Innovation, Globalisation and Growth John Dryden

1. Innovation, Globalisation and Growth John Dryden Deputy Director for Science ,Technology and Industry, OECD UNCTAD Workshop on Innovation, Geneva, 15 Oct. 2007

2. Outline • What is the OECD? • What is innovation, innovation policy, innovation systems? • What is the OECD doing? • The challenge: Innovation, globalisation and technology • Innovation plays an important role in economic growth … • Policies to strengthen innovation performance

3. What is the OECD? • International organisation of 30 member countries – US, Japan, most EU countries, Korea, Australia, Canada, Mexico: growing engagement with China, Brazil, India • Main goals: foster co-operation between governments to address social, environmental and economic consequences of globalisation. • The output of the work includes: • Analytical reports, e.g. on Economic Growth or Innovation. • Policy reports, e.g. OECD economic surveys, country reviews of innovation policy, Going for Growth publication. • Policy Guidelines, e.g. OECD Guidelines for Multinational Enterprises. • Statistics, indicators and benchmarking reports, e.g. OECD’s bi-annual Science, Technology and Industry Scoreboard. • In practice, a platform for exchange, analysis and discussion on good policy practices.

4. What is innovation? • the act of introducing something new: something newly introduced (American Heritage dict.). • A new idea, method or device (Merriam Webster dict.) • The successful exploitation of new ideas (BERR, ex-DTI, UK) • Innovation…is generally understood to be the introduction of as new thing or method… . Innovation is the embodiment, combination or synthesis of knowledge in original, relevant, valued new products, processes or services (Luecke and Katz, 2003) • Oslo Manual (2005) “… implemented technologically new products and processes and significant technological improvements in products and processes…” (Complemented by non-technological innovation (business models, organizational, institutional, supply chain, etc.)

5. What is an Innovation Policy? • Government encouragement of the successful creation and introduction of innovation. • Related to currently accepted model of the innovation process (national systems of innovation, etc.) • Intervenes in, or complements, market (cf old style “industrial policy”) • Scope (intl., natl., regional, local); and level of aggregation (whole economy, sector, firm); • “Innovation policy”, broadly defined , includes framework conditions (favourable environment for entrepreneurship and innovation); infrastructure (e.g. ICTs) and demand side elements to match the supply side • So we need a strategic approach to ensure consistency and coherence across government; internationally • National innovation strategies; the Lisbon Agenda; OECD “Innovation Strategy”; TOR of country reviews.

6. Innovation Systems: the “actors” and the issues The “actors”: • business firms, public research organisations, the Higher Education system, specialised infrastructures (e.g. science and techno parks, technology transfer offices, incubators) and intermediaries (e.g. technology brokers), and the financial sector (e.g. venture capital) The issue areas • Research and Development – inputs, outputs and outcomes • Human Resources – education, skills, mobility • Generic technologies (production and) use • Innovation and linkages between the “actors”; “open innovation” • IP, incentives for creation and diffusion of knowledge • Framework conditions – macro-economic conditions, stability, open and competitive markets, absorptive capacity; attention to the demand side • Open-ness and globalisation – knowledge flows and the global enterprise

7. What efforts does the OECD undertake to promote innovation in member countries? • It provides policy recommendations to OECD countries: • Drawing on OECD peer reviews, such as the OECD Economic Surveys, OECD Innovation Policy Reviews and the annual Going for Growth study. • It fosters international co-operation: • To address common challenges, e.g. for ICT, biotechnology, nanotechnology • To develop practical tools to strengthen the climate for innovation. • It analyses innovation policies and performance: • To improve the understanding of factors and policies driving performance • To identify good policy practices that may help to strengthen performance • It develops statistics and indicators to compare and benchmark innovation.

8. 4. OECD work on measurement • Work on indicators and metrics underpins policy analysis and helps in comparing/benchmarking outcomes and experiences. • OECD works closely with statistical offices and policy makers to develop new indicators, based on commonly agreed guidelines, for example: • OECD Frascati Manual: Provides commonly agreed guidelines to measure expenditure on research and development – regularly updated (last in 2003). • OECD statistical guidelines on information society (measurement of uptake of information technology), biotechnology and human resources • OECD Oslo Manual: Gives guidance to innovation surveys undertaken in many OECD countries (all EU countries, Japan, Canada, Australia, Mexico, etc) – updated in 2005 • Revision of the System of National Accounts: Expenditure on R&D will be treated as investment in the SNA, instead of as current expenditure. • New challenges: measures of nanotechnology, better indicators of innovation outcomes, indicators of entrepreneurship.

9. The challenge • Much of the rise in living standards is due to innovation • Innovative performance is a crucial determinant of competitiveness and national progress, but • countries face difficulties in improving performance despite the new opportunities offered by globalisation and advances in science and technology • Reform is needed, but • Political Economy of Reform demands leadership and resolve. • And that requires understanding and communication.

10. Drivers of innovation: globalisation and technology • Globalisation and new technologies, notably ICTs, have created opportunities, posed challenges and reinforced the importance of innovation • Enabled new forms of competition and opened new markets for the creation and delivery of innovative products and services • They have increased the pressure to move u[p the value chain and engage in continuous and more rapid process of adjustment and innovation. • In OECD countries this accelerates the move towards a “services economy”.

11. Globalisation is advancing rapidly

12. Owing to sharpreductions in the costs of transport and communication Transportation and communication costs Costs of processing information

13. The current phase of globalisation ischaracterised by several new trends • The spread of global value chains: production is increasingly fragmented across countries leading to more specialisation. • Interfirm trade by multinational enterprises accounts for a large part of global trade flows. • Trade in services isgrowingrapidly, enabled by information and communications technologies. • The integration of large emergingeconomies, notably China and India, also in more innovative areas of economicactivity.

14. Non-OECD countries are also of growing importance for global science and innovation R&D expenditure in 2004(circles reflect size of spending in billion USD PPP) • China is now among the largest investors in R&D globally – with a target to reach 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 Outlook 2006, December 2006.

15. What have we learned about globalisation? • OECD work shows that among the impacts of globalisation are: • Changing trade patterns and comparative advantages of OECD and non-OECD countries. • Creating a larger global market and enabling more countries to participate in the world economy. • Improving productivity growth and increasing wealth and incomes. • Reducing inflation pressures and increasing the variety of goods and services available to consumers. • Enhancing competition, which also strengthens the pressures to innovate. • …but also, impacts on employment, earnings and income distribution.

16. Why the growing interest in innovation in this global economy? • Innovation is part of the response to globalisation and can help address several important challenges: • Innovation can help countries to move up the value chain and enable them to compete and increase productivity growth • Innovation can help address environmental and social challenges, such as climate change, energy security, health, water, …. • The global economy also offers new opportunities for faster innovation: • New technologies (information technology, the Internet) may enable more rapid innovation, notably in services. • Globalisation is creating new opportunities – it broadens markets and enables greater specialisation. • More resources are being devoted globally to research and innovation.

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

18. ... and in addressing many global challenges Source: OECD Compendium of Patent Statistics, 2007.

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

20. 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.

21. 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.

22. Business spending on R&D has risen in several OECD countries (business R&D as % of GDP) Source: OECD, Main Science and Technology Indicators, 2006-II, December 2006.

23. Innovation is more than R&D: Investment in intangibles is rising • Estimates for the United States show that intangible investment now surpasses tangible investment (machinery and equipment and buildings) as % of output. • Investment in intangibles includes investment in software, R&D and firm-specific competencies (such as training and organisational factors). • Intangibles (investments in knowledge, intellectual assets) play a growing role in growth performance. Source: Corrado, Hulten and Sichel (2007).

24. Outcomes still differ substantially … • 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 reflect greater quality of the research, as well as greater linkages to research in other countries Source: OECD, based on National Science Foundation.

25. … also in terms of patenting(Key international patents (triadic patents) relative to GDP, 2003) Note: (1) Triadic patents refer to patents applied for at JPO, USPTO and JPO. Source: OECD, Compendium of Patent Statistics, www.oecd.org/sti/ipr-statistics

26. Countries with strong innovation performance share common characteristics • A number of factors seem common: • 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, in 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 • High level of networking among innovators, notably strong linkages between science and industry • Openness to foreign sources of knowledge

27. Two key challenges for staying competitive in an increasingly global economy • Strengthen the capabilities of economy and society to innovate as this will help firms (and countries) move up the value chain and become strongly embedded in global innovation networks. • Help people adjust to the structural changes that global competition is bringing.

28. Policies to strengthen innovation performance

29. Strengthening innovation is not straightforward • Many OECD countries have had difficulties in strengthening innovation : • The EU’s Lisbon agenda has only made slow progress. • Many OECD countries have seen little improvement in productivity growth in recent years, despite new opportunities. • Some factors that may explain these difficulties: • Business, not government, is the main driver of innovation. • Innovation depends on many factors: business-friendly environment, strong education and science system, good links between science and business, etc. • Coordinating policies across policy domains can be difficult. • Improving innovation often requires a long-term policy commitment • Stronger innovation may imply winners and losers: insufficiently innovative firms may disappear and people may lose their jobs. • Sharing experiences and good policy practices can help.

30. Policy responses to the growing importance of innovation • Most OECD countries now have high-level policy strategies to foster innovation: EU – Lisbon agenda; US - competitiveness agenda; Japan - Innovation 25, Australia - Backing Australia’s ability, etc. • Broad range of policy changes underway across the OECD: • Improvements in the business environment for innovation • Reforms to the education and research sector • Attention for human resources for innovation • Improvements in the links between science and business • Changes in policies to foster business innovation • Changes to enhance coherence of innovation policy • New policy dimensions – growing focus on the demand for innovative products (e.g. through public procurement), and on non-technological innovation

31. 1. Good framework conditions are key • OECD analysis supports approaches that foster: • Strong competition, e.g. in the services sector, to strengthen the incentive of firms to innovate. • Openness : A low level of restrictions on foreign direct investment and openness to foreign talent to improve cross-border knowledge transfers. • Stable macroeconomic conditions and low real interest rates to encourage the growth of innovation activity. • The availability of internal and external finance to help boost innovation expenditures: Improved corporate profitability and higher stock market capitalisation both have a positive effect. • Intellectual property rights to provide important incentives to innovate. • Good conditions for new innovative firms and entrepreneurship to help bring new ideas to the market. • Much reform has been undertaken across the OECD, but poor framework conditions (e.g. lack of competition and lack of openness) still remain a constraint on innovation in many countries.

32. 2. Changing policies towards Public Research • There is a growing recognition that 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 under way: • Focus on critical mass for scientific research (e.g. Denmark) – fewer, larger universities • University reforms aimed at greater autonomy (Japan) and performance targets • Reforms of public research institutions aimed at improving performance (Spain) • Growing focus on excellence and relevance: • Ensure best research is funded – focus on excellence; not everything can be funded to the same degree - achieving critical mass is key • Growing emphasis on competitive funding • Growing focus on results-oriented evaluation of policies : new quality assessment frameworks in several OECD countries (e.g. Australia, Austria, Norway)

33. 3. Human resources: a common constraint • People are key for innovation – but there are concerns about the future supply of qualified people in several OECD countries: • Interest in some fields relevant to innovation (e.g. science) has declined. • The workforce is ageing. • Some OECD countries suffer from brain drain. • Some policies that are being introduced across OECD countries: • Start early: Reform of curricula and improved teaching can increase interest in science and technology – involvement of firms and role models can help • Improve the attractiveness of research careers – insecurity of careers in early stages, “tenure” later on, low salaries, future prospects not always clear. • Enhance the participation of women (e.g. in science) – still under-represented in many fields, in some countries and at higher levels. • Life-long learning - initial education is no longer sufficient. • Attract foreign talent to fill gaps – though this is not a long-term solution.

34. 4. Science-industry links can be improved • More can be done to link science with industry • Too few firms collaborate in innovation with higher education institutions, particularly SMEs • Most OECD countries lag behind in modernising their science-innovation interface. • Better management of IPRs in PROs is needed for fruitful relationships • Low rates of mobility of researchers between sectors • Venture capital markets / business angels funds relatively small • Policy requirements to improve the climate for innovative entrepreneurship • Boost exchanges of tacit knowledge, e.g by movement of human resources • Regulatory reform related to labour mobility, IPRs and licensing • Measures to stimulate business demand for scientific inputs • Improve the ability of PROs to transfer knowledge and technology to the private sector • Encourage competition in financial markets; disclosure of intellectual assets; policies that encourage risk-taking and supply of risk-capital

35. 5. Policies to foster business innovation • Governments typically provide some support for business innovation as this may provide important societal benefits. Also, achieving R&D targets (e.g. in the European Union) will require greater business investment in innovation. • Such support can take several forms, including tax relief and direct support (e.g. grants). • These policies are changing across OECD countries: • Some streamlining – support programmes are often too complex • Growing focus on competitive-based funding • Growing focus on supporting networks and clusters, instead of individual firms • R&D tax credits are being reformed (e.g. in Belgium, Spain, Netherlands) • Overall: in search of “smarter ways” to support business innovation.

36. 6. Developing coherent policies for innovation • Coordinating strategies towards research and innovation remains a challenge for many OECD governments • A long-term perspective on innovation is important, as this enhances trust. • Changes in 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 the debate on science and technology policy, e.g. through foresight programmes. • Growing importance of regional governments and actors in innovation policies (e.g. Spain and Belgium). • In sum, considerable policy changes are occurring in OECD countries to improve the capabilities for innovation, but still a long way to go.

37. 7. New dimensions of innovation policies • The scope of policies to foster innovation is broadening, for example: • A growing focus on the 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. • A growing focus on non-technological innovation – e.g. changes in organisations and institutions, in processes, in marketing, in design, etc. – these types of innovation are recognised as being of growing importance, in particular in the services sector. • A growing focus on the global dimensions of innovation – adapting national policies to the changing global landscape for innovation? • A growing focus on innovation for global challenges and not only economic growth: • Environment and SD (climate change, energy, “eco-innovation”) • Health (ageing society, emerging and neglected diseases, health technology, genetics, HHRB) • Development (policy coherence for development, poverty reduction, etc.)

38. Towards an OECD Innovation Strategy • The OECD Ministerial Council Meeting of 15-16 May 2007 mandated the OECD to develop an Innovation Strategy. • The Innovation Strategy will: • Provide new facts and evidence depicting innovation performance in OECD countries, based on statistical, empirical and thematic analysis. • Provide explanations for the differences in performance across OECD countries, pointing to the main policies affecting innovation. • Provide comprehensive and forward-looking policies to strengthen innovation, involving good policy practices and recommendations that will also address the new dimensions of innovation. • It will provide governments with a stronger evidence basis and good policy practices to reform and strengthen their policies towards innovation. • Country-specific recommendations will be provided through voluntary reviews.