PRO-POOR INNOVATION: MARKET AND NON-MARKET DETERMINANTS. APPLICATION TO SA

1. PRO-POOR INNOVATION: MARKET AND NON-MARKET DETERMINANTS. APPLICATION TO SA INCLUSIVE INNOVATION MILTON KEYNES JULY 6-8, 2013 DAVID KAPLAN UNIVERSITY OF CAPE TOWN

2. WIDE USE OF THE TERM IFIs DONORS ACADEMIA RESEARCH ORGANISATIONS BUSINESS

3. MANY VARIETIES OF THE TERM 3 MAIN TERMS: PRO-POOR INNOVATION INCLUSIVE INNOVATION FRUGAL (JUGAAD) INNOVATION. DIFFERENCES BUT A COMMON DENOMINATOR “serves extreme affordability users”

4. WHY THIS SUDDEN CONCERN? • EARLIER PEDIGREE – SCHUMACHER. LIMITED GLOBAL DEVELOPMENT CONCERNS – MDGs; SUSTAINABILITY GROWTH OF EMERGING MARKETS GROWTH OF POOR CONSUMERS IN EMs GLOBAL FIRMS RESPONSE – NORTH AND SOUTH

5. GROWTH OF EMERGING MARKETS GROWING SHARE OF EMs 1987 EM SHARE OF GLOBAL GDP 16% 2011 “ “ “ “ “ 31%. SET TO CONTINUE APACE 2/3 OF GLOBAL GROWTH WILL BE IN EMERGING MARKETS

6. GROWTH OF POOR CONSUMERS AND DISPOSABLE INCOME IN EMs - CHINA

7. INNOVATION RESPONSIVE TO DEMAND – NORTHERN FIRMS UNILEVER (ASIA AND RECESSION HIT EUROPE) RENAULT-NISSAN (FRUGAL ENGINEERING) SIEMENS (AFFORDABLE HEART MONITOR) GE “IF GE DOES NOT MASTER REVERSE (FRUGAL) INNOVATION, THE EMERGING GIANTS COULD DESTROY THE COMPANY”

8. INNOVATION RESPONSIVE TO DEMAND – SOUTHERN FIRMS RISE OF SOUTHERN FIRMS 2006 BRIC FIRMS IN FORTUNE 500 - 15 2008 “ “ “ “ - 62. RISE OF INNOVATIVE SOUTHERN FIRMS BUSINESS WEEK 2010 50 MOST INNOVATIVE COMPANIES; MAJORITY OUTSIDE OF THE USA. PRINCIPALLY IN ASIA

9. GROWTH OF SOUTH- SOUTH TRADE % DC IMPORTS FROM DC 1995 42. 2010 56. % DC IMPORTS OF K GOODS FROM DC 1995 35. 2010 54. % DC IMPORTS OF HIGH TECH. KGOODS FROM DC 1995 25. 2010 53.

10. GROWTH OF SOUTH – SOUTH INVESTMENT % SOUTH SHARE OF GLOBAL OUTWARD FDI 1995 15. 2010 27. INCREASINGLY CONCENTRATED IN MANUFACTURING AND SERVICES K GOOD EXPORTERS AND HOME COUNTRY FDI CONCENTRATED IN A FEW EMERGING MARKETS.

11. WHY SOUTHERN FIRMS MAY HAVE THE ADVANTAGE PATH DEPENDENCY EXPLOITING INSTITUTIONAL VOIDS MUCH OF THE FRUGAL INNOVATION ON PART OF NORTHERN FIRMS BEING DONE IN THE SOUTH WITH SOUTHERN PARTNERS

12. PRODUCT AND PROCESS INNOVATIONS PRODUCT INNOVATIONS – SUCH AS THE NANO PROCESS INNOVATIONS – RESPONDING TO DIFFERENT RELATIVE FACTOR PRICES. MOST CRITICAL HERE IS GREATER LABOUR INTENSITY CREATING MORE EMPLOYMENT OPPORTUNITIES FOR POOR PEOPLE

13. GAINS TO THE POOR CONSUMER GAINS MORE APPRORIATE PRODUCTS BETTER FUNCTIONING PRODUCTS – ATTUNED TO THE ENVIRONMENT PRODUCER GAINS MORE EMPLOYMENT INTENSIVE PROCESSES NEW FIRM ENTRY MORE DYNAMIC FIRMS

14. WHY MARKET LED INNOVATION IS LIMITED FIRMS RESPONDING TO DEMAND RISING INEQUALITIES UNDERPIN DEMAND FOR NON-POOR GOODS AND PRO RICH INNOVATION: POOR AS PASSIVE RECIPIENTS OF INNOVATION

15. LIMITATIONS OF MARKET LED INNOVATION PRO-RICH INNOVATION: CHINA SOON THE WORLD’S LARGEST MARKET FOR LUXURY GOODS. POOR HAVE NO VOICE AND NO PARTICIPATION IN INNOVATION A MORE RADICAL VIEW OF PRO POOR INNOVATION: PARTICIPATIVE INNOVATION/GRASSROOTS INNOVATION “EMPOWERING THE POOR”

16. SOURCES OF MARKET FAILURE FOR POOR TWO SOURCES: PRODUCTS WITH LONG GESTATION; LUMPY INVESTMENTS; STRONG UNCERTAINTY. RESULTING IN POOR APPROPRIABILITY – E.G. PHARMA PRODUCTS VERY POOR AND THE VERY MARGINALISED WITHOUT SIGNIFICANT DISPOSABLE INCOME. RESULTING IN NO EFFECTIVE DEMAND- E.G. SUBSISTENCE FARMERS; THE SAN

17. MARKET FAILURE FOR POOR (1)POOR APPROPRIABILITY PUBLIC FUNDED VIA A PPP E.G. SA LOW COST HOUSING SOLUTIONS BY CSIR AND PRIVATE FIRMS WHERE MARKET FAILURE IS PARTIC. INTENSE AND SOCIAL NEED GREAT, NEW INSTITUTIONAL FORMS. GOV. BUSINESS. NGO. PHILANTHROPY E.G. GAVI.

18. MARKET FAILURE FOR POOR (2)NO EFFECTIVE DEMAND GOVT AND DONOR FUNDING HOW IS INNOVATION THAT MEETS THE NEEDS OF THE MARGINALISED (NO EFFECTIVE DEMAND) BEST SUPPLIED: AN EXAMPLE FROM SOUTH AFRICA

19. SOUTH AFRICA - NATIONAL RESEARCH PLAN 2002 – makes explicit provision for pro-poor innovation as a key “mission” OECD REVIEW – mission has not been implemented

20. SOUTH AFRICA - POTENTIALLY NEGATIVE IMPACTS OF INNOVATION Example: small-scale farmers in Kwa-Zulu Natal and traditional plant varieties Threats to local varieties from innovation inappropriate to their needs (GMO and hybrid varieties)

21. SOUTH AFRICA LIMITATIONS OF MARKET-LED INNOVATION Support needed to develop climate resilient plant varieties but private sector innovation geared towards commercial varieties and lack of public research investment. Small-scale farmers have little disposable income

22. APPROACHES Identifying the needs of the poor is a vital first step Making the case for increasing public research support to meet the needs of the poor and marginalised (in context of such support dwindling) Ensuring coherent governance for innovation (Schizophrenic government departments that support farmers and undermine their systems simultaneously)

23. RESEARCHERS (per million population)– SA AND THE BRICS

24. R&D as Percentage of GDP; BRICS, 2000- 2009 Source: World Development Indicators

25. STRUCTURAL CONSTRAINTS HIGH AND GROWING INCOME INEQUALITY – biases market-led innovation away from poor LOW LEVELS OF NEW FIRM ENTRY – little change in “business model” ;less attention paid to “bottom of pyramid” LIMITED ENTRY OF FOREIGN FIRMS – from other Southern countries

26. MEASUREMENT OF “SOCIAL” OR PRO-POOR INNOVATION NO CLEAR MEASURES – particularly in relation to outputs NO CLEAR CRITERIA FOR CHOICES – what should the objective be? How to decide between competing objectives ALLOCATION OF FUNDS – how much is justified? STRESS ON R&D FOR COMPETITIVENESS – reinforced by absence of measurement indicators for pro-poor innovation

27. THANK YOU DAVID KAPLAN David.kaplan@uct.ac.za