# **I  Introduction**

Many economies in East Asia have achieved unprecedented growth in output and living standards over recent decades. Some have caught up or are fast catching up with the developed world, though it is less clear whether they can sustain the growth momentum, now that they are approaching the world technology frontier. Others remain at middle and low income levels of economic development. Whether they can catch up with and replicate their fast growing neighbors’ success remains an open question.

This paper looks at the diverse approaches employed by East Asian economies to foster innovation, the varying outcomes they have achieved and the potential policy lessons from their experience. This focus is in part predicated on modern endogenous growth theory, which regards the generation, diffusion, absorption and application of new technologies, knowledge or ideas as among the crucial drivers of economic growth and development.<sup>2</sup> We attempt to examine the extent, the modes and other characteristics of innovation in East Asia using a range of quantitative measures to compare East Asia to other developing and developed regions, as well as to contrast the wide range of experiences within East Asia. We also provide a critical survey of selected aspects of the vast and rapidly growing literature on innovation, to place the East Asian experience in the context of key research findings and broader global trends.

We adopt a broad definition of innovation which includes the introduction of new or improved goods, services, production processes and marketing methods, as well as better modes of business organization in general. The basic requirement is that the innovation be new to the firm that adopts it, even though it may not be new in the world at large.<sup>3</sup> Viewed in this perspective, the kinds of activities that lead to innovation cover a wide ground. On the one hand they include systematic, long term, large scale Research and Development (R&D) investments, typically undertaken by business firms, resulting in a stream of discoveries that add to the frontiers of global knowledge, that can be patented and which are the principal source of the firm’s competitiveness and profitability. On the other, most innovation by firms in developing countries does not entail this kind of advance in the frontier of global knowledge, but, instead, 2 Thus Romer (1993) stresses the importance of overcoming ‘idea gaps’ relative to ‘object gaps’ in the process of development, that is, of overcoming barriers to the creation and absorption of productive ideas versus gaps in the availability of objects such as factories or raw materials. See also Romer (1990a, 1990b) and Aghion and Howitt (1992, 2005). .

3 The OECD ‘s 2005 _Oslo Manual of Guidelines for Collecting and Interpreting Innovation Data_ explicitly follows Joseph Schumpeter’s pioneering 1934 analysis by defining innovation broadly as “ _the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organisation or external relations_ .” The basic requirement for an innovation in this approach is that it be _new to the firm_ implementing it, including not only products, processes or methods originally developed by the firm but also those adopted from other firms or organizations. _Innovation activities_ are defined as “ _all scientific, technological, organisational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations_ .” Innovation activities include not only Research and Experimental Development (R&D), but also acquisition of external technology (for example purchases of patents and non-patented inventions, licenses, know-how, trademarks and designs from other firms), acquisition of capital goods, both those embodying improved technological performance and those with no improvement but which are required for the implementation of new or improved products or processes, and a wide range of other activities needed to prepare an innovation, such as industrial design, engineering and set-up, trial production, patent and license work, production start-up and testing. (OECD, 2005).

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