technical capabilities. Overall, then, it appears that domestic innovation and efforts to acquire knowledge from abroad are mutually supportive activities.

# **_Innovation Outcomes in Developing East Asia: A Broad Perspective_**

Table 1 presents information from the World Bank’s firm-level Investment Climate Surveys on innovation outcomes in six low and middle income East Asian economies (and for an average for 39-43 other developing economies), showing the proportion of firms that carried out one of ten innovations in the three years preceding the survey. The term “innovation” here follows the broad Schumpeterian sense used by the OECD, as the implementation of any “ _new or significantly improved product ...or process”_ including new marketing or organizational methods in business practices. The most common forms of innovation among these developing economies include introducing a new product or upgrading an existing product line, as well as introducing a new technology that substantially changes how the main product is produced. On average more than 40 percent of firms had undertaken these activities in both East Asia and elsewhere. The rankings of different types of innovation in East Asia are broadly similar to those elsewhere, with some interesting and statistically significant exceptions. East Asian firms are more likely to upgrade their product lines, perhaps the result of their greater reliance on export markets and the need to respond to the rapidly changing product specifications demanded by foreign buyers. They are also more likely to outsource parts of their business operations, suggesting that firms in the region are more relentless in seeking to cut costs, perhaps reflecting a more competitive environment.

**Table 1.  Innovation Outcomes and  Firm Dynamism (Proportion of Firms in Sample)**

||Cambodia<br>2002|Indonesia<br>2003|Malaysia<br>2002|Philippines<br>2003|Thailand<br>2004|Vietnam<br>2005|E.Asia<br>(5/6)|<br>Other<br>(39/43)|
|---|---|---|---|---|---|---|---|---|
|(1) New product line|0.53|0.38|0.28|0.49|0.50|0.44|0.44|<br>0.40|
|(2) Upgraded product line|0.90|0.68|0.49|0.64|0.71|0.66|0.68*|<br>0.56|
|(3) Intro. new technology(1)|0.60|0.22|0.29|0.42|0.52|0.45|0.44|<br>0.40|
|(4)Discontinued product line|0.05|0.22|0.20|0.42|0.19|0.19|0.21|<br>0.23|
|(5)Opened new plant|0.18|0.07|0.11|0.13|0.08||0.11|<br>0.14|
|(6)Closed existing plant|0.02|0.08|0.05|0.11|0.02||0.06*|<br>0.11|
|(7)New foreign JV|0.21|0.06|0.05|0.06|0.04|0.06|0.08|<br>0.08|
|(8)New license agreement|0.21|0.08|0.06|0.13|0.11|0.10|0.13|<br>0.14|
|(9)Outsourcing|0.33|0.13|0.09|0.21|0.18|0.09|0.17*|<br>0.09|
|(10)Insourcing|0.41|0.10|0.07|0.14|0.11||0.17|<br>0.10|
|Core: (1)+(3)|1.13|0.60|0.57|0.91|1.02|0.89|0.88|<br>0.80|
|Dynamism(Sum of all 10)|3.44|2.02|1.69|2.75|2.46||2.49|2.25|
|Source: World Bank Investment<br>et al (2006). (1) New technology<br>significant at the 5percent level.|Climate Su<br>that substa<br>|rveys. http:/<br>ntially chang|/iresearch.<br>es how ma|worldbank.org<br>in product is p|/Investment<br>roduced. *|Climate/ma<br>Difference|in.html<br>, <br>between|Ayyagari<br>means|

There are also interesting differences between East Asian economies. Even though firms in low income Cambodia do not do formal R&D or make cutting-edge innovations (they received no US patents at all), they are among the most active in adoption and adaptation activities as defined in the Investment Climate Surveys, with over half the firms in the sample introducing or upgrading product lines and production processes. Low income status is clearly 7