Background, scope and objectives Competitiveness & Sector Innovation Systems

1. Background, scope and objectivesCompetitiveness&Sector Innovation Systems Nicholas Vonortas Center for International Science and Technology Policy & Department of Economics George Washington University

2. Competitiveness

3. National Competitiveness: Definition “A nation’s competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously expanding the real incomes of its citizens. Competitiveness at the national level is based on superior productivityperformance and the economy’s ability to shift output to high productivity activities which in turn can generate high levels of real wages. Competitiveness is associated with rising standards [of living], expanding employment opportunities, and the ability of a nation to maintain its international obligations. It is not just a measure of the nation’s ability to sell abroad, and to maintain a trade equilibrium.” Report, US President’s Committee on Industrial Competitiveness (1985, p.1)

4. National Competitiveness: Definition The importance of maintaining relative performance, increasing productivity and strengthening of the underlying factors, and raising structural flexibility permeate the definition. More specifically, the important ideas directly linked to our subject matter are as follows: • Competitiveness relates to the ability to produce and compete internationally. • Competitiveness is about both goods and services. • Centrality of productivity. • Centrality of (i) ability for structural adjustment to changing conditions (competition, technology) and (ii) ability to upgrade to higher value-added economic activities. • International trade performance does not say much on its own and may actually be misleading in judging competitiveness.

5. Industry Competitiveness The international competitiveness of national economies is built on the competitiveness of firms which operate within national borders (Chesnais, 1986). To a large extent, it is an expression of the dynamism of domestic firms and their capacity to invest and to innovate both as a consequence of their own R&D and of successful appropriation of technologies developed elsewhere. However, international competitiveness also depends on “structural factors” such as the flexible and proficient productive structure of the national economy’s industries, the rate and pattern of capital investment, its technical infrastructure and other factors determining the “externalities” on which firms can build. The “externalities” refer to economic, social and institutional frameworks and phenomena which can substantially stimulate or hamper both the productive and competitive thrust of domestic firms. Hence one needs to think broader, specifically in terms of structural competitiveness.

6. Sector Competitiveness: Indicators 1 The productivity of firms populating a particular sector largely defines the sector’s performance. The ultimate judge of performance is the market, especially the international market where products and services compete for a share of the domestic and foreign markets. The most basic indicators of industry performance are productivity and market shares. A third front-line indicator, profitability (profitability), could be used mainly as a check for market share results – firms can always raise their market share in the short term by dropping their prices below marginal cost.

7. Sector Competitiveness: Indicators 2 Necessity to understand the more general socio-economic fundamentals affecting firm actions. The first line of indicators of industry performance (previous slide) should be complemented with a second line of indicators to deal with the factors determining the economic environment such as: • relative prices • unit labor costs (relative to labor quality (productivity)) • capital costs • rate of investment • foreign direct investment / investment portfolios • rate of exposure to foreign competition • other

8. Sector Competitiveness: Indicators 3 The competitiveness of a sector is a dynamic concept and should take into account explicitly the ability of firms to react to changing economic/technological conditions, restructure and upgrade. A third line of performance indicators take a more dynamic approach by considering industry evolution and changing company capabilities. Such indicators may, for example, include: • the dynamics of competition in an industry such as . firm entry and exit . the rise and fall of incumbents . patterns of large- and small-firm mobility . measures of market structure and intensity of competition; • the innovatory capability of firms in an industry such as . the rate of introduction of new products and production processes . upgrade of the product mix . upgrade of the quality of the factors of production . technology output (patents, licenses, etc.) . technology imports and exports . R&D expenditures/intensity; • the participation of domestic producers in regional, national, and international production and innovation partnership networks.

9. Competitiveness Analysis Blues The problem with such lists of indicators is their ad hoc nature. While this has not stopped analysts piling up empirical results on the basis of whatever data becomes available, the issue is more serious than commonly understood. Strictly speaking, the lack of coherent theory – to choose important variables and determine cause and effect – makes interpretation difficult. The task is enormous. It transcends the ability of economists to go-it-alone and requires inter-disciplinary solutions. Urgency for new conceptual beginnings. Hence the effort in this project to conceptualize the nature / structure of sectors, inter-sectoral relationships, and evolution over time.

10. New Beginnings

11. Systems, Evolution, Localization The emergence over the past 30 years of research on systems of innovation evolutionary economics localization of innovative activities offers new perspectives on science, technology and innovation policy

12. I. Innovation Systems The innovation systems concept refers to the complex and varied set of actors and arrangements that, through the actions and interaction they engender and mold, influence the pace and pattern of innovation in a field. (Nelson, 2009) A major attraction of the concept is that it focuses attention on the variety of institutions and institutional actors involved in innovation. It does so without invoking the traditional notion of “market” failure to rationalize the non-market parts of the system. In innovation systems language, government programs, policies and special legal structures are part of the system.

13. Ia. National Innovation Systems The concept of national innovation systems (NSI) – Freeman (1987), Lundvall (1992), Nelson (1993) – opened an era of comparative institutional analysis as a new foundation of policy-making. The NSI approach extended from the rationale of coordination failure, and also drew upon contemporaneous debates about the sources of comparative advantage - “varieties of capitalism” - and competitive advantage (Porter, 1990) that addressed national competitiveness concerns and shortcomings of technology transfer per se to reshape the opportunities for catching up and convergence (Steinmueller, 2009). A most useful contribution of the NSI approach has been its combination with a more nuanced systemic view of the innovation process to create a method of diagnosing systemic dysfunction.

14. Ia. National Innovation Systems Despite the value in diagnosing dysfunction, the production of prescriptive policy from the NSI approach has not been easy. Institutions are situated within the historical and cultural framework of particular countries and therefore cannot typically be reliably transferred, adapted or translated into other contexts. The NSI approach also has the problem that when one approaches the practicalities of policies directed at specific industries, national boundaries become restrictive. Hence the development of a more general notion of innovation systems (Edquist, 1997) and sectoral systems of innovation (Malerba, 2004). Innovation systems these days come in a variety of sizes and shapes: national, regional, sectoral and technology-specific.

15. Ib. Sectoral Innovation Systems A SIS is composed of a set of agents carrying out market and non-market interactions for the creation, production and sale of sectoral products. The agents are individuals or organizations at various levels of aggregation, with specific learning processes, competencies, organizational structures, beliefs, objectives and behaviors. Sectoral systems have a knowledge base, technologies, inputs and potential or existing demand. A sectoral system undergoes processes of change and transformation through the co-evolution of its various elements.

16. Ib. Sectoral Innovation Systems A SIS has three building blocks: Knowledge and Technology. Accessibility, opportunity and cumulativeness are key dimensions of knowledge and define technological and learning regimes. These differ across sectors. The specificities of technological regimes and the knowledge base provide a powerful restriction on the patterns of firms’ learning, competencies, behaviors and organization of innovative production activities.

17. Ib. Sectoral Innovation Systems Actors and Networks. A sector is composed of heterogeneous agents, including individuals and organizations. These agents are connected in various ways through market and no-market relationships. Institutions. Cognition, actions and interactions of agents are shaped by institutions, including norms, routines, common habits, established practices, rules, laws, standards, etc. National institutions may have major effects on sectoral systems as, for example, the patent system, property rights, antitrust regulations. Sectoral system elements co-evolve. This process involves demand, technology, knowledge base, learning processes, firms, non-firm organizations, institutions. National boundaries are not always the most appropriate for the examination of the structure, agents and dynamics of sectoral systems.

18. II. Evolutionary Economics The concept of innovation systems has made use of evolutionary economics extensively. Evolutionary economics sees institutional evolution as a central part of the dynamic process of economic change. Institutions evolve, along with technologies. The institutions, and the way they evolve, involve both private and public actors. An important consequence is that policy-making is a continuing process. Existing institutional structures, including bodies of relevant law and particular government policies and programs, are not regarded as optimal. They are always subject to examination.

19. II. Evolutionary Economics Evolutionary economics has also raised attention to the cognition and learning capacities of actors (Steinmueller, 2009). By rejecting extreme concepts of individual rationality and the ubiquitous objective of profit maximization for firm decision-making, evolutionary economics has asked hard questions about: • the composition of motives that underlie the choice to innovate • the nature and reproducibility of routines • the means by which individuals and companies become aware of technological opportunities. Evolutionary economics has also provided a basis for understanding the process by which technological opportunities and market demandinfluence both the character of goods and services and the nature of supporting institutions, a process often described as co-evolutionary. Combination of mainstream economic analysis and evolutionary economics concepts is considered optimal for the project at hand.

20. III. Localization of Innovative Activities The localization of innovative activities is addressed in studies of regional innovation systems (Cooke, 2001) and studies of clustering (Porter, 1998) and of co-localization of research and productive activities – especially high technology industries (Saxenian, 1994). The epicenter is a pragmatic approach to thestickiness of knowledge. Knowledge-related activities seem to localize because of a mixture of Marshallian district features, the localized accumulation of specialized inputs (Including skilled labor), and the related accumulation of collective knowledge. Studies of the localization of innovative activities have helped provide some indication of the major ongoing changes in the internationalization of knowledge sourcing and specialization within countries.