Lecture 10: The policy relevance of innovation studies

Comments on the 11/10 debate

The search process…

Our “current state of the art”

Our elusive target - or how the world will look like in May 2007…

Innovation policy: a definition � Innovation policy refers to elements of science, technology and industrial

policy that explicitly aim at promoting the development, spread and efficient use of new products, services and processes in markets or inside private and public organisations.

� The main focus is on the impact on economic performance and social

cohesion. Innovation policy has wider objectives than those of science policy and technology policy. It includes policies which aim at organisational change and the marketing of new products.

� Many other policy areas affect innovation. This is true of competition policy

and macroeconomic policy, but it is also true of sectoral policies like environment, energy, transport and communications and most importantly it is true of human resource development policy.

Innovation Policy InstrumentsPolicy Tools ExamplesPublic enterprises: Innovation by publicly owned industries, setting up of

new industries, pioneering use of new technologies Financial: Grants, loans, subsidies, financial sharing arrangements,

export credits, loan guarantees Procurement: Government purchases, prototype purchases, R&D contractsCommercial: Trade agreements, tariffs, currency regulationsPublic services: Purchases, maintenance, construction, innovation in health

services, public buildings, transport, telecommunicationsTaxation: Tax allowances, company taxationScientific research: Research laboratories, support for research associations,

professional associations, research grantsEducation: General and technical educations, universities, apprenticeship

schemes, retrainingInformation: Information networks and centres, consulting services,

databasesRegulation: Patents, environmental and health regulation, monopoly

regulation

Innovation Policy Trends� 1960s: Basic research and human capital

� 1970s: Emphasis on macroeconomic adjustment and competitiveness (neglecting the micro-level)

� 1980s: Technological change challenges� Technological leadership (Japan vs. US)� The <peace dividend>: declining military R&D� Diffusion-oriented policies� Environmental issues� Regulatory frameworks

� 1990s: The learning economy and innovation driven growth� Exogenous shocks and complex learning processes� Emphasis of the efficiency of policy portfolios

Economic rationales for innovation policy

• Market failures

• Co-ordination failures [a special case of market failures involving failures in the innovation process]

• Path-dependence in the evolution of institutions and industries

• Complementarities with other policies

Invention, co-invention and co-ordination failures.

Back to our 11/10 Debate…

Innovation Policy and Phases of Economic Development

PHASE I: INFRASTRUCTURE DEVELOPMENT FOR FDI• Solicitation of FDI• Creation of attractive investment and regulation regimes• Public investment on IT, energy and transportation infrastructuresPHASE II: LOCAL CAPABILITIES AND TECHNOLOGY ACQUISITION• Offset policies for market access• Technology transfer and technology acquisition strategies• Expanded incentives to local producers• Incentives for increasing local value addedPHASE III: INDIGENOUS R&D AND COMMERCIALISATION PROCESSES• Government funding of R&D• Investment in technology commercialization• Investment in higher education and human resources• Targeted promotion of innovation at the sectoral level

Evolution of the Korean Government’s S&T Role

S&TRole

of Government

Scientific InstitutionBuilding

•Establishment ofMinistry of S&T

•S&T promotion low•Human resource

development

ScientificInfrastructure

Setting

•Establishment ofgovernment

research institutes•R&D promotion low

•High qualifiedpersonnel

development

R&D and PrivateResearch Lab

Promotion

•National R&D funds•Promotion of theestablishment of

private research labs•Promotion ofindustrial R&D

Leading Role in Strategic

Area

•Strategic program (highly advanced national project)

•Enhancing university research capability

•Linkages to universityindustry governmentresearch institutes

Exploration,Creation, andNationwideInnovation Diffusion

?

Major Direction of

Industrial Policy

Expand export-oriented light

industries

Expand heavyand chemical

industries

Expand technology-

intensiveindustries

Promotehigh-technology

innovation?

CompetitiveDevelopment

Stage

1960s 1970s 1980s 1990s 2000s

Factor Driven StageInvestment Driven Stage

Innovation-Driven Stage

InnovativeCapabilityof Private

Sector

Sources ofCompetition

Cheap laborManufacturing capability

Innovative capability

Innovation Policy and Industrialization

Objectives/Targets

Obstacles Market failures & Policy Constraints

Policy Approach & Policy Components

��Widespread Endogeneization of the R&D process

��Lack of good R&D projects ��Pervasive market failure

��Learning Approach: Government Agency becoming an N3 network entrepreneur; generating relevant project taxonomies; codification of policy experience

- Assemble networks - User-producer - Exchange if ideas

��Collective, Multidisciplinary & Cumulative Learning Process

��Absence of R&D (and search) routine at firms

��Massive and flexible support

��Achieving ‘critical mass’ of projects

��Underdeveloped R&D Consultancy/advisory services and financial services markets

��Mix between finance/monetary incentives and institutional/market building policies

��Developing Policy Capabilities

��

��Partially inadequate institutional framework

��Predominance of Neutrality in incentives/finance

��Defining the specifics of firm based incentives

��Inadequate policy approach and policy capabilities at Government

��Proactive policies (project generation) ��Investment in new policy capabilities (training, staff

work etc.)

Challenges for Developing Countries

• New areas of co-ordination failures– Skills– Infrastructure and logistics– Capital markets– Ability to adjust

• The lack of space for macroeconomic adjustment, i.e. the absorption of exogenous shocks– Interest rates fluctuations in the global economy– De-regulation facilitating innovation driven growth in advanced

countries

Different Views on Innovation Dynamics and Innovation Policy

• NEO-CLASSICAL APPROACH– Market failures

• POLICY AGENDA– Innovation=R&D– Human Capital– Property rights

• SYSTEMS APPROACH– Co-ordination failures– Knowledge externalities– Diffusion of technology– Institutional competences

• POLICY AGENDA– Adjustment to institutional

change– Proactive diffusion policies– Institutional learning– Networking policies

Policies affecting the pressure for change, the ability to change and the consequences of change

Transformation pressure Macro-economic policies

Competition policies

Trade policies

↓

Ability to innovate [broadening vs. deepening] and adapt to change Human resource development policies

Labour market policies

Innovation policies

↓

Redistribution of costs and benefits of change Tax and other income transfer policies

Social policy

Regional policy

Is that enough?Six Myths about Technology

and their influence on Industrial Policy

(i) Technology is (just) Applied Science � Set up R&D Institutes

(ii) Technological Self-reliance is Key, period � Indigenization as end in itself

(iii) More Technology is always Good � Focus on R&D Spending, not Content or Value Added

(iv) High tech is the Best technology � Expensive, high-tech Champions, State or Private

(v) Technology is well understood and easily transferred � Focus on Regulation

(vi) R&D is Key, and led by Research � Focus on Research, not Development

Technology Policy Implementation

BEST PRACTISE

• Well defined targets• Already available

expertise• Limited requirements for

new institutional arrangements

• Lack of priorities• Difficulty to adjust to

exogenous changes

ENDOGENOUS NEEDS

• Links local needs and complementary policies

• Consensus building• Adjustment to exogenous

shocks• Limited local resources

for policy analysis• Lack of policy

implementation institutions

Readings…

• Westphal

– Additional readings Martin, Metcalfe, Aghion, et al. (2006)