In one sense, the knowledge economy (also called the “knowledge-based economy” or the “information economy”) refers to a historical trend. During the last several hundred years, the primary source of wealth has progressed from natural assets such as land resources to increasingly technological assets like factories and equipment. More recently, the primary source of wealth in many industries is becoming knowledge itself (Dunning 2000: 8). One example is the percentage of “value added in US manufacturing industries” stemming from “knowledge” increased from 20% in the 1950’s to 70% in 1995 (Dunning 2000: 8). In addition, the rate of innovation has sped up dramatically. This trend is quite obvious to all consumers: advertising continually showcases new products and fashions. Home entertainment has progressed from mechanical instruments to cassette tapes, compact discs, DVDs and video games (O’Brian and Williams 2004: 177). Computer processing speeds have been increasing exponentially for the past 40 years and show no signs of slowing (Kurzweil 2000). Even the most basic-seeming industries increasingly employ innovation. For instance, agricultural crops are being genetically modified for desirable harvesting traits (Goff and Salmeron 2004) and information technology is becoming ubiquitous in virtually all industries.

The result of all this has been a change from the classical economic principle that “the generation of extra profit [following an innovation] is implicitly assumed to happen against the background of some initial equilibrium position” (Cooper 1994: 3). Instead, especially in high-technology industries, innovations occur so frequently that the market is never in equilibrium. Indeed, “competition is about creating a stream of disequilibrium situations, in which there are quasi-monopolistic rents” (Cooper 1994: 6). This means that in order to compete, companies must produce a continuing stream of innovation with which they can occasionally gain these monopolistic profits. There are several tenets of “innovation theory” which are important in maintaining this type of economy. First, the accumulation of past ideas will both improve a company’s ability to innovate and affect the direction of future innovations. Second, a mechanism for protecting the monopoly associated with new technology needs to exist for companies to go to the effort of research and development. This protection can be in the form of patents, secrecy, or simply the lag time for competitors to catch up (Cooper 1994: 7-9). Third, “lesser” activities such as adaptation, imitation, and “reverse-engineering” are also forms of innovation and thus the above findings apply to them as well (Radosevic 1999: 18).

It is important that the distinction be drawn between two meanings associated with the knowledge economy. The meaning which has been dealt with directly above is the economics of creating knowledge, which looks to analyse the increasing importance of innovation. The other is the economics of information technology, which concerns the specific technologies which aid in creating, managing, and transmitting information. Clearly the two are linked in that information technologies play a large role in aiding innovation and innovation constantly improves information technologies. But while it is true that information technologies are “pervasive tools of global impact with wide applications and growing potential” (UNESC 2003: 4), they are just one part of the changing infrastructure necessary for successful competition in the knowledge economy. For instance, without electricity they are not relevant, and without information they are not useful. To emphasize the more fundamental importance of the creation of knowledge I use the term “innovation economy.”

Much of the world is not so fortunate to have centres of active research and development going on, or even basic infrastructure like water and electricity. These less-developed countries (LDCs) are defined by their position significantly behind the most advanced countries in terms of living standards, infrastructure, and thus the capability for innovating. If LDCs cannot innovate by themselves, how can they meaningfully compete in the global economy? One option, of course, is to not participate at all; but the assumption here is that LDCs are looking to break out of this protectionist strategy in favour of the potential benefits of foreign trade. The alternative, of course, is for technology to be “transferred” to LDCs from the more developed countries. Indeed, Radosevic finds that “the more a country is lagging behind the technological frontier the more it has to rely on foreign knowledge and the import of technology through equipment, machinery, licences or through copying” (1999: 3). However, there has been considerable debate over many facets of technology transfer, including the definition of technology, the characteristics of innovation, and ultimately the extent to which technology “spillovers” actually occur.

The Encyclopedia of International Political Economy points out that “’technology’ is now an imprecise term used in a number of ways by political economists” (May 2001: 1553). A good general definition is “the application of science... to industrial or commercial objectives” (Technology 2000). Many researchers differentiate between “information” (or codified knowledge) and “tacit knowledge” (or expertise) as two aspects of technology. For Radosevic, information is marked by ease of transfer and the sense of being static and universal, while tacit knowledge is firm-specific, difficult to transfer, and implies a capability to innovate (1999: 16). Both are integral facets of technology, but have different implications for transferability. In particular, the ability to easiliy transmit information across the Internet should not be confused with the capability to use that information for production or further innovation. Both of these facets must be somehow transferred to LDCs if they are to be of any significant use.