R&D, innovation and all that - Science and innovation – the policy choices

1. R&D, innovation and all that- Science and innovation – the policy choices Presentation for Taller 3: Inversión Investigación y Desarollo pública-privada 17 February 2004 at Palacio Euskalduna Johan Hauknes johan@step.no STEP – Centre for Innovation Research Oslo, Noruega

2. Who am I? – And what am I doing here? • Johan who? • Research director at STEP – Centre for Innovation Research • Policy experience • Scientific background and experience • What am I doing here? • R&D and innovation policy – stimulating and shaping industrial innovation and economic development through public policies and instruments • But my knowledge of the economy of the AC of the Basque Country … is meager • … so thanks for the opportunity to learn something new

3. My expertise • Economics, innovation theory – the knowledge base of industrial innovation policy • Functional evaluation and monitoring of innovation policies and related instruments and objectives • Weak expertise on policy making and policy processes – and the experiencebased core competence coming from long time participation and management of policy processes • Put bluntly: I’m a researcher – not a policy maker!

4. Outline • General issues of innovation, and S&T policies as to the incentive towards enhancing private investments in S&T and R&D • The innovation context – what is innovation? • The policy context – how should we approach innovation and S&T policies? • The need of integrative portfolio approaches to S&T policy formation • Lessons and messages for enhanced public and private investments in S&T

5. I am impressed

6. R&D indicators 2001

7. Does R&D deserve public support? • Little systematic evidence – lots of anecdotal evidence • Probably high social returns to R&D – though hard to estimate • “Guesstimate”: 50-70% marginal gross rate of return, • despite mechanisms that can induce overinvestment in private R&D • AND incentives for rent seeking behaviour by private investors and firms • Appropriating the full returns for the investor is difficult (impossible?) • Social returns exceeds private returns by a wide margin • Intellectual property rights are important • RTD generating complementary social assets • The structure of technological knowledge • Receptive and formative capacities in the economy • Social returns are generated in exploitation and utilisation of technological knowledge

8. So what can we say of R&D and economic growth?

9. Recent European Initiatives The Lisboa strategy – knowledge based competitiveness • ERA & S&T policies – the European Research and Innovation Area and the 6th FW programme • The Barcelona goals – 2+1% GERD/GDP • The Growth Initiative – TENs and large scale R&D projects • Life Sciences and Biotechnology a strategy for Europe • White Paper on Space Policy

10. What does this mean? The policy view In the final years of the XXth century we entered a knowledge-based society [depending] essentially on … the production, acquisition and use of knowledge. Scientific research and technological development … are at the heart of what makes society tick. … research and technology provide one of the principal driving forces of economic growth, competitiveness and employment. … the XXIst century … will be the century of science and technology. Towards the European research area, COM(2000)6

11. What does this mean? There are severe shortcomings with this discourse • These shortcomings are, however, seen as “R&D paradoxes” or anomalies rather than challenges to our interpretation of economic change. • It is now more necessary than ever to search for a proper understanding of what kind of competence and knowledge formation activities that matter and why and how they matter. • That is, what are the key activities contributing to long run growth and employment - and how should we identify and label them.

12. Concepts such as high-tech, knowledge-intensive industries and S&T base are seriously flawed as core • descriptors of economic change and • core dimensions for political prioritisation in improving society’s efficiency in its resource use Standardized definition of high-tech has the consequence that all advanced economies are dominated by low- and medium-tech industries • Innovation policies are potentially extremely important to growth – but there are no simple cures

13. The point at this stage • is not that technology, R&D and innovation is not important • On the contrary! They are probably VERY IMPORTANT • Sustaining innovation performance is complex for business firms – Sustaining innovation performance and impact for an economy is a much harder task

14. What can you do? • Enhance R&D performance in existing firms • Short to medium term perspective • Volume, efficiency or effectiveness? – relating R&D to the market nexus of firms • Learning non-performers to R&D • What forms – technology producing vs. technology exploiting • Expand R&D intensive industries • Managed structural change – medium to long term perspective • R&D performance in all countries and regions is skewed (80/20 rules) • Large share of R&D organised by MNEs • Generate new firms/industries of R&D performing industries • Long term impact • Uncertainty • New globalised divisions of labour – the case of biotech

15. Innovation is bootstrapping • Innovation is at the core of what makes economic systems change • The argument is not that new & old technologies matter • - but how and why they matter • and how they are shaped by economic agents • The core issue here is our understanding of knowledge, learning and productive competences – and the role of RTD in these

16. What is innovation? • Innovation is the essential characteristic of the life of a firm • A firm without innovation is a contradiction in terms • Innovation - any “new ways of doing things in the way of economic life” – is basically defined as any deliberate changes in economically related behaviour • Distinguishing between relevant and irrelevant • to analytical questions on objectives and aspects of innovations • to socio-economic questions on objectives and aspects of innovations • is a task for the analyst to make – not the economic agent.

17. What is innovation? – What was the question? The MBA question: Innovation creating Attacker’s advantage The Policy question: The long term viability and sustainability of ‘wealth creation’ The Economics question: Resource allocation and structural change in production and economic systems The Statistics question: Standardized indicators mapping industrial dynamics (Where’s the beans, and how may I count them?) The Marxist question: Innovation and Capitalist development

18. What does the innovating firm do? Compete! But how? Doing same things more efficiently – “internal” innovations – or doing different things – “external” innovations • Innovation is simple – and complex • The Anna Karenina principle – successfully innovating firms are all innovating the same way, while every unsuccessful innovator and non-innovator is unsuccessful in its own way

19. Economic competences and capabilities– the underpinnings of innovation • Economic competences – the abilities to generate, identify, expand and exploit business opportunities – is the basis for economic ‘action’ • strategic capabilities • organisational capabilities • functional capabilities, • market capabilities • capabilities to learn • This is where its R&D efforts are focussed

20. What does all this mean? Innovation is a market phenomenon • Innovation’s rationale and consequences in the nexus between the firm and the market environment • This implies a market logic for what incentives work and what their impact is • And what inclinations – or fields – of innovation are relevant to the socio-economic questions addressed

21. Stone Age Economics

22. What is innovation policy • Policies affecting the intent, orientation and extent of the innovation activities of firms and other economic agents • Public objectives and initiativesthat shapes and forms • economic agents’– producers, distributors, financial investors and mediators, consumers etc.) – • development and implementation of new ways of behaviourin their economic activities • with the intent of ensuring and enhancing their appropriation ofpecuniary, social or culturalreturns and goal achievements– based on agents own objectives and intentions – of their economic economic activities

23. Innovation policy = Welfare policy • The overall objective of innovation policy is general social welfare • These policies are requisites for attaining high levels and distribution of income and income generation capacity • through refining and utilising available socio-economic resources cost-efficiently • At the core innovation and RTD policy is very simple • appropriation – IPR systems • diffusion and spillover – industrial espionage

24. Innovation policy = Wider economic policy • The core objectives of economic policies is to ensure socially beneficial • factor supply • factor utilization • factor efficiency • distribution • Industrial S&T and RTD policies is a core part of this • RTD at firm level = problem solving • RTD at social level = enhancing factor supply and efficiency

25. Why innovation policies? Two rationales • Innovation performance as major determinant of economic growth  Facilitating innovation  Strengthening incentives to innovate • Two types of policy • policies concerned with resources and incentives taking technological possibilities and capabilities of firms as given by changing marginal returns to [innovation] • policies to change and enhance the innovation possibilities that firms face by improving their access to knowledge and by improving managerial capabilities • Social objectives otherwise unattained by commercial firms  Shaping innovation  Altering incentives to innovate

26. Implications • With this view of innovation and technical change, there is no longer any well-defined optimum allocation of resources • There’s good practice, not best practice • Policy development must be based on informed use of theory, information and subjective judgement  the explorative policy maker  the adaptive policy maker  the integrative policy maker  the contextual policy maker  the learning policy maker: systematic policy learning • This alters the requisite policy capabilities and competencies of policy makers • It is not that firms know better than policy makers, it is that they know differently

27. Systemic innovation – three insights • Innovation is a main explicant of the dynamic evolution of market systems • Innovation is multi-functional; and involves a recombination of factors from various dimensions of firms’ functions and activities. • Innovation is shaped by interactions between the firm and its institutionalised surroundings – the techno-economic environment of the firm Innovation is a dynamic microlevel process involving mutual and multi-functional interactions with a varied, and organisationally structured, socio-economic environment

28. Richer, simpler and more difficult innovation policies • Simpler: • Emancipation from market failure rationales of innovation and RTD policies, with their conflation of the objectives of public policies with a fictitious benchmark of perfectly functioning markets • No single critical missing factor • More difficult: • Innovation policy challenges are much more indirectly related to the actual unfolding of industrial innovation • More open-ended and framework enabling policy objectives than oriented towards specific technological or economic objectives • Targetting social objectives is paramount • No quick fixes • Long term

29. The policy messages • Design of innovation incentive structures at the microlevel to ensure the fulfillment of social needs and objectives • The core goal is generating economic variety • S&T infrastructures are particularly important, and must continue to rely on public-sector support • Potentially strong externalities and spillovers from public provision of R&D support • Needs of focus on bridging and receptive capacities to ensure this • Use macroeconomic, competition, monetary, education policies to shape innovation incentives

30. Policy issues – the information view • Information generation – new competences, new knowledges • Information emission – open and competitive environments • Information transmission network – ensure distributive capacities of economic systems • Information transmission signal quality – standardisation, certification etc. • Information absorption – build up receptive and interpretative capacities of firms, • Power supply – adaptive supply and receptivity of RTD systems: • Ensure flexible and sustained contribution and interaction with a public regulatory systems as well as systems of S&T institutions, institutions of higher education and so on

31. Lessons learned • The overall objectives of innovation policies are milestones – on the way towards more basic goals • It requires understanding of the wider political and social goals and objectives they are expected to realise • It is not a question of pro et contra for specific policy instruments – choice of instruments is a choice of tools; they can do a job easier – or more cumbersome • Innovation policy objectives are complex – goals for individual tools and instruments should be made simple • Thus, the design of policy instrument portfolios – of “policy mixes” – is essential – Innovation policy must be based on a portfolio approach • Policy learning – systematic analysis and exploitation of experience etc. of the requisites, design and implementation of innovation policies at portfolio level – is crucial

32. The focus of innovation policies • Innovation systems are social systems • habits, practices and rules of social actors participating • Social systems are dynamic and open • influenced irreversibly by external factors • they are path-dependent • system ‘logic’ is locality specific, • strongly contingent on local socio-economic history • Firms never innovate in solitude • To successfully innovate, companies are dependent on complementary knowledge and know-how • Innovation is an active search process to tap new sources of knowledge and technology and apply them to products and production processes

33. What does system approaches to economic systems emphasise The importance of • denseness – complementary activities • proximity – access to and richness of interaction • openness – agility and adaptability • competition along all relevant dimensions • market related dimensions • socio-technical dimensions • socio-geographical dimensions  Generalised “cluster approaches” help capturing important complementarities

34. Policy vectors and instruments • The overall objectives of innovation policies are milestones • where the choice of specific policy instruments is a choice of tools; they can do a job easier – or more cumbersome • Innovation policy objectives are complex – goals for individual tools and instruments should be made simple • RTD policies and goals form a set of such tools – albeit an important part • Thus, the design of policy instrument portfolios – of “policy mixes” – is essential – Innovation policy must be based on a portfolio approach

35. Towards a taxonomy of policy instruments • Direct vs. indirect instruments • Direct instruments are targetted at the agents where the impacts are to be generated • Indirect instruments are providing offers requiring further unilateral decision by the agent to access • Generic vs. specific instruments • Generic instruments apply to all agents in a defined population • Specific instruments apply to agents in this population satisfying predefined criteria • Distinguish between eligibility and functionality • Rightbased vs. competitive instruments • Right-based apply to all firms/agents satisfying a set of minimum standards • Competitive instruments – selective among eligible applicants • Intraorganisational vs. interorganisational orientation • (Inhibiting) Regulatory vs. (enabling) infrastructural measures

36. Towards a taxonomy of policy instruments

37. Industrial RTD support Disincentives

38. Task: Design a portfolio of policy instruments to enhance S&T investments and impacts in the economy • What are the targets? In which industries and sectors of the economy? • What is the role of S&T and RTD activities in these? • Design supplementary (dis-)incentive systems that rephrase and integrate socio-economic objectives into the market related incentives of the firm • by designing an appropriate and complementary set of policy instruments • that incorporates systematically all relevant activities and organisations

39. Policy and authorities Industry – economic production S&T institutions S&T policy portfolio design • Focus particularly of bridging functions and the associated translatory systems for the parties bridged – the Triple Helix • Consider explicitly the interaction of economic, technological and locational complementary groups of firms, industries and related factor inputs • Count in relevant costs and losses of transformation process • Be especially aware of the substitution effects of instruments and targets implemented • Do not rely heavily on pecuniary benefits to companies

40. Enhancing RTD performance in “advanced” technologies • Challenge 1: Globalized markets • Challenge 2: Structural change • Challenge 3: Techno-economic scales • Loco-motive goal? Ensure localization advantages • Adaptation of localized factor inputs – • design relevant “high technology” research programmes and S&T institutions • Ensure factor mobility • Competitors and complementary industries • Localize leading customer base • Spillover goal? Ensure bridging systems • Focus economic complementarities • Ensure use-oriented RTD and sustained development of receptive capacities • Enable bridging of “high technology” to techno-economic competences • Enable receptivity oriented RTD programmes and S&T institutions

41. S&T policy design • But most important: • Experiment – and document! • Consider what you are good at! • Be a demanding customer of business! • Have patience! • Make sure you fail!

42. And now for some conclusions

43. How to increase public and private investments in R&D? O1. Things take time (to happen): Stick to your goals • The stability of public policies related to R&D activities building confidence and long-term commitments in R&D O2. Understand the context and your vulnerable points • Large companies remain essential actors in R&D funded by the private sector: links between large companies and SMEs are important O2.Ensure checks and balances between stakeholders • The problems of the use of public money where private investment would have been done anyway needs to be addressed O4. Make RTD spill over easily • Long-term co-operation among R&D and innovation actors is fundamental to increase R&D investment and to improve its effectiveness. Promote networking • Location (denseness, proximity) may be an efficient way to increase R&D investment from the private sector and to invest public money. Focus of S&T parks (Bridging) O6. Focus receptive capacities of local systems explicitly • Highly skilled human resources become a crucial factor in stimulating R&D activities and innovation, particularly in SMEs linked to traditional sectors – Receptive capacities

44. How to: Efficient and effective use of resources O9.Build interactive bridges • Collaborative public-private and private-private partnership R&D projects are an efficient way to improve and to avoid duplication of effort O10.Be serious about what you want • Design appropriate goals and indicators, relevant for the long term industrial objectives set. Short-term priorities should be designed as check points – not as goals by themselves O11.Build institutional and functional bridges • Ensure strong interaction between higher education, scientific research, bridging institutions and other infrastructures through specific policy measures. O12.Build receptive capacities • In the long run, investing in human resources and other intangible assets appears much more efficient than investing in tangible infrastructures to improve the absorption rate of advanced technologies. O14.Integrate and involve other policies – share responsibility • Public R&D and innovation policies must be integrated with other policies. Close co-operation among decision-making instances or even integration should be explored to guide prioritisation processes and to better exploit synergies. O16.Make sure you learn, explore and adapt • Systematic evaluation and monitoring and development of extensive and appropriate indicator systems is important. Evaluation is primarily a tool for exploration and learning, not for administrative control and cost/benefit analyses

45. How to: Work through the behaviour of major players • Shape supplementary incentive systems – and be serious about it O17. Private policies on R&D investments are always based on effort-benefit trade-offs. Enhancement of technology appraisal capacity as well as understanding of societal needs by the authorities is needed. • This calls for the participation of all stakeholders (scientific community, business sector, administration and society) in priority setting O18. Facilitate co-operation, boost diffusion and uptake of knowledge by increasing the efficiency of the resources used. • Create critical mass and enable take-off

46. Summary – some main messages • Innovation and industrial S&T policies are important • Focus microlevel incentive structures – ensure social additionality • The checks and balances • Start from a point of strength • Build systematically up receptive capacities • The policy system’s receptive capacity • The S&T systems receptive capacity • The industrial system’s receptive capacity • Enable systematic policy learning and experimentation • The dilemma of small open economies – be specific without picking winners • Focus factor supply, mobilization and utilization

47. Zvi Griliches: This response is probably too long, reflecting the fact that I do care about the issue, and possibly that I am not entirely sure how good my arguments really are …(JPE 1994) • Thank you!