utilize more advanced technology – in those core industries which operate far below the technology frontier.<sup>5</sup>

- **<u>Dilemma #2:  High Tech Sectors Vs. High Value Added.</u>** Contrary to popular opinion, high tech is not always synonymous with high value added, high wages and rapid growth.  On the contrary, transition economies such as Latvia may get more development “bang for the buck” by helping such “low tech” sectors as forestry and food processing increase value added than by trying to develop a few high tech niche products and industries.  Policy makers, however, tend to view high tech as the surest route to competitiveness and prosperity.  They mistakenly devote considerable resources to building up a small high tech sector while ignoring the competitive enhancing opportunities available from the much larger non-high tech part of the economy.<sup>6</sup> At a minimum, some balance needs to be restored to the high tech/non-high tech equation.  An imbalance could be especially damaging to long run growth and economic stability if government support of high-tech sectors creates a dual economy: on the one hand a low wage, low productivity traditional sector responsible for the bulk of employment, GDP and exports and, on the other hand, a small high-tech sector that is more or less disconnected from the rest of the economy.

- **<u>Dilemma #3:  Production and Sale of Knowledge Produced Inside Latvia vs. the Import, Absorption, and Diffusion of Knowledge Produced Outside Latvia.</u>** Policy makers should not focus solely on the commercialization of knowledge produced inside Latvia at the expense of helping firms import innovative technology produced outside Latvia and adapting it for local use.  This issue is especially critical for Latvia.  Total **<u>annual</u>** R&D spending in Latvia from all public, private and foreign sources is about equal to **<u>one week’s</u>** R&D spending by one large US corporation.  And the total number of R&D personnel in Latvia is equivalent to the total R&D personnel in one mid-sized US laboratory.  Thus, even if Latvia boosts R&D spending (as a share of GDP) to the EU average, vastly improves the targeting and efficiency of its R&D spending, and commercializes a large share of those technological innovations generated in Latvian laboratories, Latvia will still be a minor player in the global R&D arena. Like it or not, therefore, most of the economically relevant knowledge that Latvian firms will need to boost productivity and compete internationally will be produced is produced elsewhere.  Latvia’s success in the global economy will depend as much on the ability and willingness of Latvian enterprises (both foreign-owned and domestic) to adapt and utilize knowledge produced outside

> 5 It is also important to note that adopting, adapting, and applying the results of basic research requires advanced managerial and organizational capacities.  When firms do not have these capacities, it will be futile for governments to finance large amounts of basic research in the hope that this will generate increased levels of innovation and enterprise productivity.

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> For example, computers are generally regarded as high-tech activities.  However, assembling computers is not a high wage, high tech activity, even though computers are classified as a high tech export in international trade statistics.  Similarly, forestry sector exports are classified as a low tech export, although  as we will show in more detail below, forestry activities can be either high tech or low tech depending on how much skill, knowledge, and research is applied.

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