Long-term Research and Innovation Policies for Sustainable Growth

1. Long-term Research and Innovation Policies for Sustainable Growth Luc Soete UNU-MERIT Regions for Economic Change – Building Sustainable Growth, 20-21 May 2010, Brussels

2. Outline • Cohesion Policy Contribution to Smart Growth from the perspective of a Knowledge and Innovation based economy. • Three focal entry points into EU2020 discussion but with the crisi(e)s as background: • Smart growth and the issue of long-term funding of research and innovation – the rate of technical change – and the respective roles of private and regional, national and European public funds; • Sustainable growth and the (re-)discovery of the importance of the direction of technical change – at different levels, local/regional, national/European, global level our societies are confronted with major societal challenges; • Inclusive growth limited here to the issue of the regional impact of knowledge accumulation and innovation opportunities: a spiky versus flat world? .

3. 1. Conditions for long term smart growth Investing in R&D and innovation: from Barcelona to EU 2020 and back… • Asking for more private investment in R&D without offering a credible plan for integrating, or at least harmonizing, the final Single Market, was missing the point. Some basic economics: • Companies invest private resources in R&D only if they consider the final market large enough to recover the investment; • Having national markets fragmented by regulation, language, and entry processes, implies an increase in marginal costs of the overall “time-to-market” decision, leading to a reduction of the rate of return to research investment; • The institutional separation between European research, leading to proof-of-concept or prototype stage, European innovation policy and European competition policy, is a source of uncertainty; • It made little sense for the Lisbon strategy to ask for more R&D from the private sector without offering any means to leverage such an effort. There should have been a milestone strategy for the integration of European final product and services markets. The services directive is now finally in operation, we need to exploit it to strive towards a single innovation market.

4. Proposal for a new 3% knowledge investment target Given the likely long term fiscal pressures on Member States’ budgets in the years to come, it is crucial to stress today the particular responsibility of public sector in Europe to support research and innovation. The intervention of nation states in preventing the collapse of their financial system might be described as a “socialisation of debt”. In the coming years of fiscal austerity, it will be important to stress the need for a process of “socialisation of knowledge”. The core responsibility of the public sector in providing support for knowledge level and investment in close interaction with the private sector. Hence the proposal for a new 3% knowledge investment target: with clear policy advantages over the Barcelona 3% target. It focuses on what governments are directly responsible for: whether in terms of funding or setting funding rules such as in the case of tuition fees with respect to higher education. Target thus offers credibility. All MS are being challenged to either find own public resources to increase such knowledge investments, alternatively to call upon private resources to invest in individual’s future human capital.. Private R&D investments, innovations however measured, are outcome variables: they need to be monitored as performance variables but have limited meaning as policy targets. In the worst case they lead to beggar-thy-neighbour policies attempting to attract such investments in one country/region at the expense of another.

5. A target for all Member States

6. 2. Achieving sustainable smart growth • The focus in knowledge and innovation policy, certainly since Lisbon has been on increasing the “rate” of technical change… More research, more innovation is good for you. On what should be left open to markets and to the interest of researchers. Policy makers seem to have forgotten about the direction of technical change. Again some basis economics: remember the first, seminal NBER book on research and innovation published in 1962 on The Rate and Direction of inventive Activity. • Societal Challenges represent major social problems that cannot be solved in a reasonable time and/or with acceptable social conditions, without a strong coordinated input requiring both technological and non-technological innovation, and at times, advances in scientific understanding. A good example was the STEP initiative. • The central issue is at the opposite end of the previous one. Can resources, not just research but also procurement and other investments, be shifted across different national/European stakeholders to more productive “societal use” to influence not only the rate but also the direction of technical change and innovation? • Societal Challenges are not grandrather they raise grandpolicy challenges: how to achieve compatibility between top-down initiatives and a more bottom-up, market-driven resource allocation logic that allows for multiple decentralized experiments.

7. The sustainability smart research challenge:

8. Case of climate change • There is in fact substantial agreement on the most efficient and effective policies for mitigating climate change. The policy menu involves: • A unified global price for CO2 emissions including CO2 equivalents for other principal greenhouse gases (GHGs) • Elimination of explicit and implicit subsidization of fossil fuel consumption • Expanded funding for research and development into green energy technologies • Programs of technology transfer such that new technologies diffuse rapidly • Standards and mandates for key sectors such as power production, transport, and buildings • Public infrastructure investments that encourage greener technologies and modes of living • There are other important issues particularly those relating to land use change, including deforestation and reforestation/carbon sinks, where the way forward is less clear but: if the policy menu mentioned above were implemented, the world would be a long way down the path to mitigating climate change in an efficient and effective manner   • Yet, topic presents today all signs of grandpolicy failures: failure of European FP research programmes; lack of diversified research and innovation experimentation, ignorance of opportunties for local, regional research and innovation specialisation; frictions between national and global policy convergence (failure of Clean Development Mechanism within Kyoto protocol), etc.

9. 3. On inclusive social cohesion smart growth • At the geographical level, the crisis is likely to increase the gap between front runners and laggards in knowledge investments by exacerbating the different existing capacities of countries and regions to respond. The crisis challenges directly both the limited degrees of freedom offered to laggard countries being part of the Eurozone (Greece, Portugal, Spain, Ireland) and regional cohesion policies, and in particular the role of research and innovation in those policies. • At the same time, the search for excellence in research and innovation is challenging directly social cohesion policies in Europe. The European Research Area is likely to become more spiky and less flat. At the same time, income inequality in Europe is already higher than in the US and other large countries in the world. • At organizational level,the crisis leads to a further increase in the off-shoring and outsourcing of private R&D form European firms: a more rapid relocation of certain parts of R&D, in particular development, to cheaper locations with good access to S&E within and particularly also outside the EU. • Yet. the open innovation paradigm offers also new opportunities for local public-private collaboration and for young innovative SMEs. Due to their flexibility and ability to operate in new areas of business that are uncertain but potentially highly promising, such firms are important for pursuing radical innovations and constitute an important avenue of local knowledge specialization.

10. Income spread across regions

11. The need for new regional smart knowledge policies • Specific recommendation proposal: allocate a greater proportion of structural funds to the development of research and innovation capacity. In particular, make the provision of structural funds conditional upon the development of local, smart and open specialisation strategies. • The prevailing institutional conditions in partly fragmented European markets raise still formidable barriers which have limited the overall success of this process so far. There is an urgent need for an EU-wide scheme that can strengthen links between high regional performers in research, innovation and entrepreneurship, and promote at the same time the evolution of regional specialization based on the growth of young innovative firms. • Smart knowledge specialisation is in need of smart research and innovation polciy governance. Research quality assessment is heavily dependent on scale: the European scale is the logical scale for most publicly funded research activities, for reducing costs in selecting and evaluating research proposals and for enabling high quality research specialization; Europe’s regional scope represents the long tail of European opportunities for growth specialisation based on diversity. • A formidable challenge for Europe, given the wide diversity in income levels across regions but the growing converging aspirations of European youngsters.