Sets out the implications for industrial policy in developing countries that can be drawn from recent research on firm and national technological capabilities. Many unconventional approaches to the issues of technology in developing countries exist. These approaches have assigned a central role to indigenous technological effort in mastering new technologies, adapting them to local conditions, improving on them, diffusing them within the economy, and exploiting them overseas by (1) manufactured export growth and diversification and (2) exporting the technologies themselves. The nature of micro-level technological development - e.g., firm-level technological capabilities and national technological capabilities - in developing countries is explored, with reference to the experience of the following newly industrializing countries (NICs): South Korea, Taiwan, Hong Kong, Singapore, India, Brazil, Mexico, and Thailand. Based on the interplay of incentives, capabilities, and institutions, a broad framework for explaining the growth of national capabilities is proposed. Capabilities include physical investment, human capital and technological efforts. The development of capabilities was found to be the outcome of a complex interaction of incentive structures with human resources, technological effort and institutional factors (which are all strongly affected by market failures and are mediated by government interventions). It is suggested that, at the firm level, the interplay of these factors in particular country settings determines how well producers learn the skills and master the information needed to cope with industrial technologies. At the national level, the interplay of these factors decides how well these countries employ their factor endowments, raise those endowments over time, and grow dynamically in the context of rapidly changing technologies. Government policy is shown to affect all components of technological development. (SFL)
