Key Messages:

1. Innovation, Competitiveness and Economic DevelopmentAFDC 2006 Forum, Session One21-22September,2006Yoshiaki TOJOHead, Economic Analysis and Statistics DivisionDirectorate for Science, Technology & IndustryOECD

2. Key Messages: • Innovation becomes increasingly important for sustainable growth and development in globalised, ICT driven, knowledge-based economy • Open Innovation paradigm is emerging, in which intellectual asset management and business models play a larger role. • Comprehensive package of efficient framework policies and science & technology policy is necessary to modernise national innovation system.

3. Message 1 Innovation becomes increasingly important for sustainable growth and development in globalised, ICT driven, knowledge-based economy

4. Investment in R&D has been increasing, reflecting improved economic environment and growth of knowledge intensive industries… Trends in R&D Intensity(1) by area, 1991-2004 (as % of GDP)

5. Non-OECD countries are also increasing their presence in worldwide R&D activities… R&D intensity in non-member countries % of GDP Source: OECD, Main Science & Technology Indicators database

6. … and increasing their presence in worldwide R&D activities. OECD STI Scoreboard 2005 Source: OECD, Main Science & Technology Indicators database

7. China accounted for half of the non-OECD share of the R&D expenditure Gross Domestic Expenditure on R&D in China, 1995-2003 Source: China Science and Technology Indicators, 2004

8. Increasing business-sector performed R&D (BERD)… Trends in BERD Intensity by area, 1991-2004 (as % of GDP)

9. … accounts for most of the cross-country dispersion of R&D intensity… Expenditures on R&D performed in the public and business sectors (as % of GDP, 2003)

10. … partly reflecting country-specific industry structure. R&D Intensity in the business sector adjusted for variations in industry structure, (average over 1991-2002, as % of business value added)

11. Investment in knowledge (R&D, education, & software) is catching up for that in tangible capital. Investment in knowledge versus investment in gross fixed capital formation Knowledge Investment > GFCF

12. In some countries intangible assets match fixed capital stock. Intangible Capital Accumulation in the United States (% of business output) IAs = 10~11% GFCF = 11%

13. Changes in business R&D expenditure are mirrored by changes in patenting. Trends in Triadic Patent Families

14. R&D investment positively co-relates with triadic patent generation… Number of Triadic Patents per million of working age population and business-sector R&D Intensity

15. … and innovation in manufacturing … Share of successful innovators and business-sector R&D Intensity in manufacturing

16. … but not with innovation in services… Share of successful innovators and business-sector R&D Intensity in services

17. … since there are various non-R&D investments for innovation. Share of innovative firms engaged in different innovation activities, 2000 (%) Note: Figures are merely indicative (simple average of available country shares) and should be considered as such. Source: Figure 4.13 in “Promoting Innovation in Services”, Chapter 4, inOECD Science, Technology and Industry Outlook 2004, based on Eurostat, CIS3 survey 2004 (OECD, 2004b).

18. Investment in Intellectual Assets in the United States, % of business output Non-R&D Investment

19. Corrado, Hulten, Sichel (2006) Intangible Capital Stock estimated for : inv (1998-00) δ Computerized information $ 154 bil 33% R&D, scientific $ 201 bil 20% R&D, non-scientific $ 223 bil 20% Brand equity $ 140 bil 64% Firm-specific resources $ 365 bil 40% Contribution to Labour Productivity 1973-95 1995-2003 Labour Productivity 1.63 3.09 Tangible Capital deepening .55 .85 Intangible Capital deepening .43 .84 Labour composition .25 .33 MFP .41 1.08

20. Innovation becomes increasingly important for sustainable growth and development … • Innovation is the key driver of economic growth - new and improved products, processes and services account for the bulk of economic growth since the Industrial Revolution. • Innovation is of growing importance to economic activity in OECD countries – global competition is forcing all countries to upgrade their economic activity and move up the value chain. • A growing number of countries has recognised the importance of innovation, e.g.: • Lisbon strategy in the EU • Policy strategies in the US, Japan and Korea to strengthen innovation • Growing policy focus outside the OECD, notably in China.

21. Message 2 Open Innovation paradigm is emerging, in which intellectual asset management and business models play a larger role.

22. Innovation model was recognised as closed and unilinear. Closed Innovation Model Internal Technology Base Market Research Development Commercialisation

23. Emerging open innovation paradigm has various input and output channels Open Innovation Paradigm Other firm’s Market Licensing, Technology Spin-offs Internal Technology Base Market Technology Market External Technology Base Technology Insourcing Research Development Commercialisation

24. Major Characters of Open Innovation • Rise of Innovation Intermediaries and Their Markets • Equal importance given to external knowledge and internal knowledge. • Outbound Flows of Knowledge and Technology • Centrality of the Business Model in Extracting Value from R&D • Dilemma in Innovation Management: • Proactive and Nuanced Role of IP management

25. R&D activities are increasingly globalised… R&D expenditure of foreign affiliates, % of R&D expenditure of enterprise, 1995 & 2005

26. … so the invention activites. Notes: 1. Share of patent applications to the EPO owned by foreign residents in total patents invented domestically. 2. Share of patent applications to the EPO invented abroad in total patents owned by country residents. Data are according to the residence of the inventors. The EU is treated as one country; intra-EU co-operation is excluded. Source: OECD, Patent Database, March 2005. 出处: China’s Progress Towards a Knowledge-Based Economy, M. Sharper (2005)

27. Guellec and van Pottelsberghe (2004) Long-term elasticities of output with respect to R&D variables Business R&D 0.132 Foreign R&D 0.459 Public R&D 0.171 Luintel and Kahn, mimeo Mean elasticities of R&D variables Business R&D 0.025 Foreign R&D 0.010 Public R&D 0.022 * Luintel and Kahn includes human capital, public infrastructure, hi-tech trade, and FDI in their GMM System estimation.

28. Human resources for R&D activities also become mobile. Emigrants as a % of highly skilled in the country of origin Immigrants as a % of highly skilled native population Main Destinations OECD STI Scoreboard 2005

29. Intellectual Assets should be developed, retained, and commercialised for value creation by firms. Development/Control Commercialisation Intangible investment Research & Development Training Education Back Office Spending Marketing Customer Relations… Intellectual Assets Accumulation Knowledge (IPR, Product, Process) Human Resources (Skills, Creativity,..) Organisation / Network Reputation / Brand Value Creation Technology Market Product Market Productivity

30. Ability to create economic returns from intellectual assets also depends upon economy-wide business environments ( IAs for Nation / Region / Cities). National / Regional IAs Knowledge Pool Human Resource Pool Creative Culture • Product Market Reg. • Labour Market Reg. • IPR Regime • Entry and Exit • Openness • Education • Public R&D Diffusion/Mobility Firm-level IAs Intangible investment Intellectual Assets Accumulation Value Creation Commercialisation Development/Control IA-based Management

31. Major Findings of the IA-VC Project • Intangible determinants, including R&D, play substantial and growing role in economic growth. They works in combination.  Treat R&D intensity as one of the benchmarks. • Good management is indispensable for earning economic returns from R&D/innovation activities.  Create innovation-friendly business environment, Efficient financial market and corporate governance, flexible market, good education, Public-Private Partnership. . • Insufficient comparable data, under-utilised micro-data.  Co-ordinate data gathering on intangible determinants Harmonised analyses on national micro-data .

32. Message 3 Comprehensive package of efficient framework policies and science & technology policy is necessary to modernise national innovation system.

33. National innovation system is more than science and technology policies. 1. Science policies include R&D tax incentives, subsidies for private R&D, business funding of non-business R&D, non-business R&D intensity, intellectual property rights and absorptive capacity (capacity to understand and make use of foreign knowledge). 2. Framework conditions include financial factors, real interest rates, real exchange rates, foreign exposure (foreign R&D stock and openness), import penetration, product market regulation, employment protection legislation, human capital and the domestic economy-wide average wage. Source: OECD (2005), Innovation in the Business Sector. Policy Impact on R&D intensity growth in 1990s

34. Going for Growth 2006 Framework policies that influence innovation performance-1 • Education • Basic educational skills • Training of scientists and engineers • Financial markets • Access to financing important for innovation, especially to risk/venture capital • Taxation, Portfolio restrictions in institutional investors; barriers to cross-border M&A; bankruptcy procedures • Labour markets • Employment protection laws influence innovation via ability of firms to hire/fire and incentives to invest in training

35. Going for Growth 2006 Framework policies that influence innovation performance-2 • Openness for overseas knowledge pool • Foreign R&D makes large contribution to productivity growth • Multiple channels: FDI, international mobility of human resources, participation of foreign firms/researchers in R&D programmes, etc. • Market competition and IPR: striking balance • Strong PMR encourages investments in innovation to stay ahead of competitors, but can weaken firm’s ability to appropriate returns • Strong IPR can enable firms to appropriate returns from investment in innovation, but can jeopardise quality of patents and promote diffsion

36. Going for Growth 2006 Innovation policies Governance of Public Research • Inter-ministerial coordination mechanisms • New priority-setting mechanisms • Changing funding modelsRevised evaluation methods • Increasing autonomy

37. Going for Growth 2006 Innovation policies Industry-Science Linkage • Importance to innovation • Improve match between public research and industry needs • Facilitate transfer of knowledge/technology to industry • Policy measures • Reforms governing the ownership of IPR resulting from publicly funded research. • Funding for commercialisation of public-sector technology and/or support of technology transfer offices • Establishment of public/private partnerships to share cost, risks and jointly determine objectives

38. Further OECD works are in preparation on intellectual assets and value creation as well as open innovation paradigm, such as… • Business environment and corporate governance mechanism to improve IA-based management Industry-Specific Template for IA intensive firms IA-management Tools for Small-Cap Listed Companies • IAs for nation, region, economic clusters Internatinal / Domestic spill-overs (positive & negative) Best practices ofOpen Innovation Paradigm in Globalisation • Intellectual property rights and other institutional design to balance diffusion of knowledge and control of IAs

39. Thank you yoshiaki.TOJO@oecd.org