Policies for creating new growth areas

Timo Hämäläinen, Ph.D., Dos. Eesti Arengufond, Tallinn 26th June 2011

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Agenda

1.  Big picture: historical transformation 2.  Finnish industrial and innovation policies in the 1990s 3.  The economic renewal challenge 4.  Pause for discussion 5.  Open industrial and innovation policy 6.  Evolutionary approach to policy making 7.  New macro-organizational role of government

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Big picture: historical transformation

GLOBALIZATION OF MARKETS AND BUSINESS ACTIVITIES

SPECIALIZATION OF MARKETS & VALUE-ADDING ACTIVITIES

ICT REVOLUTION

INCREASING KNOWLEDGE INTEN- SITY & NETWORK COOPERATION

 HERE WE ARE!

SOCIO-INSTITUTIONAL ADJUSTMENT

- Everyday life - Shared cognitive frames - values and norms - laws, regulations - policy regime - public sector organization

Source: Freeman & Perez (1988)

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Finland’s depression in the early 1990s

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Real estate prices

Unemployment rate

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Jump in National Competitiveness in the 1990s

Sources: Hämäläinen (2003): National Competitiveness and Economic Growth (Edward Elgar) and Hämäläinen & Heiskala (2007): Social Innovations, Institutional Change and Economic Performance (Edward Elgar)

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Finnish industrial and innovation policy since 1990

•  Policy paradigm shifted in response to economic depression and transformation of the world economy (ICTs & globalization)

•  New focus on: (a) export competitiveness of manufacturing industries (b) industrial clusters (forest, metal, …, telecoms?) (c) general framework conditions of firms (market failures) (d) research & technology development activities (%/GDP) •  Linear innovation model in the background: research development commercialization

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Share of R&D expenditure in GDP

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But all good comes to an end…

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Finland’s trade balance is declining…

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170,000

190,000

210,000

230,000

250,000

270,000

290,000

310,000

330,000

350,000

Suomessa

Tytäryrityksissä ulkomailla

in Finland

…and so is Domestic Personnel of Finnish Technology Industries

2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Stats Finland, Balance Consulting, Finnish Technology Industry Assoc.

in foreign subsidiaries

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The Renewal Challenge

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EXPLOITATION -  traditional clusters -  SHOKs, OSKEs -  incremental innovations

EXPLORATION -  new growth activities -  experiments, innovation platforms -  radical innovations

New opportunities

Finland’s specific Strengths & capabilities

Value Added /well-being

2000 1950 2050 Time

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Finland’s new innovation strategy

KNOWLEDGE AND CAPA-

BILITIES

DEMAND- DRIVEN

INNOVATION

Innovation- process

HOLISTIC DEVELOPMENT

LINKING WITH GLOBAL KNOWLEDGE- AND VALUE NETWORKS

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Opening of the seminar Director General Petri Peltonen Ministry of Employment and the Economy

13:05 Key messages of the evaluation Professor Reinhilde Veugelers (chair)

Katholieke Universiteit Leuven (Belgium)

Professor Dan Breznitz Georgia Institute of Technology (US)

Professor Gordon Murray University of Exeter (UK)

14.15 Comments Minister of Economic Affairs Mauri Pekkarinen Minister of Education and Science Henna Virkkunen

www.evaluation.fi Reports, Slides &

Other Material

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Key challenges identified in the Evalution

1.  Globalization 2.0 – old clusters are disintegrating

2. Incremental innovation policies

3. Need for experimentation and radical innovations

4.  Need for policy coordination

5. Changing rationale for innovation policy

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Globalization 2.0 – old clusters are disintegrating

•  Each activity will seek its globally optimal location. => Old clusters disintegrate!

•  Need for new sources of growth and welfare. •  Finland does not attract industrial investment (OFDI>IFDI) or skilled

labor and researchers. •  Low degree of internationalization in research and teaching.

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Incremental innovation policies

•  Innovation policy should evolve with its targets •  Tendency to stick with traditional instruments and sectors •  Strong consensus •  Strategic Centers of Excellence (SHOKs) in R&D are mostly about

incrementally renewing larger incumbent companies in traditional industries.

•  Innovation system has difficulties in dealing with open-source and social media innovations.

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Need for experimentation and radical innovations

•  Having reached the frontier, Finland should adopt a more experimental and risk-taking policy approach which aims for radical innovations.

•  Policies that fit the catching-up phase are not optimal for a leading economy.

•  More radical R&D is carried out in Finland, routine R&D is outsourced.

•  Complex face-to-face R&D processes remain in Finland. •  Need to improve the quality of research. •  Regional innovation policy could provide a foundation for

experimentation.

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Radical innovations…

•  Need to tap deeper in global knowledge pools if we want to develop radical innovations.

•  Experimentation and failures are inevitable with radical innovation.

•  Clear signs of the need for broad upgrading of the quality of exports and production.

•  Quality, not price, should be Finland’s competitive advantage.

•  World class excellence in research is rare in Finland. Resources are scattered.

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Need for policy coordination

•  Weak coordination among policy making organizations => wasteful duplication

•  Current innovation policies are not yet broad-based or systemic. •  Lack of vertical coordination in innovation policy (national, regional,

local). •  Need for system reform: goals, rationales, organizations and

instruments.

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Changing rationale for innovation policy

•  Rationale for innovation policy is increasingly: spillovers, network effects and systemic failures.

•  Policy process: a) identify market failure, b) understand its reasons, and c) intervene if government the best solution.

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Pause for discussion

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Traditional vs. new ”open industrial policy”

Traditional Goal: Development of existing clusters and ’framework conditions’ of firms Uncertainty: Small (market failures) Focus: Content / cluster, firms / supply Intervention rationale: Scale economies => externalities, big risks Main instrument: Finance Dominant level: National (top down) Degree of tailoring in policies: Low Relationships to firms: Program- and project- based Initiative/leadership: Civil servants Failures: Trying hard to avoid Openess of policy process: Rather closed Capability demands: Industry and instrument Risks: Path-dependence, incrementalism, gradual deterioration of economic base

Open (Rodrik, Haussman, Sabel) Goal: Creation of new growth areas in the economy Uncertainty: Big (exploration process) Focus: Cooperation process / value-adding activity /growth obstacles / demand Intervention rationale: Uncertainty, coordination problems, systemic failures Main instrument: Facilitation, knowledge Dominant level: Local (bottom up) Degree of tailoring in policies: High Relationships to firms: Strategic partnership (PPPP) Initiative/leadership : Commitment of political leadership Failures: Natural and expected Openess of policy process: Open (public support important) Capability demands: Knowledge of local context and global value-adding networks and markets Risks: Insufficient capabilities of policy makers, vested interests, overextending the support failed experiments

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Some examples

•  Finnish electronics telecommunications •  Taiwanese laptops •  Korean electronics, mobile phones •  Chilean wine and aquaculture •  Scottish renewable resources •  Chinese Eco-Cities, renewable energy, electric cars (etc.) ************************************************ •  “Evolutionary targeting” in Israel  New approach for complex and advances economies:

experimentation strategic choice long-term development in PPP

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Open industrial policy gave rise to the Finnish telecom cluster

•  Paljon alueellisia puhelinyhtiöitä (esim. 815 puhelinoperaattoria v. 1938) eksperimentointi, asiakastarpeiden seuraaminen, luova jännite kansallisen operaattorin kanssa

•  Avoin markkina ulkomaisille valmistajille uusi teknologia heti saatavilla, kilpailua kotimarkkinoille •  Julkinen puhelinoperaattori kehitti kansallista infrastruktuuria, hoiti ulkomaanyhteydet sekä otti haltuunsa

heikosti toimivia paikallisoperaattoreita (170 kpl v. 1920 – 1949), toimi innovatiivisena laiteostajana ja ensikäyttäjänä, harjoitti t&k-toimintaa ja teknologian siirtoa Suomeen, oli keskeinen toimija pohjoismaisessa ja eurooppalaisessa standardointityössä (NMT ja GSM)

•  Julkinen radiopuhelinyhtiö (Televa) kehitti ensimmäisen sukupolven digitaalivaihteen (DX200) ennen Siemensiä ja Ericssonia ja teki tiivistä yhteistyötä Nokian kanssa

•  Julkinen kysyntä tuki elektroniikkateollisuuden alkuvaiheen kehitystä (esim. armeijan radiopuhelimet, Valcon robotit, Helsinki-Vantaan elektroluminenssinäytöt)

•  Julkishallinto mobilisoi kotimaisen osaamisverkoston, joka pystyi ratkaisemaan digitaaliseen verkkoon siirtymisen tekniset ongelmat

•  Poliittisen johdon vahva sitoutuminen tietotekniikan kehittämiseen (Teknologiakomitean ohjelmat v. 1980, TTN 90-luvulla) TEKES:in perustaminen 1983

•  Julkista t&k-toimintaa (Televa, PT, VTT, yliopistot) ja t&k-rahoitusta (Sitra, TEKES) kasvatettiin sekä räätälöitiin uuden klusterin tarpeisiin

•  Läheinen horisontaalinen tutkimusyhteistyö yritysten (laitevalmistajat, operaattorit, valtionyhtiöt), yliopistojen sekä julkisten tutkimuslaitosten kesken

•  Telekommunikaatiomarkkinoiden sääntelyn vapauttaminen •  Elektroniikan ja informaatioteknologian koulutuksen ja tutkimuksen lisääminen yliopistoissa ja

korkeakouluissa •  Pohjoismaisten telekommunikaatiostandardien luominen (NMT, GSM) •  Pääomasijoitusmarkkinoiden kehittäminen Sitran toimesta 1990-luvulla

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Evolutionary targeting (Avnimelech & Teubal 2008)

•  Motivation: Growing recognition that, in increasingly turbulent and competitive global environment, economic growth requires structural change, systemic adjustment and more explicit priority setting in policy making.

•  Aim: Creation of new multi-agent structures (ecologies). •  Preconditions: Capable domestic ”market forces” (firms) •  Rationale: High uncertainty, externalities & spillovers,

coordination failures, system failures •  Evolutionary process and policy making:

- variation (pre-conditions, potential) => horizontal policies - identification & selection => targeted policies - development & growth

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Why evolutionary model of policy making now?

•  Economies are complex adaptive systems (CAS) •  World economy is going through a transformation/paradigm

shift great uncertainty  Decision making and top-down planning problematic  Decentralization of decision making important. •  However, competitiveness of firms is a function of:

a)  firm-specific advantages b)  systemic and location-specific advantages (which policies

influence)  Government interventions, strategic choices and active

coordination and cooperation are still needed! •  If societies and economies are characterized by evolutionary

processes (Hodgson & Knudsen 2010), could intelligent human beings adopt the evlutionary model for policy making?

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”Institutional evolution through purposeful selection: The constitutional economics of

John R. Commons”

Viktor J. Vanberg Constitutional Political Economy, 8, 105-122 (1997)

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Vanberg (1997)

•  Jurisdiction evolves through continuous judicial and legislative decisions.

•  Common’s evolutionary approach is modelled after Darwin’s arguments of ’artificial selection’ (not natural selecetion).

•  Common’s speaks about purposeless and purposeful selection (involves human will).

•  Human will affects both variation and selection. Selection criteria are human made.

•  No central planner (Darwin’s ’breeder’) decides institutional evolution. => But co-selection may be possible!

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Vanberg (1997)

•  Trials, selection, diffusion and even the nature of their context involves purposeful human acts.

•  These acts do not always achieve their intended goals, however. There is uncertainty about the results.

•  The selection (choices, decisions) can be made by different actors: individuals, families, markets, hierarchies, associations, governments.

•  Which of them would make socially optimal decisions depends on the context.

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Vanberg (1997)

•  Evolutionary processes can be ”guided” or ”cultivated” towards desirable directions: - Utilizing their exploratory potential - Steering them towards a desirable directions

•  Passively accepting the status quo is also a choice – one for the old rules and structures.

•  Active shaping of evolutionary processes can raise the odds of favorable changes. The outcomes of the process will remain uncertain, however.

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Vanberg (1997)

Improving evolutionary processes through purposeful interventions may take place at the policy level. This may involve:

1.  Improving experimentation at the grass-roots 2.  Improving strategic selection and commitment at the

national level 3.  Improving PPP-development processes at the chosen

areas of new activities

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New ”Macro-Organizational” Role for Government?

-  Facilitating a widely shared visioning process -  Evaluating various systems’ performance and anticipating

environmental changes -  Fostering local experimentation (businesses, policies, systems) -  Analyzing local experiments, conditions and potential (strengths

and weaknesses) -  Studying international markets and value-adding systems

(opportunities and threats) - Making strategic choices and commitments (with stakeholders) -  Facilitating multi-level PPP-processes and cooperative platforms -  Solving development problems (with stakeholders) as they emerge

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