From Industrial Policy to Innovation Strategies: The Global and the Local

1. David A. Wolfe Program on Globalization and Regional Innovation Systems Munk Centre for International Studies University of Toronto Presentation to the Industry Canada/ICP Workshop on Industrial Policy and International Trade Ottawa, Ontario, March 13, 2009 From Industrial Policy to Innovation Strategies: The Global and the Local

2. What is Industrial Policy? • Definition: • Any government program that directly affects the economic activity of an industry, company or plant • Policies designed to change economic structures, behaviour and/or performance • Types of industrial policy • Innovative – designed to promote growth and development by fostering the promotion of new product and process technologies • Defensive – attempt to protect firms, sectors or regions against undesired economic changes • Adaptive – attempt to ease the adjustment process by reallocating capital and human resources away from declining economic activities

3. The End of Industrial Policy ? • Failure of Industrial Policy, 1970s to 1980s • Adaptive and defensive more than innovative • Industry and Labour Adjustment Board • Canadian Industrial Renewal Board • Individual bailouts – Chrysler, Maislin, Massey-Ferguson • Tier I and Tier II Consultations • Great expectations – few results • Megaprojects strategy • Sidelined in Cabinet • Macdonald Commission Report • In a small open economy, industrial policy and trade policy are synonymous – FTA, CUFTA

4. Provincial Industrial Policy • Provincial Initiatives – 1980s and 1990s • Ontario Premier’s Council Reports – late 1980s • “Competing in the Global Economy” • “Industrial Policy Framework” – 1992 • Emphasis on sectors – Sector Partnership Fund • Quebec – early 1990s • Industrial Atlas of Quebec • Influence of Porter • provincial economy as twelve industrial clusters • Parallel initiatives in BC, Sask, Nova Scotia • Lack of integration with federal strategy

5. Industrial Policy Redux • Federal Programs – Innovative & Adaptive • DIPP, TPC and Program for Strategic Industrial Projects • Industrial and Regional Benefits Policy • Regional Development Agencies • Subsidy and loan programs • NRC, IRAP, CSA • Science and Research Policy • SR&ED • NCEs, CRCs, • CIHR, NSERC, SSHRC, CFI

6. Industrial Policy from an Innovation Systems Perspective • Innovation is a ‘social’ process • Networks and relationships facilitate the translation of new ideas, ie. research into commercial products • Innovation is ‘place-based’ • Occurs in an institutional, political and social context • Spatial proximity facilitates sharing of knowledge and capacity for localized learning, but global pipelines remain important • Localized learning is facilitated by common set of regional institutions • Innovation policy becomes the cornerstone of industrial policy • Focuses on system failures rather than market failures • Recognizes the internationalization of technology development • Learning process are central to innovation and policy design • Knowledge capabilities are person embodied

7. Schumpeterian Dynamics in a Small Open Economy • Inventive activities of firms in knowledge-intensive industries remain concentrated in home country (Macher & Mowery 2008) • Growth of global production networks • Vertical specialization – firms specialize in a limited set of activities • Design, systems integration and R&D located in home base • Small open economies face structural disadvantage from the perspective of Schumpeterian competition (Harris 1985) • Smaller indigenous firms perform lower levels of R&D and face greater barriers to entry in Schumpeterian industries • Less than optimal industrial structure for Schumpeterian competition especially in where scale economies represent entry barrier • “Industries in which product differentiation is the most important structural feature of the innovation process offer greatest for success for smaller firms from a small open economy to establish export market bases” • Provides justification for targeted support for firms in these industries

8. Spatial (nested) Scales • National • Corporate organization and governance • Legal/regulatory framework • Fiscal (taxation) and macroeconomic environment • Framework of industrial relations and labour training • Financial system • Government policy • State/Provincial • Regional industrial structure • Research infrastructure – higher education sector • Specialized training institutions • Government policy/support • Industrial attraction and retention • Local /Cluster • Civic governance • Physical /communications infrastructure • K-12 education system

9. Unique Capabilities of Local Innovation Systems • Regional Innovation Systems produce unique local capabilities, which become a key source of competencies for local firms in a variety of sectors • Localised capabilities include: • The region’s specific institutional endowment • Local knowledge infrastructure • Specialized knowledge and skills available in the region • These capabilities develop and evolve slowly over time • A region’s institutional endowment shapes: • Distinctive rules, practices, routines, habits, traditions, customs and conventions • Entrepreneurial spirit, moral beliefs, political traditions and decision-making practices • Regional ‘culture’

10. Clustering as a Source of Competitiveness • Competition and cooperation are complementary • The old dichotomies no longer apply – (Best 2001) • Cluster members are both suppliers and buyers • Beneficial outcomes of cluster collaboration: • Creates linkages among firms • Facilitates specialization • Role of lead anchor firms • Focus on core competence • Builds critical mass • Improved branding and marketing • Enhanced resources for the cluster • Specialized financing, education, policy supports • Attracts customers, new investment, skilled talent • Growth of a ‘thick’ labour market

11. Average Regional Income by Employment in Clusters

12. Strategic Management ofLocal Innovation Systems • Regional response to globalization is emergence of strategic management policy • Not for firms, but for regions • “This strategic management of regions has harnessed the propensity for knowledge and innovative activity to concentrate geographically as a locomotive of regional economic development” (Audretsch, 2002) • Collaborative institutions - formal and informal organizations that: • Facilitate exchange of information and technology • Foster cooperation and coordination • Enhance civic capital and improve competitiveness by: • Creating relationships and establishing trust • Forming collective institutions • Identifying common strengths and developing common agenda • Formulate innovation-based strategic plans • Strategic planning exercises draw upon civic capital created by these institutions • “local social knowledge management exercises”

13. Strategic Planning at the Community Level • Innovation-based strategic planning • Promotes innovative ideas in all aspects of regional economy • Integrate across all levels of governance • Promotes strategic alignment of policy across spatial scales • Strategic assessment of local/regional assets • Workforce skills • Knowledge assets and R&D • Creative elements • Infrastructure • Quality of place • Entrepreneurial networks and clusters • Key Role of Community Leadership • Civic entrepreneurs • bring civic interests together to collaborate • Create broad buy-in across all sectors of community

14. Policy Implications • Linkages between elements of the system • Especially research infrastructure and clusters • Not just a ‘supply-push’ phenomenon • Importance of demand side of innovation system • Absorptive capacity – at both firm and regional level • National policies impact at the local level • Best example is IRAP which builds innovative capacity at local level • Need to coordinate role of federal agencies at local level • Growing role of networks and clusters • Disaggregation of ‘companies’ and ‘industries’ as objects ofpolicy into supply chains and knowledge networks. • Continuing role of lead anchor firms in grounding clusters • CATA’s ‘motherships’ • Gaps in capital markets at key stages of cluster evolution • Critical role of strategic planning and regional foresight at the local and community level