‘catching up’ to the global frontier, through adoption and adaptation of existing knowledge, most often from abroad.

East Asia provides an ideal laboratory for studying this broad spectrum of innovation activities because of the unusually wide range of economic development levels of countries in the region, extending from high income emerging economies like Korea, Singapore and Taiwan (China), which now conduct formal R&D and patenting at the levels of the most advanced developed countries, to middle income economies like Indonesia or low income economies like Cambodia that conduct very little or none of these formal innovation activities. What is common to most East Asian economies though, is their success in absorbing knowledge from abroad. The paper therefore begins by examining the channels through which economies have drawn on foreign knowledge, drawing in part on the World Bank’s firm level Investment Climate Surveys.

While it is hard to establish causal relationships, a distinctive feature of East Asian economies is their exceptionally high engagement in international trade. The Bank’s investment climate surveys show that firms in low and middle income East Asian economies rate imports of capital equipment as their most important source of new technology. We also survey other potential channels for international technology transfers and spillovers that have been suggested in the literature, including through exports and foreign direct investment. While the econometric evidence is mixed, a rich body of case study literature argues that East Asian firms may have derived significant technological benefits from exports under longer term Original Equipment Manufacturing (OEM) contracts, as part of the global production networks of foreign multinationals (a model of technological development sometimes described as _supplier-oriented industrial upgrading)._ East Asian economies have varied more widely in their openness to FDI than they have in their engagement in trade. Here evidence for technology transfers through ‘vertical’ relationships between local firms and MNC affiliates (another form of supplier– oriented upgrading) is more convincing than for other channels that have been suggested.

We then document trends in indigenous knowledge creation within East Asia, using the growth and distribution of R&D and patenting. Over the last decade East Asian R&D spending grew much more than in any other region, but disparities in spending between economies also widened. Newly Industrialized Economies (NIEs) like Korea, Singapore and Taiwan (China) now devote 2 percent or more of GDP to R&D, among the highest in the world, with the business sector generally performing over two thirds of R&D. China has also been rapidly boosting its R&D spending towards an official target of 1.5 percent of GDP. On the other hand middle income economies such as Indonesia, Philippines and Thailand spend a miniscule 0.1-0.2 percent of GDP on R&D. The skewness of the distribution of R&D activity in East Asia is dwarfed only by the uneven distribution of the patents secured by East Asian economies. Patenting per capita in the NIEs has grown at a pace four times that in the developed world, and is now approaching average developed country levels, while, on the other hand, it remains negligible in most middle and low income economies of the region.

The increasing preeminence of the R&D capability of East Asia’s NIEs raises the possibility of increasing technology diffusion within East Asia. We take the hypothesis to a data set of patent citations. As would be expected, East Asian patents continue to draw heavily on knowledge flows from the US and Japan. But citations to other ‘compatriot’ patents from the same East Asian economy or to other East Asian economies are quickly rising, indicating the emergence of East Asian national and regional knowledge stocks which are now providing an indigenous or regional foundation for new innovations and for cross-border knowledge flows.

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