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DOES BEING A KNOWLEDGE-BASED ECONOMY BOLSTER

INDUSTRIALIZATION?
By Lara Gianina S. Reyes
2010 – 11072

Does being a knowledge-based economy bolster industrialization?

The paper looks into the current global context where states are integrating towards a
knowledge-based economy. This new economic structure emerged in the late 1900s and has
since been the object of study and policy analysis among states. Countries in Europe and Asia
have devised their respective economic development plans that aim to adjust their country to
the knowledge economy transition. However, many questions were raised on the rationale of
the knowledge economy especially on its effects on the economic and political affairs of
states.

Queries such as “does the knowledge economy foster economic development”, and “does the
knowledge economy increase the gross domestic product (GDP) of countries” challenge the
feasibility of the contemporary economic structure. Studies, cited in the literature review of
this proposal, have been conducted regarding these questions (Brinkley, Fauth, and
Theodoropoulou 2009, Brinkley 2006, Godin 2006, and Chen and Dahlman 2005). However,
not much attention has been given in exploring its effect on one of the foundations of a fully-
functional economy: industrialization.

This study aims to fill the gaps in the pool of literature on the knowledge economy and its
effect on industrialization. The economic aspect of industrialization was also chosen in the
study as recognition of its importance in economic development. Furthermore, one of the
goals of transitioning into the knowledge economy is also to harness the full potential of
technological advancement among states. Thus it makes the study of its effect on
industrialization more significant.

The research is currently working under the assumption that being a knowledge-based
economy automatically means that there is recognition to further industrialize. It also
assumes that the components of a knowledge-based economy, particularly on education and
on technological advancement, can largely contribute to the establishing of industries. Finally
it assumes that these two components are significant and are needed to boost even existing
industries.

BACKGROUNDER OF A KNOWLEDGE-BASED ECONOMY

In the era of globalization, states begin to adopt new policies that would foster tighter
economic integration with one another. Coupled with scientific and technological
advancements, this prompted the emergence of a new economic structure referred to as the
knowledge-based economy. Countries today are gradually shifting towards the knowledge
economy because of its promise of bringing economic growth through investments in
knowledge and skills.

A knowledge-based economy is based on the production, distribution, and use of knowledge


and information (Godin 2006; Vaile 2000). It is further characterized as an emerging
structure where “economic success is increasingly based on upon the effective utilization of
intangible assets such as knowledge, skills, and innovative potential as the key resource for
competitive advantage” (ESRC 2005 as seen in Brinkley 2006, 4). It is now also viewed as
the drivers of productivity and economic growth (Bhatiasevi 2010; NZCER 2014). However,
Brinkley (2006, 5) also presents an alternate view that the concept of a knowledge-based
economy is not new since the economy “has always been driven by knowledge leading to
innovation and technical change and knowledge-based institutions have helped store and
share knowledge for centuries.”

The goal of the knowledge-based economy is to connect the knowledge resource to the global
market (Wongkar 2005; Brinkley et al. 2009). In order to bridge the gap between knowledge
and globalization, the following are considered to be drivers of knowledge-based economy
transformations: (1) rapid growth of information and communication technologies (ICT), (2)
cultural values that have become a crucial factor in technological advances, (3) integration of
economic resources, and (4) societal activities (Bhatiasevi 2010). Institutional changes have
also driven transitions to knowledge-based economies: (1) commitment to research by those
from the private sector, (2) commercialization of open science institutions, and (3)
privatization of government civilian research agencies (Foray 2002).

Methodologies and theories

The World Bank designed an internet-based tool known as the Knowledge Assessment
Methodology (KAM) to provide an assessment on whether or not a country is ready to
become a knowledge-based economy (Chen and Dahlman 2005). KAM is developed
specifically for the purpose of providing country profiles that will help determine the
opportunities and challenges countries may face during their transition. KAM is composed of
four categories, each with their own set of sub-indicators: (1) Economic incentive comprises
tariff and nontariff barriers, regulatory quality, and rule of law; (2) Education and human
resources is composed of average years of schooling, secondary enrollment, and tertiary
enrollment; (3) The innovation system contains royalty and license fees payments and
receipts, patent applications granted by the US patent and trademark office, and scientific and
technical journal articles; and (4) information and communications technology (ICT)
consisting of telephones per 1,000 people, computers per 1,000 people, and internet users per
1,000 people (Chen and Dahlman 2005).

OECD also provided the following criteria as determinants or indicators of a knowledge-


based economy: (1) knowledge economy (e.g. investments in capital and knowledge, venture
capital, R&D in manufacturing companies), (2) information and communication technologies
(e.g. ICT spending as percentage of GDP, use of computers, internet and e-commerce), (3)
Science and technology policies (e.g. public R&D per GNP, socioeconomic objectives of
R&D, public support to R&D), (4) globalization (e.g. R&D abroad, technological alliances,
patent ownership), and (5) output and impact (e.g. scientific publications, innovation,
productivity, high technology trade) (Godin 2005).

A theory is also used for analysis of knowledge-based economies known as the endogenous
growth theory (EGT). This theory posits that economic growth comes from endogenous
aspects such as human capital and knowledge, not from external factors (Kamara, Bousrih,
and Nyende 2007). EGT creates a model that argues “education and research and
development (R&D) are important factors in sustaining a long-term economic growth rate”
(Kamara, Bousrih, and Nyende 2007:6). From this theory, the authors constructed an
econometric model that consists of four analytical equations that elaborate on economic
growth and human capital development with respect to indicators of knowledge-based
economies (Kamara, Bousrih, and Nyende 2007).

Five cases of knowledge-based economies

This review cites five countries that were studied by scholars on their shift towards the
knowledge economy. Bhatiasevi (2010) wrote about Malaysia and Thailand, Kamara,
Bousrih, and Nyende (2007) did a study on Africa, Wongkar (2005) on Indonesia, and Vaile
(2000) on Australia. Following the comparative study between Malaysia and Thailand,
Bhatiasevi (2010, 115-16) discusses that Malaysia began to be a knowledge-based economy
at the time of former Prime Minister Mahatir Mohamad when he introduced the long-term
plan called Vision 2020. It sought to fulfil the following objectives: (1) to optimize the
brainpower of the nation and to strengthen human resource development, (2) to expand the
supply of skilled and knowledgeable manpower, (3) to increase accessibility to quality
education and training, (4) to make sure quality education and training is in accordance to
market demand, and (5) to enhance employability and productivity. On the other hand,
Thailand with its program IT 2000, followed by IT 2010, had the following goals: (1) to
upgrade the country’s capability from a “dynamic adopter” to a “potential leader”, (2) to
increase the proportion of knowledge-based industries to 50% of the country’s GDP, and (3)
to increase the number of knowledge-based workers in Thailand from 12% to 30% of the
force.

Kamara, Bousrih, and Nyende (2007) studied all 52 countries of the African continent in
order to bridge the gap between the utilization of knowledge and the continent’s abundant
resources. The study was conducted to gauge Africa’s situation as the continent gradually
adopts policies in accordance to the knowledge economy. They based their measurement on
the amount of allotted public expenditure to the education sector in Africa. Their econometric
model’s findings showed that there is still inadequate funding for education in the continent.
Well-funded education institutions and high enrollment rates especially in the secondary level
are two of the requirements in order to be considered as a knowledge-based economy.

Wongkar (2005) discusses in his paper that there should be efforts directed towards building
a learning society. The author clarifies that economic development in Indonesia must no
longer be about the implementation of protectionist policies since the country is joining the
fray of economic integration of the global community. Instead, the state must focus on
“developing the minds of the farmers and factory workers to equip them with learning,
information and knowledge” (Wongkar 2005, 5). He concludes in his case study of Indonesia
that it must “take a step towards knowledge-based economy” (Wongkar 2005, 12). In order
to do so, the state must focus on four areas of improvement: (1) human resource development
and education, (2) developing information and communications technology, (3) empowering
small and medium enterprises, and (4) practice of government, university, and industry
collaboration.
The same conclusion applies to Australia wherein Vaile (2000) explains that Australia is not
a resource-based economy. Rather, the country’s economy is grounded on the manufacturing
and service sectors. Because of this distinction, the author states that Australia must build on
and utilize its strength (i.e. the sectors in which it has an advantageous position). He
forwarded ideas of innovation and the improvement of the international trading environment
which makes Australia fit for becoming a knowledge-based economy. It is in this spirit that
the country would be able to adapt and participate in a “globally competitive modern
economy” (Vaile 2000).

The articles and case studies link knowledge economy to economic growth, development in
communications and information technology, and human resource development. However,
the literature leaves out the aspect of industrialization in its investigation. Filling this research
gap is the main goal of this paper. This study investigates how becoming a knowledge
economy through its two components (i.e. internet user per 1000 people and gross tertiary
enrolment rate) affects the industrialization of the different countries. There are three
hypotheses that may be posited:

H0: The two components of a knowledge-based economy have no significant effect on


the industrialization of states.

This hypothesis may serve as an explanation to the lack of literature tackling the
effect of the knowledge economy transition on industrialization. Perhaps there is
indeed no significant effect of the transition to the industrial sector of states.

H1: Both components of a knowledge-based economy boost the industrialization of


states.

This is the main assertion of the study. Since the knowledge-based economy is
grounded not only on knowledge but also on technological advancement, it would be
reasonable for these factors to lead to industrial development.

H2: One of the components of the knowledge-based economy (either internet usage or
higher number of enrolees in the tertiary level) would boost the industrialization of
the states.
While both are valid components that are also needed to industrialize, it is also
possible for occurrences of insignificance for one or both of the components. This
acknowledges the possibility that it might happen; however, it also asserts its
significance in the study.

H3: The two components of a knowledge-based economy deter the industrialization of


states.

This is the opposite of the main argument of this study. This hypothesis posits that
internet use and higher tertiary education enrollment rate may have a significant effect
on industrialization; however, this effect is not geared towards development but
towards the deterioration of the industrial sector of states.

KNOWLEDGE-BASED ECONOMY BOOSTING INDUSTRIALIZATION

A country is understood to have a knowledge-based economy when it has adopted policies


geared towards further economic integration through knowledge and technological transfers.
Using the KAM methodology, the World Bank was able to generate the knowledge economy
index (KEI) in 1995. The KEI presents a scorecard of a knowledge-based economy by
presenting a list of indicators under seven classifications: economic performance, economic
regime, governance, innovation system, education, labor, and information and
communications technology (ICT).

For the purposes of this study, the main explanatory variables used are internet users per 1000
people and gross tertiary enrollment rate. The two variables jointly represent or serve as
proxy for the knowledge economy. The indicator “internet users per 1000” is a variable under
the category of information and communications technology. This is chosen among the other
indicators because the internet serves as one of the main channels and repositories of
information. On the other hand, gross tertiary enrollment rate factors under the education
category. This is chosen to be the other explanatory variable because research-oriented
programs needed in a knowledge-based economy are primarily found in the tertiary level of
education.

Industrialization serves as the dependent variable in this research because it is one of the
basic foundations of a stable economy. It is defined as the modernization and development
not only of the manufacturing sector but also of the technological and communications sector.
This may be operationalized through the industrial production index (IPI) which measures the
production output of manufacturing, mining, and utilities among others.

The study controls for economic development, employment to population ratio, secondary
education, and food security. Economic development is consistently operationalized in
various studies as the Gross Domestic Product (GDP) of a country. Secondary education may
be measured through gross secondary enrollment rate. Employment is operationalized as the
employment to population ratio or the proportion of the population that are employed. It is
important to note that the data used specifies that the age of citizens included in measuring
the ratio of employment to population is 15 years old and above. Finally, food security is
operationalized by the food production index which contains the aggregate volume of edible
agricultural produce.

DATA AND METHODOLOGY

Data

The study is made by compiling a data set that came from different sources and databases.
The period to be covered in this investigation would be from 2005 to 2012. This is because
World Bank released the knowledge-based economy rankings of countries in 2005 and again
in 2012. This research aims to find out about the development of a knowledge economy and
how it affects a country’s industrialization within the given years.

The main source for the data set compilation is that of the World Bank Database. Of the
seven variables in the study, three of them (two independent, dependent, and four control
variables) came from this particular database. These are gross tertiary education enrollment,
gross secondary education enrollment, GDP, and employment to population ratio. The World
Bank database releases information about the world economy to the public for years that can
go as far back as the 1930s. Furthermore, this database is not only comprehensive but also
rarely has missing values which makes it a good source for research.

For the data on industrialization, this research used the industrial production index provided
by the Organization for the Economic Cooperation and Development (OECD). Similar to
the World Bank, the OECD also had a database that contains information on the different
economic aspects of countries. Finally, the data for the control variable of food production
came from the food production index of the Economist Intelligence Unit. This database
contains the different indicators used in determining the yield and stability of food source in a
country.

Table 1. Summary statistics


2005-2007
2005 2006 2007
Variables
Standard Standard Standard
Mean Min. Max. Mean Min. Max. Mean Min. Max.
Deviation Deviation Deviation

Dependent variable

99.7 9.8 53.6 113.5 105.2 9.6 62.6 117.2 109.3 11.4 63.0 131.7
Industrial productions capacity

Explanatory variables
52.3 20.5 12.7 87.0 56.6 19.5 19.5 89.5 61.1 17.6 28.3 90.6
Internet users per 1000 people
55.3 6.6 45.0 73.5 56.0 6.5 45.7 74.2 56.8 6.4 45.8 74.7
Employment to population ratio, 15+ (%)
60.4 18.7 10.1 93.5 61.4 18.8 10.3 97.5 62.5 18.0 10.5 100.8
Gross tertiary education enrollment
103.1 11.7 81.0 147.6 102.4 9.6 82.7 126.6 102.6 9.3 85.4 125.4
Gross secondary education enrollment
Food production index 99.6 3.1 89.0 108.0 99.0 3.1 91.5 105.3 98.6 7.5 76.8 112.0

60.4 18.7 10.1 93.5 26.1 1.8 22.6 30.3 26.2 1.7 22.7 30.3
GDP [log(gdp)]

Table 2. Summary statistics


2008-2010
2008 2009 2010
Variables
Standard Standard Standard
Mean Min. Max. Mean Min. Max. Mean Min. Max.
Deviation Deviation Deviation

Dependent variable

108.9 12.1 81.7 146.2 98.4 12.6 81.3 139.1 103.7 13.2 81.6 139.3
Industrial productions capacity

Explanatory variables
64.7 17.0 32.4 91.0 67.9 15.9 36.6 93.0 70.7 15.2 39.9 93.4
Internet users per 1000 people
57.0 6.2 45.8 73.5 55.4 6.0 44.7 68.8 54.8 6.2 44.2 68.9
Employment to population ratio, 15+ (%)
63.4 17.6 10.6 101.8 65.0 16.8 14.4 101.6 66.9 16.3 18.2 101.0
Gross tertiary education enrollment
102.8 8.9 89.6 126.7 103.0 9.6 87.7 128.8 104.3 10.0 89.1 130.8
Gross secondary education enrollment
Food production index 103.1 5.8 89.3 120.5 102.8 7.4 84.9 120.5 100.8 8.7 79.4 118.3

26.3 1.7 22.9 30.3 26.2 1.7 22.8 30.3 26.3 1.8 22.8 30.3
GDP [log(gdp)]
Table 3. Summary statistics
2011-2012
2011 2012
Variables Standard Standard
Mean Min. Max. Mean Min. Max.
Deviation Deviation
Dependent variable
Industrialization productions capacity 105.73 14.61 75.80 144.20 105.79 16.97 73.80 152.10
Explanatory variables
Internet users per 1000 people 72.56 14.40 40.01 94.82 75.12 13.23 45.88 96.21
Gross tertiary education enrollment 68.47 17.50 16.30 113.98 68.94 16.17 17.25 103.36
Gross secondary education enrollment 104.18 10.92 87.14 133.05 104.38 11.51 86.29 135.54
Food production index 102.69 9.06 84.45 124.52 101.04 13.15 77.61 138.96
GDP [log(gdp)] 26.36 1.74 22.94 30.37 26.33 1.75 22.89 30.42

Looking at the summary of the data for 40 countries, the industrial production capacity
noticeably fluctuates throughout the eight years covered by the study. The average industrial
production capacity of the 40 countries is 99.7 in 2005, 105.2 in 2006, and 109.3 in 2007 only
to decrease to 108.9 in 2008, lowering further to 98.4 in 2009 and picked up by 103.7 in
2010, 105.7 in 2011, and finally 105.8 by 2012. This is in contrast to the average number of
internet users per 1000 people from 2005 to 2012. From a mean of 52.3 in 2005, it began to
continuously rise to 56.6 in 2006, 61.1 in 2007, 64.7 in 2008, 67.9 in 2009, 70.7 in 2010, 72.6
in 2011, and 75.1 in 2012. Another fluctuating variable would be the employment to
population ratio. The average value is consistently increasing from 2005 (55.3) to 2008
(57.0). However by 2009, the number begins to decrease starting from 55.4 in 2009 to 54.9 in
2012.

In examining tertiary education enrollment, the average value constantly also rose from
having a mean of 60.4 in 2005 to 61.4 in 2006, 62.5 in 2007, 63.4 in 2008, 65 in 2009, 66.9
in 2010, 68.5 in 2011, and 68.9 in 2012. As for secondary education, it is almost constant or
similar to the results in tertiary education with 103.1 in 2005 and by 2012, it already has an
average of 104.4. As for the food production index and the gross national product, both
average values fluctuate through the eight years covered in the study. The GDP started out
with an average of 60.4 in 2005 and 26.3 by 2012. As for the gross secondary education
enrollment, it begins by having an average of 103.1 in 2005 and ends with an average of
104.4 in 2012.

Estimating equation
This study examines top 40 countries that had a score of five and above out of ten in the
knowledge economy index (KEI) from 2005 to 2012. The proposal of this research originally
stated 50 countries; however, ten of them had to be omitted because they do not have any
data on industrial production capacity and have missing values on tertiary and secondary
education. These countries are (in no particular order): Singapore, Barbados, United Arab
Emirates, Bahrain, Uruguay, Oman, Malaysia, Serbia, Costa Rica, and Trinidad and Tobago.

Using the dataset composed of 40 states, the following model was estimated using the panel-
data analysis with fixed effects. This model is designed to determine whether a country’s
becoming of a knowledge-economy boosts its industrialization.

Indusit = β0 + β 1Intit + β 2 Teit + β 3 Seit + β 4Eprit + β 5Fpiit + β 6 log (gdp) it + uit + εit

Indus – refers to industrialization. This is measured by the industrial production index


as explained in the operationalization and methodology of the paper.

Int – refers to the number of internet users per 1000 people. This signifies information
and communications technological advancement which is a component of the
knowledge economy.

Te – refers to tertiary education or the gross tertiary enrollment rate. This is chosen
because tertiary education today focuses either on research or technical knowledge,
both of which links it to knowledge economy.

Se – refers to the gross secondary enrollment rate. This is also under the category of
education in the KAM score card used to evaluate prospective knowledge economy
countries.

GDP – is an operationalization for economic development. GDP is a straightforward


type of data because it returns specific integer values that would signify a country’s
economic development. It is in log form in the equation because it generated numbers
or values.

Epr – refers to employment to population ratio. The treatment for this variable would
be the same as economic development (GDP) due to its straightforward generation of
values.
Fpi – refers to food production index. This is also related to the aspect of food
security which monitors how much edible food can be produced at a certain period.
This kind of work needs the assistance of machinery which is related to
industrialization; and improvement in production which is related to research brought
about by a knowledge-based economy.

u – accounts for between entity errors

ε – accounts for within entity errors

i – refers to the ith country

t – refers to year

ANALYSIS OF RESULTS

Table 4 shows the estimated effects of knowledge economy, through its two components (i.e.
internet user per 1000 people and gross tertiary enrollment rate), on industrialization. The
regression results show that the first component of knowledge economy in this study (i.e.
internet user per 1000 people) has no statistically significant effect on industrialization. This
might indeed be the case because internet usage, although it is linked to technological
advancement, is not directly related to manufacturing. Since the concept of industrialization
is still heavily grounded on manufacturing, it may take time before the two concepts become
directly related and significant to each other. The values even show that for every additional
user in the population, the industrial production capacity will be reduced by 0.03 which is
detrimental to industrialization.

On the other hand, the second component of knowledge economy (i.e. gross tertiary
enrollment rate) is statistically significant with a p-value of 0.049. This supports the notion
that the orientation of tertiary education is directed towards theoretical and practical studies
for national development. Since industrialization is a component of national development, it
is logical for tertiary education to become significant to industrialization. According to the
table, for every addition to the gross tertiary enrollment rate, there is a corresponding 0.262
increase in industrial production capacity.

It is very surprising to find out that the most significant variable among those on the list is
the employment to population ratio. While it is not unknown that employment is needed in
order to industrialize, it is unexpected for this ratio to be more significant than the GDP
(which is always associated to industries) and secondary enrollment rate (since this is also
another component of the knowledge economy). It is also more significant than the food
production index even though the latter is directly related to industrialization. Furthermore
even if the food production index is still significant to industrialization, a single improvement
in food production would only lead to a 0.172 increase on industrial production capacity. On
the other hand, an addition to the employment to population ratio would contribute a 1.44
increase in industrial production capacity.

Table 4. Regression results on the effect of the knowledge economy on industrialization


Industrial production
Independent variables capacity
(2005 - 2012)
Internet users per 1000 people -0.0259716
[0.798]
Gross tertiary enrollment rate 0.262254**
[0.049]
Gross secondary enrollment rate -0.2264881
[0.195]
Employment to population ratio 1.441416***
[0]
Gross Domestic Product 2.335595
[0.68]
Food production index 0.1724774*
[0.081]
Constant -46.12573
[0.725]
Number of observations 40
Number of groups 40
R-squared 0.1283
Prob>F 0
Note: Figures in brackets are p-values. ***p<0.01, **p<0.05, *p<0.10

CONCLUSION

This table shows that we are able to reject the null hypothesis and affirm the second
hypothesis that gross tertiary enrollment rate is statistically significant to industrialization
based on the investigation of 40 countries. It is also important to pay attention to the food
production sector because, aside from processing and sustaining our food supply, it is also
crucial in building a foundation or base for industrialization.

On the topic of knowledge economy, it is important to note that this study was not able to
harness the full potential of data on the subject. This is because the World Bank only presents
the rankings of countries on certain years. Case in point, 2012 was the third and latest
presentation of ranking since 2005. It would therefore be a good endeavour for researchers to
study more about the knowledge economy including the different factors under the score
cards of the knowledge economy index.

This paper re-affirms the salience of employment and how it not only provides wages for
workers but also largely contributes to the industrialization of a country. This research is very
applicable in the Philippines given that we have an issue regarding industrialization and
unemployment. The country remains to be based on agriculture and our economy and
remains to be export-oriented. Furthermore, people are subject to harsh working conditions
and others do not even have work. Others see migration as a solution which leads to the loss
of people/ labor force and resources.

The knowledge economy, looking back, may be geared towards advancement in technology
and breakthroughs in knowledge. However, given the context of globalization and market
liberalization, this presents a dangerous tendency that developing countries such as the
Philippines may no longer have the opportunity to become self-sufficient and instead remain
being the service provider and raw materials exporter to more developed countries. This
study took a surprising turn which led to the realization that, even within the framework of
technological advancement, it is still the basic aspects such as the generation of jobs that
would lead to industrialization and social progress.

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