The OECD Innovation Strategy: Findings and Implications

The OECD Innovation Strategy: Findings and Implications Mario Cervantes, Dirk Pilat and Karen Wilson, OECD / STI Stockholm, 11 February 2010

Overview • The OECD Innovation Strategy • The innovation imperative • The changing nature of innovation • Some broader messages

1. OECD’s Innovation Strategy

The OECD Innovation Strategy: Cutting across many policy areas Science and technology Tax Investment Information and communications Industry and entrepreneurship Statistics Competition Trade Public governance

2. The Innovation Imperative

Pre-crisis slowdown in productivity

Decomposition of cross-country differences in GDP per capita into their determinants, 2005 (United States = 100) GDP PPP per capita TFP Human capital Physical capital Employment United States 100.0 100.0 100.0 100.0 100.0 Canada 83.5 72.0 103.3 105.8 106.0 Japan 72.6 52.6 100.4 130.7 105.1 China 9.8 13.6 57.3 105.2 119.5 India 5.2 12.7 47.7 98.3 87.1 Brazil 20.5 29.3 70.1 103.1 96.8 97.4 Russian Federation 28.6 31.5 84.9 99.3 EU27 + EFTA 64.7 67.8 91.2 114.1 91.3 Total World 22.8 27.9 64.2 104.2 95.8 Source: OECD. Innovation offers the largest potential for catching up

The need to sustain innovation has grown due to the crisis. 8

3. The Changing Nature of Innovationwhat, how, where, why & who

What innovation encompasses has changed… • Expansion to services, including non-market services like public sector services; • Broader than just R&D to include non-R&D innovation like design, marketing, organisational innovation; • Applied to social issues – e.g. climate change – not well supported by market mechanisms

…to include non-tech innovators … Share of non-technological innovators by sector Source: OECD based on Eurostat, CIS-2006 (April 2009) and national data sources.

…a wide cross section of industries… Share of business R&D by technological intensity (manufacturing, 2006)

...and applications to global issues. Patenting in climate mitigation technologies relative to all sectors (indexed on 1980=1.0, Annex 1 ratification countries)

Implications from the broadening of innovation • Growing importance of education and training: hard and soft skills, including entrepreneurship • Need to provide space for innovation to flourish: • Competition & empowering consumers • Solid, predictable institutional framework that supports entrepreneurs: • Recognition that a bundle of investments are needed for innovation: tech & non-tech.

How innovation is conducted has changed… • Increasingly at the intersection / interaction of separate borders: disciplines; geography and institutions • Cost pressures, competition and desire to reduce risk have led to more open / collaborative strategies; • Premium and competitive advantage attached to tacit knowledge: know-how, organisational capital, access to networks.

There is more collaboration among scientists... Trends in co-authorship in scientific publications Domestic co-authors Domestic single authors International co-authors International Single author 16 16

...and between firms... Share of companies collaborating in innovation activities, by size Source: OECD based on Eurostat, CIS-2006 (April 2009) and national data sources.

…who are employing “open innovation” strategies for competitive advantage. • Items shipped on behalf of sellers who utilized Fulfillment by Amazon (FBA): 3x from 2008 • Amazon Web Services (AWS): 300k users • 100k approved apps, up from 65k in August • estimated 2.5b$US iPhone “apps economy”* Q3 ‘09 Q3 ‘09 18 * www.gigaom.com 27/08/09 “How Big is the iPhone App Economy?”

Implications from a more open mode of innovation • Erect bridges between the different parts, forming or joining a network – not necessarily more or new hard infrastructure. • Soft skills are neededthat can traverse disciplines, cultures and organisations. • Building networks through labour mobility. • Use of ICT to build networks; informatics as a multidisciplinary field and public depositories of information as a platform for innovation; • Developing knowledge networks and markets; • Providing a modern and reliable knowledge infrastructure and platforms for innovation • Facilitating knowledge flows and fostering the development of knowledge networks and markets

Where innovation occurs has changed… • MNEs still play a huge role; but increasingly more than just “D” abroad; • Increase in cross-border links; • Emergence of a global labour market for the highly skilled; • Rise of China and India.

In some OECD countries, foreign affiliates carry out more R&D than national-based firms

...as global innovation networks emerge...

...labour markets for the highly-skilled become global… Growth in the number of tertiary education students enrolled outside their country of citizenship worldwide (millions) 23 Source: OECD and UNESCO Institute of Statistics

… and new global players emerge... Contributions to growth in global R&D (in billion constant US PPP and %) 1996-2001 2001-2006 Note: (1) Australia, Canada, Iceland, Korea, Mexico, New Zealand, Norway and Turkey (2) Argentina, Brazil, India, Israel, Russian Federation, Singapore, South Africa, Chinese Taipei Source: OECD.

...that alter the topography of innovation. Broad based Leaders Narrow Leaders / Adopters Adopters / Followers link 25

Implications of global networks of innovation • Build absorptive capacity: skills, institutions, access to networks; • Importance of services as a means of capturing value locally & gaining access to lead-users; • Universities are an essential node in innovation systems that can be the glue between actors, a local anchor into global networks and a magnet for global talent. • Building on existing strengths for dynamic comparative advantage through innovation.

Why innovation occurs has changed… • Global Challenges – climate change, health care, food security – are exerting a strong “demand-pull”; • Innovation is an eco-system: not only the supply side (R&D, facilities, SET) but also the demand side (procurement, “vouchers” and lead users).

… ICT (especially the Internet) has altered the nature of innovation... 28 28

...and global challenges are exerting a large “demand-pull”... Potential technological contributions to CO2 emission reductions 29 Source: IEA.

...raising the awareness of the demand-side of innovation. Demand-side measures e.g. Procurement policies Policies to enhance innovation competencies of firms Policies to strengthen linkages within innovation systems Policies to support investment in S&T & innovation e.g. Promotion of entrepreneurship & innovation in SMEs e.g. Public-private partnerships e.g. R&D tax incentives Grants Supply-side measures

Implications of the changing drivers of innovation • Harnessing innovation to address global challenges • combination of “getting prices right” and stimulating innovation; • stable and long-term policy horizon; • international science and technology co-operation; • support for capacity building in developing countries; • incentives for the adoption of appropriate technologies • Demand and supply side policies 31

Who the actors are in the innovation system has changed…

...by broadening to include a wide range of actors...

…a range of Ministries... Finland’s Governance of Innovation Policy 34

…and many levels of government.

…which raises issues of how to govern policies for innovation. • Need for strong political leadership; • Need to clearly delineate local, regional & national roles to avoid duplication, and build coherence. • Need for measurement and evaluation frameworks to support policy. 36

4. Some broader messages 37

Policies for supply and demand: Responding to a changing Why of innovation: Policies for innovation need to focus on meeting the demands of society. • The objectives of innovation (growth, sustainability, health, …) are achieved through diffusion and take-up • Most public policy is aimed at the creation of knowledge. • Need to better join up “push” and “pull” policies: • Empowering people to create knowledge and apply knowledge • Protecting IPR andcreating value from IPR • Getting prices right to create markets for environmental innovation and policies that can create radical innovations and breakthroughs.

Seizing benefits at the local level: • Setting priorities and creating excellence and critical mass • Strengthen and capitalise on local strengths: knowledge institutions, people, services, social factors, culture, etc. • An open environment • Develop a joint vision and strategy for long-term investment

The roles of government and business: • In many cases, the role of markets can be strengthened to unleash demand and foster innovation: e.g. through getting prices right, regulatory reform, smart use of public procurement, consumer involvement, etc. • At the same time, governments play an important role in driving innovation in the post-crisis environment • Need for a true public-private partnership

The 5 areas of action in the Innovation Strategy: • Empower people to innovate. • Unleash innovation in firms • Invest in knowledge creation and encourage its diffusion • Improve the frameworks for innovation to address global challenges • Improve the governance of policies for innovation

The Innovation Strategy in 2010 … • A short Ministerial paper setting out the challenge and priorities for action on innovation, combined with a set of policy principles • A compendium of policy-relevant indicators that will enable countries to benchmark themselves on a range of policies and measurements • Synthesis and background reports, providing evidence on key factors and drivers of innovation • The beginnings of a policy handbook, that will enable countries to examine their own performance and system, and provide tools and examples to take action

… and beyond • Further work could involve: • Implementing and monitoring action • Country reviews • Moving ahead on the measurement agenda • Addressing remaining questions • Focusing on specific questions, e.g. green growth and innovation.

For further information • E-mail comments & ideas: • Dirk.Pilat@oecd.org • Mario.Cervantes@oecd.org • Karen.Wilson@oecd.org • Keep abreast • www.oecd.org/innovation/strategy

The OECD Innovation Strategy: Findings and Implications