The market mechanism will not allocate the right amount of support to innovation activity not least because of peculiarities of knowledge as an economic commodity… there is a divergence between private incentives and social incentives which government can correct.
At no time, therefore, has the building of indigenous technological capabilities in developing countries assumed as much urgency as it has today.
Industrialization in developing countries requires catching up with industrialized countries by building up and accelerating supply capacity, making the supply capacity efficient and competitive in the internal and external markets, and moving up the value added ladder and value chain by upgrading the industrial structure. The upgrading of the industrial structure requires, inter alia, enhancing the technological capabilities of the country in order to increase value added per worker. The implication of the neoclassical theory of industrialization and growth is that developing countries will catch up automatically as long as market forces are allowed to operate. In other words, in the long run GDP per capita will grow at the same rate in all countries.
Do catch-up and technological upgrading take place automatically as suggested by the proponents of neoclassical theory? The new growth theorists argue that differences in economic development across countries are due to the differences in endogenous knowledge (Romer 1986). As shown in Chapter 3, according to the proponents of capability building industrial development requires development of endogenous capabilities.