Innovation Trends and Policies

1. Innovation Trends and Policies John Dryden Deputy Director for Science, Technology and Industry, OECD Istanbul Chamber of Industry – 6th Industry Congress, Istanbul, 26 – 27 Nov. 2007

2. Outline • Trends affecting innovation • Policies to strengthen innovation • OECD Innovation Strategy • The OECD Review of Innovation Policy in Turkey

3. TRENDS AFFECTING INNOVATION • Globalisation • Advances in generic technologies, notably ICTs

4. Globalisation is advancing rapidly…

5. … and Turkey is one of the active participants (Exports plus imports of goods and services as a ratio of GDP, %) Source, Presentation by Rauf Gönenç, OECD Economics Department, Country Desk for Turkey, September 2007

6. The current phase of globalisation is characterised by several new trends: • The spread of global value chains: production is increasingly fragmented across countries leading to more specialisation, even in traditional industries . • Intra-firm trade by multinational enterprises accounts for a large part of global trade flows. • Trade in services is growing rapidly, enabled by information and communications technologies. • The integration of large emerging economies, notably China and India, also in more innovative areas of economic activity.

7. Non-OECD countries are also of growing importance for global science and innovation R&D expenditure in 2005(circles reflect size of spending in billion USD PPP) • China, already among the largest investors in R&D globally, targets an R&D intensity of 2.5% by 2020. • In 2005, non-OECD countries accounted for over 21% of global R&D, up from 17% four years earlier. Source: OECD, Science, Technology and Industry Scoreboard 2007

8. Why the growing interest in innovation in this global economy? • Innovation is part of the response to globalisation: • countries move up the value chain, increase productivity growth and become more competitive; • Innovation can help address global challenges in the environmental (climate change, energy security) health (diseases, aging society, water) and development (poverty reduction, income disparity) domains. • The global economy also offers new opportunities for faster innovation: • New technologies (information technology, the Internet) enable more rapid innovation, notably in services. • Globalisation broadens access to markets and enables greater efficiencies and specialisation. • More resources can be devoted globally to research and innovation.

9. Welfare Economic growth Employment growth Productivity growth Innovation Human capital Investment in Capital Non-technological innovation (changes in processes, organisations, etc.) Technological innovation (often linked to R&D and scientific discovery) Innovation plays an important role in economic growth …

10. Investment in innovation is rising in several OECD countries (R&D expenditure as % of GDP) Source: OECD, Science, Technology and Industry Outlook 2006.

11. Government budgets for R&D have grown substantially in some countries: (Growth in government budgets for R&D, 2000-2006, current prices, in %) Source: OECD, Main Science and Technology Indicators, 2006-II, December 2006.

12. But raising R&D intensity primarily involves increasing business R&D: (R&D expenditure as % of GDP, 2005) Note: (1) Other R&D includes government, abroad and other sources. Source: OECD, Main Science and Technology Indicators, 2006-II, December 2006.

13. Innovation is more than R&D: Investment in many intangibles is rising • In the U.S., intangible investment now exceeds tangible investment (machinery and equipment and buildings) as % of output. • Investment in intangibles includes investment in software, R&D and factors such as training and firm organisation. • These intangibles (investments in knowledge) play a growing role in growth performance. Source: Corrado, Hulten and Sichel (2007).

14. Outcomes still differ substantially … Relative prominence of cited scientific literature, 2003 (1) … • Scientific research from some countries is more frequently cited than that from others. • Countries with large efforts in scientific research are also more frequently cited. • This may also reflect greater quality of the research, as well as greater linkages to research in other countries (1) “Relative prominence” is the ratio of a country’s share of S&T literature cited by the rest of the world to its share of S&E articles (NSF). Source: OECD, Science, Technology and Industry Scoreboard 2007.

15. … also in terms of patenting:(Key international patents (triadic patents) per billion dollar of GDP, 2005) Note: (1) Triadic patents refer to patents applied for at JPO, USPTO and JPO. Source: OECD, Compendium of Patent Statistics 2007, www.oecd.org/sti/ipr-statistics

16. Countries with strong innovation performance share common characteristics • Strong fundamentals, including well-functioning labour and product markets • Strong investment in knowledge (education, ICT and R&D) – which also strengthens the absorptive capacity of economies • Success in turning new technology, notably ICT, into • Stronger productivity growth and process innovation, e.g. in the services sector. • A high share of business in financing R&D • A diversified base of innovators (large and small firms) • Solid regional pillars of national development • Networking among innovators, notably strong linkages between science and industry • Openness to foreign sources of knowledge

17. POLICIES TO STRENGTHEN INNOVATION • Many OECD countries have had difficulties in strengthening innovation : • The EU’s Lisbon agenda has made slow progress. • Many OECD countries have had weak productivity growth in recent years, despite new opportunities. • Why? • Business, not government, is the main innovator. • Innovation depends on many factors: business-friendly environment, strong education and science system, good links between science and business, etc. • Co-ordinating policies across policy domains is difficult. • Improving innovation often requires a long-term policy commitment • Stronger innovation may imply winners and losers: insufficiently innovative firms may disappear and there may be job losses. • Sharing experiences and good policy practices can help.

18. Good framework conditions are key • OECD analysis emphasises : • Strong competition, especially in the services sector • Openness: A low level of restrictions on FDI; openness to foreign talent • Stable macroeconomic conditions and low real interest rates • The availability of internal and external finance: Improved corporate profitability and higher stock market capitalisation • Intellectual property rights, which provide the incentive to innovate • Much reform has been undertaken, but poor framework conditions (e.g. lack of competition and lack of openness) still remain a constraint on innovation in many OECD countries.

19. Policies towards Public Research are changing • Strong innovation requires a strong and efficient knowledge base (e.g. in universities and public research institutions). • Public R&D expenditure in several OECD countries has risen. • Reform of public research institutions is underway: • Fewer, larger universities (e.g. Denmark) • Greater university autonomy (Japan) and performance targets • Improved performance in public research institutions (Spain) • Growing focus on excellence and relevance: • Ensure best research is funded – focus on excellence • Growing emphasis on competitive funding • Growing focus on evaluation of programmes and policies; new quality assessment frameworks in several OECD countries (e.g. Australia, Austria, Norway)

20. Science-industry links can be further improved: Firms collaborating in innovation with higher education institutions, by size, 2002-04 Source: OECD, Science, Technology and Industry Scoreboard 2007.

21. Policies to foster business innovation • Governments support business innovation through several channels, including tax relief and direct support (e.g. grants). • These policies are changing across OECD countries: • Increasing reliance on R&D tax credits, less direct support in a number of countries • Some streamlining – support programmes often too complex for firms • More competitive-based funding • Supporting networks and clusters, instead of individual firms • R&D tax credits are being reformed (e.g. in Belgium, Spain, Netherlands) • Overall: “smarter ways” to support business innovation.

22. Developing coherent policies for innovation • Coordinating strategies towards research and innovation remains a challenge for many OECD governments • A long-term perspective on innovation enhances trust. • Better co-ordination mechanisms can improve policy coherence: • Growing inter-ministerial co-operation, sometimes co-ordinated by the prime minister (e.g. in Finland) • Growing involvement of stakeholders (scientific institutions, business, the public) in S&T policy debate, e.g. through foresight programmes. • Growing importance of regional governments and actors in innovation policies (e.g. Spain and Belgium). • In sum, despite major policy efforts to improve innovation capabilities, OECD countries still have a long way to go.

23. New dimensions of innovation policies • The scope of policies to foster innovation is broadening: • Demand for innovation: what is the market for innovative products and services? - in Europe, the 2006 Aho report on “Creating an Innovative Europe” focused on this issue. • Non-technological innovation – e.g. changes in organisation, in processes, in marketing, in design, etc. –recognised of growing importance, in particular in the services sector. • The globalisation of innovation – how can national policies be adapted to the changing global landscape for innovation? • Innovation for global challenges and not only economic growth, “global public goods” – eco-innovation, health innovation, etc.

24. The view of innovation is moving away from a linear model… Discovery Development Delivery …Diffusion

25. …towards a continuous innovation paradigm Enabling environment? Match innovation and market needs Research Policy and Behaviour Networks collaborations DISCOVERY • Policy • Environment • Energy • Health • Etc • Market • Demand • Tools • Flexibility IDENTIFICATION of NEED Connectivity & Interoperability DIFFUSION Industry Policy Structure Practice • Regulatory/ • Legislative • Policy • Incentives? DELIVERY DEVELOPMENT COMMERCIALISATION Decisions

26. TOWARD AN OECD INNOVATION STRATEGY… • The OECD Ministerial Council of May 2007 mandated an OECD Innovation Strategy: • Provide new facts and evidence depicting innovation performance in OECD countries, based on statistical, empirical and thematic analysis. • Provide explanations for the differences in innovation performance across OECD countries. • Provide comprehensive and forward-looking policies to strengthen innovation, involving good policy practices and recommendations. This will also seek to address the new dimensions of innovation. • It will provide governments with a stronger evidence basis and good practices to reform and strengthen innovation policies. • Country-specific recommendations (including through voluntary reviews.

27. …to build on OECD’s existing role • develop statistics and indicators to compare science and innovation performance. • analyse innovation policies and determinants of performance: • to improve the understanding of factors and policies driving performance • to identify good policy practices • foster international co-operation in science and innovation, e.g. through the OECD Global Science Forum • provide country-specific policy analysis and recommendations • Country reviews of innovation policy have been finalised for Switzerland, Luxembourg, New Zealand, South Africa, Chile and China; are underway for Norway, Korea, Turkey, Mexico, Greeceand Hungary; and are under discussion with Brazil, Germany, Japan and Russia. • The OECD Economic Surveys have also covered innovation for several OECD countries.

28. The Review of Turkey’s Innovation Policy • Agreement of principle reached with the Government • Review commissioned by TÜBITAK, other agencies to be involved, including the Ministry of Industry and Trade, in particular on SME and enterprise issues • Terms of Reference agreed; Final Report in mid- 2008 • Goals of the Review: • To provide an independent and comparative assessment of the strengths and weakness of Turkey’s innovation system • Formulating concrete recommendations for reform • Highlight the successful practices and outcomes that already exist in Turkey

29. Focus of the Review • How well is the innovation system related to past and present growth? • Does the policy mix match evolving policy priorities? • Are existing instruments for promoting business R&D effective? What else may be needed? • Focus on SMEs • Are PROs managed in a way to promote excellence ? • How effective are industry-science relationships; what role do clusters play? • How well are Turkish innovators positioned to benefit from global innovation and research networks, including the EU FPs? • What is needed to match the supply and demand for Human Resources in S&T?

30. john.dryden@oecd.org www.oecd.org/sti