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The middle income trap: a way out based on technological and structural change

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Abstract

This article is intended to provide an updated discussion on a series of issues that the relevant literature suggests to be crucial in dealing with the challenges a middle income country may encounter in its attempts to further catch up to a higher income status. In particular, the conventional economic wisdom—ranging from the Lewis-Kuznets model to the endogenous growth approach—will be contrasted with the Schumpeterian and evolutionary views pointing to the role of capabilities and knowledge, considered as key inputs to foster economic growth. Then, attention will be turned to structural change and innovation, trying to map—using the taxonomies put forward by the innovation literature—the concrete ways through which a middle income country can engage in a technological catching-up, having in mind that developing countries are deeply involved in globalized markets where domestic innovation has to be complemented by the role played by international technological transfer. Among the ways that a middle income country can foster domestic innovation and structural change in terms of sectoral diversification and product differentiation, a recent stream of literature underscores the potentials of local innovative entrepreneurship, which will also be discussed bridging entrepreneurial studies with the development literature. Finally, the possible consequences of catching up in terms of jobs and skills will be discussed.

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Notes

  1. For instance, it has been shown that firms invest in R&D not only to produce technological innovation, but also in order to create an internal capacity (see Cohen and Levinthal 1989) able to absorb external knowledge coming from other firms and scientific institutions such as universities and public laboratories. In other words, firms that conduct their own R&D are better able to identify, assimilate and exploit externally available knowledge.

  2. By the same token, the recruitment of university graduates or the spin-offs from larger innovative firms may be intended as carriers of the competences necessary to those firms that want to obtain values from external spillovers (see Acs et al. 1994; Audretsch and Vivarelli 1996; Arrighetti and Vivarelli 1999).

  3. And patenting activity, as well (see Montobbio and Sterzi 2013).

  4. Indeed, in seeking to account for the persistent gap that exists between the EU and the US in terms of innovative performance and productivity, scholars and policy makers often refer to the European weakness regarding young innovative companies (YICs; see Cincera and Veugelers 2010). In fact, in Europe, young companies have lower capacities to innovate and higher rates of early failure (see Bartelsman et al. 2004; Santarelli and Vivarelli 2007; Vivarelli 2013b), whereas the US economy has been able to generate a steadily increasing flow of young innovative firms that not only survive but develop new products at the core of emerging sectors. For these reasons, many EU countries have implemented policies to support the creation and growth of YICs, focusing, for instance, on facilitating their access to funding and providing support for the commercialization of innovation (see EC-DG ENTR 2009; Schneider and Veugelers 2010).

  5. The prevalence of ‘survival-driven’ entrepreneurs in DCs is often associated with the choice to stay small and informal rather than participating in the formal sector of the economy (see Sect. 3; Klapper et al. 2010; Desai 2009). This is one of the reasons why the effects of entrepreneurship on economic performances of DCs appear to be problematic.

  6. More specifically, Cefis and Marsili (2005) have shown that being an innovator enhanced the expected time of survival by 11 % compared with non-innovator counterparts.

  7. As a matter of fact, in different historical periods and different institutional frameworks, the relative balance between the labor-saving effect of process innovations and the labor-intensive impact of product innovations can considerably vary.

  8. By the same token, Conte and Vivarelli (2011), using a direct measure of embodied technological transfer, found that imported skill-biased technological change is one of the determinants of the increase in the relative demand for skilled workers in DCs.

  9. A substitution effect occurs when a policy intervention (such as a subsidy or a tax relief) favors a poorly performing agent (for instance, a firm), crowding out a possibly more efficient one; a deadweight effect occurs when public money is given to an efficient agent that would have performed well in any case, even without the subsidy.

  10. A “national system of innovation” is made by those national interacting organizations and institutions (firms with their suppliers and customers; banks and financing agents; education and training institutions, national and regional policy makers) that jointly contribute to producing knowledge and innovation within a given country and to increasing its absorptive capacity in implementing knowledge produced elsewhere in the world.

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  1. Istituto di Politica Economica, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123, Milano, Italy

    Marco Vivarelli

  2. SPRU, University of Sussex, Brighton, UK

    Marco Vivarelli

  3. IZA, Bonn, Germany

    Marco Vivarelli

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An early version of this article has been developed as a background paper for the International Labour Office (ILO-Geneva).

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Vivarelli, M. The middle income trap: a way out based on technological and structural change. Econ Change Restruct 49, 159–193 (2016). https://doi.org/10.1007/s10644-015-9166-6

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