entrepreneurs tend to maximize profits by minimizing the use of inputs through process inno- LI Yong vations. During the structural change process, the Director General, UNIDO x xiiv vAcknowledgements The Industrial Development Report 2016 was pre- de Management; Raphael Kaplinsky, Open Univer- pared under the overall guidance of LI Yong, Direc- sity; Florian Kaulich, University of Vienna; Michael tor-General of the United Nations Industrial Devel- Landesmann, Johannes Kepler University; Carolina opment Organization (UNIDO). It is the result of Lennon, Vienna University of Economics and Busi- two years of intense research efforts, fruitful discus - ness; Giovanni Marin, National Research Coun- sions and close collaboration between the members cil of Italy; Isabella Massa, Overseas Development of a cross-organizational team headed by Ludovico Institute; Roberta Rabellotti, University of Pavia; Alcorta, Director of the Research, Statistics and Cornelia Staritz, Austrian Foundation for Develop- Industrial Policy Branch at UNIDO. This lengthy ment Research; Robert Stehrer, Vienna Institute for and at times arduous endeavour was coordinated Economic Studies; Fiona Tregenna, University of by Nicola Cantore, Industrial Development Officer Johannesburg; as well as Juergen Amann and Gary (UNIDO), who played an instrumental role in the Gereffi from Duke University; Thomas Gries, Rainer successful completion of the report. The other mem - Grundmann and Margarete Redlin from the Univer- bers of the UNIDO core team, without whom this sity of Paderborn; and Marianna Gilli, Massimiliano report would not have been possible, were Michele Mazzanti and Francesco Nicolli from the University Clara, Smeeta Fokeer, Nobuya Haraguchi, Alejandro of Ferrara. Deepest gratitude is also due to Xiaolan Lavopa, Ascha Pedersen, Miriam Weiss and Shohreh Fu from Oxford University, and John Weiss, Emeri- tus Professor at the University of Bradford, who Mirzaei Yeganeh. The report was a collaboration with the United Nations University—Maastricht thoroughly reviewed numerous drafts of the report and significantly improved several sections of the Economic and Social Research Institute on Inno- vation and Technology (UNU—MERIT), in par- report. The report further benefited from constructive ticular Adam Szirmai and Bart Verspagen; and with Paula Nagler and Wim Naudé from the University comments by members of the IDR Advisory Board at UNIDO, specifically Stefano Bologna, Guill- of Maastricht and the Maastricht School of Manage- ment, who were part of the core team. Many of the ermo Lorenzo Castella, Mohamed-Lamine Dhaoui, Sam Hobohm, Steffen Kaeser, Bernardo Calzadilla concepts introduced and elaborated in the report were developed during IDR core team meetings and Sarmiento, Stephan Sicars and Nilgun Tas, by mem- bers of the UNIDO Publications Committee Jacek at workshops at UNIDO headquarters in Vienna in February and April 2015. Cukrowski, Frank Hartwick and Patrick Nussbau- mer, as well as other UNIDO colleagues including The invaluable contributions and insightful com - ments received greatly enhanced the overall quality Manuel Albaladejo, Ralph Luken, Valentin Todorov and Shyam Upadhyaya. Profound appreciation is also of the report—these included experts from UNU— MERIT, namely Ibrahima Kaba, Mary Kaltenberg, extended to Taizo Nishikawa, Deputy to the Director- General at UNIDO, for the exceptional support he Neil Foster-McGregor and Simone Sasso. Other con- tributing experts were Charles Fang Chin Cheng, provided throughout the entire production process. The authors of the report were backed by a tal - University of New South Wales; Valentina De Marchi, University of Padova; Teresa Domenech, ented and indispensable team of research assistants and interns at UNIDO including Juan Carlos Cas- University College of London; Elisa Giuliani, Uni- versity of Pisa; Arjan de Haan, International Devel- tillo, Emi Mima, Stefano Olivari, Francis Ostermeijer and Sheng Zhong. opment Research Centre; Jojo Jacob, Grenoble Ecole xvForeword UNIDO staff members Debby Lee, Fernando The editors, Bruce Ross-Larson and Jonathan Russo and Iguaraya Saavedra, without whom a Aspin of Communications Development Incorpo- smooth production process would have been unthink- rated, improved the language, style and structure of able, provided extensive administrative support, and the report. Christopher Trott and Joe Caponio, also Niki Rodousakis, Nelson Correa and Franz Brugger with Communications Development Incorporated, provided copy-editing assistance. copy-edited and proofread the report, and Elaine Wilson was in charge of design and layout. x xv viiTechnical notes and abbreviations References to dollars () are to United States dollars, unless otherwise indicated. In this report, industry refers to the manufacturing industry and sectors refers to specic m fi anufacturing sectors. This report defines developed countries or developed economies as the group identified as “high-income OECD countries” by the World Bank and developing countries or developing economies as all other economies. See Annex B1 for a complete list of economies by region, income level, least developed countries and largest develop- ing economy in each region. e a Th nnexes contain more detailed information about methodology and classic fi ations. Annex B also contains additional tables and indicators to complement those contained in the text. Annex C is a guide to the origins of the data used for the figures and tables in the Industrial Development Report 2016. Components in tables may not sum precisely to totals shown because of rounding. CIP Competitive industrial performance MNE Multinational enterprises DEIE Developing and emerging industrial MVA Manufacturing value added economies OECD Organisation for Economic FDI Foreign direct investment Co-operation and Development GDP Gross domestic product PPP Purchasing power parity GHG Greenhouse gas R&D Research and development GVC Global value chain SEZ Special economic zones ICT Information and communications SME Small and medium-size enterprise technology STI Science, technology and innovation ILO International Labour Organization TFP Total factor productivity IPR Intellectual property rights UN United Nations ISIC International Standard Industrial UNCTAD United Nations Conference on Trade Classic fi ation and Development ISID Inclusive and sustainable industrial UNDESA United Nations Department of development Economic and Social Affairs ISO International Organization for UNDP United Nations Development Programme Standardization UNEP United Nations Environment Programme LDC Least developed countries UNIDO United Nations Industrial Development MDG Millennium Development Goal Organization xviiGlossary Capital goods. Goods used in the production of other closed energy conversion process, energy can be goods and services. (UNIDO 2013a) neither created nor destroyed; energy that goes in Decoupling. Weakening or breaking the link between must come out or be accumulated in the system. environmental effects and economic activity so But only a portion of the energy output will be in that output increases with a less than commensu- a useful form (for example, light) while the rest is rate increase (or with a decrease) in energy con- waste, typically low-temperature heat. The ther - sumption (Von Weizsäcker 1989; Enevoldsen, mal ec ffi iency of a process is thus the ratio of useful Ryelund and Andersen 2007). energy outputs to total energy inputs. In engineer- Deindustrialization. Long-term decline in manufac- ing, energy efficiency is interpreted as conversion turing relative to other sectors. Typically measured efficiency—the proportion of the energy input in terms of a share of manufacturing employment that is available as a “useful” output. For example, in total employment. (UNIDO 2013a) only 5–10 percent of the electrical energy fed to an Elasticity. Percent change in one due to 1 percent incandescent light bulb is converted to useful light change in another. For example, the growths of energy; the remaining 90–95 percent is lost to the value added, employment and labour productivity environment as “waste” energy (low-temperature as per unit increase in GDP per capita can be meas- heat). In developed countries, the average ec ffi iency ured as percentage change in these variables due of conversion of heat energy from fuel to electric power delivered to consumers is 33–35 percent to 1 percentage point increase in GDP per capita. (UNIDO 2013a) (Ayres, Turton and Casten 2006), so if this elec- tricity is converted to light energy using an incan- Energy. The ability to do work. In industry it com - monly refers to the energy used to power manu- descent bulb, the overall energy efficiency is just 3 percent. In economics, energy efficiency is the facturing processes. This report measures energy in tonnes of oil equivalent to allow compari- ratio of the value of output to the quantity or cost of energy inputs—the amount of economic activity sons of energy from various sources. Primary energy sources include biomass-based fuels (trees, produced from one unit of energy. (See also Energy intensity.) (UNIDO 2011) branches, crop residues), fossil fuels (coal, oil, natu- ral gas) and renewable sources (sun, wind, water). Energy intensity. The amount of energy used to pro - duce one unit of economic activity. It is the inverse Secondary energy sources are derived from other (usually primary) energy sources and have zero pol- of energy efficiency: less energy intensity means more energy efficiency. This report measures energy lution at the point of use (electricity, for example). (UNIDO 2011) input in physical terms (tonnes of oil equivalent) and economic activity in monetary terms (sectoral Energy efficiency. The ratio of a system’s energy inputs to its output. Since inputs and outputs can and manufacturing value added). (UNIDO 2011) Externalities. Costs or benet fi s that accrue to unrelated be measured in more than one way, energy effi - ciency has no single meaning. An engineer’s defi - third parties. When it is a benet r fi eaped by third parties, it is called a positive externality. When it is nition will differ from an environmentalist’s or an economist’s—mainly reflecting differences in the a cost imposed on third parties, it is called a nega- tive externality. Externality is a market failure that level of aggregation. The energy-efficiency ratio is commonly called thermal or first-law efficiency, provides rational for industrial policy. Hausmann and Rodrik (2003, 2006) identify three main types based on the first law of thermodynamics. In any xviiiGlossary of externalities that are particularly relevant for new are expected to offer better prospects for economic activities to emerge: coordination externalities, as growth or societal welfare than would occur in the specic fi new industries or activities require simulta - absence of such intervention—that is, in the mar- neous, large investments to become profitable; infor - ket equilibrium (Warwick 2013). mation externalities, as “discovery” of new activities Informal economy. It is part of the economy that is oper- requires an investment whose returns cannot be ated outside the purview of government, thus not fully appropriated by the investor; and labour train- taxed and included in statistics. (UNIDO 2013a) ing externalities, as firms regard labour mobility as Innovation. An innovation is the implementation a disincentive to invest in on-the-job training, thus of a new or significantly improved product (good reducing technological spillovers. (UNIDO 2013a) or service), or process, a new marketing method, Global value chain. The value chain describes the or a new organizational method in business prac- full range of activities that firms and workers do to tices, workplace organization or external relations. (OECD and Eurostat 2005) bring a product from its conception to its end use and beyond. This includes activities such as design, Intermediate goods. Goods used as inputs in the production of other goods and services. (UNIDO production, marketing, distribution and support to the final consumer. The activities that comprise 2013a) Labour intensity. Relative proportion of labour used a value chain can be contained within a single firm or divided among different firms. (Gereffi and in production. It is approximated in this report as the number of employment per value added. Fernandez-Stark 2011) Inclusive and sustainable industrial develop- (UNIDO 2013a) Manufacturing-related service/producer-related ment. ISID has three elements: long-term (or sustained) industrialization as a driver for devel- service. Service activities whose demands arise largely from manufacturing production. opment; socially inclusive development offering equal opportunities and an equitable distribution Wholesale, retail, transportation services for goods and business services (including, for example, rent- of benet fi s (including all countries and all peoples, as well as the private sector, civil society organiza- ing services of machinery and equipment, research and development, and computer and related ser- tions, multinational development institutions and all parts of the UN system); and environmental vices) are considered major components of manu- facturing-related services. (UNIDO 2013a) sustainability, which focuses on decoupling the prosperity generated by industrial activities from Manufacturing value added. See Value added. Marketing innovation. The implementation of new excessive natural resource use and negative environ- mental impacts. The Lima Declaration, adopted by marketing methods involving significant changes in product design or packaging, product place- UNIDO’s Member States in December 2013, set the foundation for ISID. (UNIDO 2015d) ment, product promotion or pricing. (OECD and Eurostat 2005) Incremental innovation. Incremental innova- tion concerns an existing product, service, process, Non-manufacturing industries. Industries that comprise mining and quarrying, construction organization or method whose performance has been significantly enhanced or upgraded. (OECD and public utilities (electricity, gas and water). (UNIDO 2013a) and World Bank n.d.) Industrial policy. Any type of intervention or govern- Organizational innovation. The implementation of new organizational methods in the firm’s business ment policy that attempts to improve the business environment or to alter the structure of economic practices, workplace organization or external rela- tions. (OECD and Eurostat 2005) activity towards sectors, technologies or tasks that xixGlossary Product innovation. The introduction of goods or but results in greater demand for skilled labour. services that are new or significantly improved (UNIDO 2013a) with respect to their characteristics or intended Structural change. Change in the long-term compo- uses. (OECD and Eurostat 2005) sition and distribution of economic activities. A Process innovation. The implementation of new normative perspective of structural change often or significantly improved production or delivery emphasizes desirability in the direction of change. methods, including significant changes in tech - For example, Ocampo (2005), Ocampo and Vos niques, equipment and/or software. (OECD and (2008) and UNDESA (2006) define structural Eurostat 2005) change as the ability of an economy to continually Purchasing power parity. A concept that deter- generate new dynamic activities characterized by mines the relative values of two currencies in higher productivity and increasing returns to scale. terms of purchasing power. PPP-based GDP (UNIDO 2013a) Sustainable Development Goal No. 9 Build resilient shows what goods and services produced in one country would cost if they were sold in the infrastructure, promote inclusive and sustainable industrialization and foster innovation. This goal United States. Since non-tradable services of similar quality are priced lower in low-income promotes ISID via sharply raising industry’s share of employment and GDP by 2030, integrating of countries than they are in the United States, their PPP-based GDPs usually become higher small-scale industrial and other enterprises into value chains and markets, upgrading infrastructure than their GDPs based on market exchange rates. (UNIDO 2013a) and industries with greater resource-use efficiency, using clean and environmentally sound technolo- Radical innovation. A radical or disruptive innova- tion is an innovation that has a significant impact gies and industrial processes, boosting scientific research, upgrading technological capabilities and on a market and on the economic activity of firms in that market. This concept focuses on the impact encouraging innovation (UN 2015a). Technological capabilities. The ability to exploit of innovations as opposed to their novelty. (OECD and World Bank n.d.) what modern technology can contribute to the economic development of the developing coun- Research and experimental development. R&D comprise creative work undertaken on a systematic tries. (ILO 1991) Technological change. Improvements in technology. basis in order to increase the stock of knowledge, including knowledge of man, culture and society, Technological change involves a series of stages with multiple actors, relationships and feedback and the use of this stock of knowledge to devise new applications. The term R&D covers three loops—from invention, as a new technology is cre- ated and prototyped, to innovation, as it becomes activities: basic research, applied research and experimental development. (OECD 2002) commercially viable (Freeman and Soete 1997; IEA 2008a). In decomposition analysis, if data on Resource efficiency. Resource efficiency is defined from a life cycle and value chain perspective. This manufacturing processes were available at the low- est level of aggregation, the measure of technical means reducing the total environmental impact of the production and consumption of goods and ser- change would be actual physical ec ffi iency and the rest would be structural change (Jenne and Cattell vices, from raw material extraction to final use and disposal. (UNEP n.d.) 1983). Industrial energy intensity can be lowered by improving technology (technological change) Skill-biased technological change. Technological change that does not lead to proportional change and producing more goods that require less energy (structural change). (UNIDO 2011) in the demand for unskilled and skilled labour xx xx

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