Innovation Systems in Latecomer Development

1. Innovation Systems in Latecomer Development BanjiOyelaran-Oyeyinka Professorial Fellow, United Nations University-Merit, Director, UN-HABITAT Emerging Economy Perspectives and Priorities in a Multi-Polar World November 2011

2. CONTENT • What is Development in the context of Innovation studies? • How do we view development in light of Innovation and Learning Studies • What have we learnt in this Dialogue and the extant Framework? • On the Role of Policy and Institutions for Innovation • Thoughts on Future

3. How Has Development been interpreted? • What are key issues emerging from the more than five decades of learning, theorizing and experimentation? • They are complex issues that can be classified into a number of stylized facts. • How do we understand lessons from the Dialogues?

4. Three stylized categories: • Underdevelopment has a single cause These “causes’ have evolved over time and include the following: • Shortage of physical and financial capital. The debate conceptualized economic development as a process requiring complex shifting of factors of production from low-productivity, traditional sectors plagued with diminishing returns to the more productive industrial sector characterized by increasing returns.

5. The high end is an economy with high levels of human capital and knowledge with an economy corresponding to “increasing returns to scale” and corresponding path is a high-factor-productivity, high growth and high levels of per capital income. • Ineffective government: Recently “governments matter” (Chang, 2001; Stiglitz, 2001) and that “the role of the state must be at center stage” (Stein, 2001)

6. What we Know from Development and Innovation Studies The issues pivotal to the “new” development framework are: 1. Development is a non-linear, non-sequential and complex process; Innovation is a non-linear, non-sequential and complex process Example: East Asian firms reversed the sequence of innovation cycle 2. Development paths are differentiated and non-unique; Innovation trajectory is equally differentiated. Examples: Foreign owned; Taiwan small firms, locally-owned; Malaysia. Large MNCs, foreign-owned; China: a new set of institutions and organizational forms. India complex sectorally-diverse modes (BPO success)

7. 3. Development is path dependent; Innovation is path dependent. Both shaped by initial conditions which affect subsequent paths of the process. Examples: China’s dominance of computer hardware not a sudden success; India’s success in software rooted in long years of building engineering and science human capital 4. Development paths are not fixed; Innovation paths are not set in unalterable contours Both are subject to change through policy and institutional changes. 5. Development process is shaped by the state; Innovation is shaped by state action.

8. What is “New” in the New Development Framework? The new makes a decisive shift in focus and content of the factors explaining economic growth. 1. That development is not only about capital accumulation neither is it just about more human capital, important as these elements are. 2 Eliminating “big” government and simply correcting for price distortions resulting from state action has equally not solved the problem of development.

9. Development is a long process of organizational change that takes as starting point five fundamentals, namely, financing, technology, institutions, human capital and policies. • The role of institutions are critical, that “history matters”, and that wealth distribution is a spur to sustained economic growth.

10. 5. Distributional inequalities perpetuate individual and productive structures from one generation to another. For instance an economy stuck in a low equilibrium production system will only be capable of supporting an incentive, contract and outcomes reflective of the kind of economic system.

11. STI: What Differentiates Countries • Pattern of R&D and WealthCreation: R&D spending is highly correlated with the wealth of nations; the highest spending is found within the OECD countries although a number of Asian countries are beginning to spend substantial amounts on R&D;

12. STI: What Differentiates Countries • Pattern of Sectoral Specialization: Countries specializing in so called high-tech goods and services tend to invest proportionally heavily in R&D activities. • Pattern Public-Private of R&D Spending: Private firms in high income countries are the dominant R&D players

13. What separates Countries • Pattern of Basic Research Investment: Spending on basic research is also concentrated in high income countries with the sort of incentive structure and institutions that promote advance scientific knowledge; • Differential Investmentin Skills Acquisition: There is a significant difference in the quality of skills and knowledge of scientists between developing and developed countries.

14. What separates Countries • Identify Key Drivers of Innovation Success: Innovation capacity building effort in latecomer countries must seek context-specific Policies and Institutional solutions.

15. How will Institutions and Policies solve the Development Problem? In addition to what we do we need to include: • How technology, Institutions and Innovation increase living standards and do we reflect these in standards of health and literacy. • The goal will be to eliminate poverty and inequalities as has been done at least in part by most industrial societies.

16. We need explicit formulation to include sustainable environment and all inclusive societal transformation. • We have pointed out differences in Systems of Innovation, Now we need to explain them and finds way to articulate different systems in emerging economies. • We need to help build Policy and Institutional Capacity to build Innovation Capacity

17. What innovation is • Much of Innovation in a developing context includes continuous improvement in product design and quality. • Changes in organization and management routines, creativity in marketing and modifications to production processes that bring costs down. • Increase efficiency and environmental sustainability. • The ability to manage a portfolio of partnerships, to form linkages and to learn through them.

18. Innovation Policy • The focus of Innovation Policy is on the interaction between system actors and their embeddedness in an institutional and policy context that influences their innovative behaviour and performance. • Coordinating these different actors e.g. agencies of government is difficult, complex and undermined by vested interests.

19. Innovation missing Links • The innovation system approach considers the demand-side. Demand flows amongst others signal the shape and focus of research, and the decision as to which technologies from among the range of the possible will be developed and the speed of diffusion. • Demand is not articulated at arms length through the market, but may take place through a variety of non-market mediated collaborative relationships between individual users and producers of innovation (Lundvall: 1988, 35). • In broader systems terms demand may be intermediated by policies. • Conventional S&T policy in poor countries has only come to terms with this reality.

20. Innovation Policy • Government Innovation policy in industrial countries usually result in actions in three broad dimensions: • Supply conditions which involve the provision of financial and human capital, • Macroeconomic conditions which include competition, taxation and legal framework to allow for innovation activities to thrive; • Demand conditions which include procurement and purchases by central and local governments.

21. Elements of IP • Supply Side: (a) Support for knowledge infrastructure particularly R&D in public and private domains, • promote research and professional associations, use of competitive research grants; (b) general and technical education, support university research, apprenticeship programmes. (c) Information networks, library and database services.

22. Elements of IP….. • Macroeconomic Conditions: • Loans, subsidies to private provision of innovation, financial services, export credits; • (ii) taxation: company, personal, indirect and payroll taxation and tax allowances; • Legal and Regulatory measures: patents, health and environmental regulations, monopoly regulations and competition policy.

23. Elements of IP…. • Demand Conditions: (i) Procurement policy: central and municipal government purchases and contracts, R&D contracts, purchases; (ii) Commercial instruments: trade agreements, tariffs, currency regulation.

24. THOUGHTS ON STIPS INNOVATION DEVELOPMENT POINTS FOR DISCUSSION • POINTS FOR DISCUSSION

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