How to improve the national innovation systems of the catching-up

economies ?

Urmas Varblane University of Tartu

THE PATH DEPENDENT MODEL OF THE INNOVATION SYSTEM: DEVELOPMENT AND

IMPLEMENTATION IN THE CASE OF A SMALL COUNTRY

Aim - to develop the model and implementation mechanisms of the national innovation system for the small country, which accounts for the path dependency, considers late-comer advantage and ensures sustainable economic development

THE PATH DEPENDENT MODEL OF THE INNOVATION SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN THE

CASE OF A SMALL COUNTRY

• Which characteristic features and problems of the national innovation system are caused by the path dependency?

• Which should be the structure of the national innovation system in order to account for path dependency?

• Which are the major advantages and disadvantages of latecomers and how to utilise those advantages by the national innovation system?

• How does the country size affect the formation and development of national innovation system?

• Which implementation mechanisms are suitable for the path dependent national innovation systems of small countries?

The framework of the research proposal

The implementation plan of the project – subtopics, working groups

• NIS partly overlaps with the three systems: economic-; education- and political system =>

Working groups:• Innovation capabilities, its factors and development

in the economic system • Human- and social capital: the role of education,

research and knowledge in the national innovation system

• The role of the public policy and public sector in the innovation system.

• Methodology: how to measure innovations and their effects.

Structure of the presentation

• development of the concept of the national innovation system, its elements and function

• applicability of national innovation system approach in different groups of countries

• advantages and disadvantages of catching up economies as latecomer economies

• major path dependency related problems in the building up of the national innovation systems in catching up economies

• Conclusion and recommendations for using appropriate policy measures.

Theoretical perspective on innovation and learning: as socially embedded (Lundvall, 2003)

– Innovation is a process that is:• Cumulative

• Nonlinear

• Path dependent

• Context dependent

• Continuous

• Interactive – Firms do seldom innovate alone

– Innovation and learning• You learn from what you do

• Innovation as joint production of innovation and competence

• Learning is a socially embedded process – social capital is important

Development and diffusion of the concept NIS• Historical roots (Friedrich List,1841) - ’national systems of

production’ - a wide set of national institutions including those engaged in education and training as well as infrastructures such as networks for the transport of people and commodities

• Freeman 1982 and Lundvall 1985 – National Innovation System• innovation process should be treated in a systematic manner

- need for systemic approach, which integrates institutions to create, store, and transfer the knowledge, skills and artefacts. (OECD,1999

• understanding innovation as a complex interactive learning process

• learning is important => key element in both the dynamics of the system and as a key agent in binding the whole system together.

• comparative - could not be an ideal NIS, which fits different nations with their specific socio-economic, political and cultural background.

Definitions of NIS

• Innovation System - a system for generating and diffusing new technologies - every country has such a system, even if it is weak or low in capacity.

• C. Freeman (1987, p. 1) ‘the network of institutions in the public and private sectors whose activities and interactions initiate,import, modify and diffuse new technologies’.

• B.-A. Lundvall (1992, p. 12) narrow NIS ‘organisations and institutions involved in searching and exploring – such as R&D departments,technological institutes and universities’.

• broader NIS includes ‘all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring – the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place’.

Definitions of NIS

• “The elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge… and are either located within or rooted inside the borders of a nation state” (Lundvall, 1992; p.12)

• “A set of institutions whose interactions determine the innovative performance of national firms” (Nelson, Rosenberg, 1993; p.5)

• “The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change-generating activities) in a country” (Patel and Pavitt, 1994; p.12)

Definitions of NIS

• “That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies” (Metcalfe, 1995;p.462-463)

Definitions of NIS

• C.Edquist (1997) - includes “all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations”

• Galli, Teubel (1997)- “a historically grown subsystem of the national economy in which various organizations and institutions interact and influence each other in the carrying out of innovative activity”.

• NSI as the set of organizations, institutions, and linkages for the generation,diffusion, and application of scientific and technological knowledge operating in a specific country .

Systemic approach to innovation• According to Ingelstam (2002):

– 1. a system consists of two kinds of constituents: there are firstly, some kinds of components and secondly, there are relations among them. The components and relations should form a coherent whole (which has properties different from the properties of the constituents);

– 2. the system has a function – that is, it is performing or achieving something;

• 3. it must be possible to discriminate between the system and the rest of the world; that is, it must be possible to identify the boundaries of the system. If we, for example, want to make empirical studies of specific systems, we must, of course, know their extension.

Elements in the system of innovation

• Players or actors. Organizations : firms (normally considered to be the most important organizations in Sis), universities, venture capital organizations and public agencies responsible for innovation policy etc.

• Rules of the game. Institutions are “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organizations,” (Edquist & Johnson, 1997).

Figure 1: Indicative Issues, Actors and Activities

in a Simple Science, Technology and Innovation System

Social and Human Capital

Universities S&T Training and Education

Absorptive Capacity ‘Follower’ firms; Intermediate and End Consumers and Professional Users Market for Goods and Services

Research Capacity

Universities; Govt Laboratories Basic Scientific Research

Technology and Innovation Performance

‘Creative’ Firms Applied RTD and Product /Process Development

Knowledge Users

Knowledge Creators

Public Sector

Private Sector

Nauwelaers, 2003Nauwelaers, 2003

Edquist, 2001

The potential reachof public policies ...

Framework ConditionsFinancial environment; taxation andincentives; propensity to innovation

and entrepreneurship ; mobility ...

Education andResearch System

Professionaleducation and

training

Higher educationand research

Public sectorresearch

Industrial System

Large companies

Mature SMEs

New, technology-based firms

IntermediariesResearchinstitutesBrokers

Consumers (final demand)Producers (intermediate demand)

Demand

Banking,venture capital

IPR andinformation

Innovation andbusiness support

Standards andnorms

Infrastructure

PoliticalSystem

Government

Governance

RTD policies

A generic national innovation system (Arnold, E., Kuhlman, S, 2001, RCN in the Norwegian Research and Innovation System. Available at www.technopolis-group.com)

Boundaries of innovation systems – types of systems

• Spatially, sectorally,functionally=>• National Innovation Systems (Freeman, 1987;

Lundvall, 1992; Nelson, 1993);• Regional Innovation Systems (Camagni, 1991;

Cooke et al., 1997; Braczyk et al., 1998; Cooke, 2001; and Asheim & Isaksen, 2002);

• Sectoral innovation systems ( Breschi & Malerba, 1997, Malerba, 2004).

• “Technological innovation systems” (Carlsson, 1995; Carlsson & Stankiewicz, 1991)

Roots of the systemic approach to innovation

• evolutionary theory (Nelson & Winter, 1982). • firms are a bundle of different capabilities and

resources (Eisenhardt & Martin, 2000; Grant, 1996; Spender, 1996) which they use to maximize their profit.

• knowledge is not only information, but also tacit knowledge; it can be both general and specific and it is always costly.

• Knowledge can be specific to the firm or to the industry (Smith, 2000).

• The innovation process is interactive within the firms and among the different actors in the innovation system.

Activities in the system of innovation(Chaminade, Edquist, 2005)

function of SIs is to pursue innovation processes: to develop and diffuse innovations.

‘activities’ in SIs are those factors that influence the development and diffusion of innovations. Four approaches

1) innovation production process, looking at the different activities needed to turn an idea into a new product or process. Edquist, (2004), Furman, Porter et al., (2002)

2) knowledge production process - how knowledge is created, transferred and exploited (emphasis on the channels and mechanisms for knowledge distribution). (David & Foray 1994; Johnson & Jacobsson, 2003; innovation systems as learning systems (Lundvall, Johnson et al., 2002).

Activities in the system of innovation(Chaminade, Edquist, 2005)

3) organizational performance - organizations as the starting point, identifying the activities of the different organizations that have an impact in the innovation system (Borrás,2004).

4) innovation policy as a focal point => what activities (and organizations) in the innovation system can be stimulated by public intervention (OECD and other international organizations)

criticism - it considers only those activities that can be directly affected by public intervention

Chaminade, Edquist, 2005

• what is the division of labor between private and public actors in the performance of each activity.

This will provide policymakers with a new perspective on:

a) what role they can play in stimulating different activities in the system of innovation;

b) once the complex division of labor between public and private actors has been unfolded, what could be the appropriate instruments to do this;

c) how to identify future research needs.

Activities in the system of innovationproposed by Chaminade, Edquist, 2005

I. Provision of knowledge inputs to the innovation process

1. Provision of R&D - creating new knowledge, primarily in engineering, medicine and the natural sciences.

2. Competence-building (provision of education and training, creation of human capital, production and reproduction of skills, individual learning) in the labor force to be used in innovation and R&D activities.

II. Provision of markets – demand-side factors 3. Formation of new product markets. 4. Articulation of quality requirements emanating from the

demand side with regard to new products

The linear model of innovation is dead

Basic research gives birth to an idea and relevant new knowledge

Applied research turns the idea into something practical

Industry development of new products and processes

The company brings the new product to the market

The old belief was that industrial innovation was predominantly the result of ideas born in universities and transformed by companies.

NIFU-STEP, 2005

Activities in the system of innovationproposed by Chaminade, Edquist, 2005

III. Provision of constituents for IS 5. Creating and changing organizations for the

development of new fields of innovation (e.g.enhancing entrepreneurship to create new firms and intrapreneurship to diversify existing firms, creating new research organizations, policy agencies, etc.)

6. Provision (creation, change, abolition) of institutions (e.g. IPR laws, tax laws, environment and safety regulations, R&D investment routines, etc) - influencing innovating organizations and innovation processes by providing incentives or obstacles to innovation.

7. Networking via markets and other mechanisms, incl. interactive learning between organizations (potentially) involved in the innovation processes. Integrating new knowledge elements developed in different spheres of the SI and coming from outside with elements already available in the innovating firms.

Activities in the system of innovationproposed by Chaminade, Edquist, 2005

IV. Support services for innovation firms8. Incubating activities (e.g. providing access to

facilities, administrative support, etc. for new innovating efforts).

9. Financing of innovation processes and other activities that can facilitate commercialization of knowledge and its adoption.

10. Provision of consultancy services of relevance for innovation processes, for example, technology transfer, commercial information and legal advice.

Problems of the building the national innovation system in catching-up economies

• National innovation system approach - proposed based on the experiences of high income economies, (strong accumulated knowledge base, stable and well functioning market system, developed institutional and infrastructure support of innovation activities).

• Catching-up economies are different: lower income level, less accumulated knowledge, weaker institutional support etc. plus

• Path-dependency => common command economy past, which has influenced the whole logic of building up their national innovation system

Problems of the building the national innovation system in catching-up economies

• Catching-up economies own latecomer advantages - extremely high dynamism=> special requirements also to the innovation system.

• Impossible automatically transplant the national innovation system concept based on the technology frontier countries from Western Europe in the catching-up economies of Eastern Europe.

Advantages and disadvantages of coming late

• Gerschenkron (1962) initial ideas ‘patterns of industrialization’(imitation, scale economies, access to the modern technology at lower costs; access to already established markets etc.)

• Perez and Soete (1988) - potential disadvantages of latecomers - showed that scale economies are industry-specific and technology-specific.

• Bell and Pavitt (1997) not sufficient for the catching-up country simply to install large plants with foreign technology – the capacity to absorb the new technology into the human capital stock is also critical.

• Active learning policies are needed to create “absorptive capacity” defined as “the ability of a firm to recognise the value of new, external information, assimilate it and apply it to commercial ends” (Cohen, Levinthal 1990, p. 128

Advantages and disadvantages of coming lateAbramovitz (1994) accepted the potential for catch-up by

latecomers, but suggested that exploitation of the potential is not an automatic process. He proposed that differences in countries’ abilities to exploit this potential might be explained with the help of two concepts: technological congruence and social capability.

technological congruence - degree to which the leader and the follower country are congruent in areas such as market size, factor supply, etc.

social capability - capabilities that the developing countries have to acquire in order to catch up, especially the improvement of education and business infrastructure and more generally technological capabilities (R&D facilities etc.).

Freeman (1999) added capacity to make institutional changes (social capability for institutional change - to overcome learning and technology divide(Arcena, Sutz,2003)

“Social capability” (M.Abramowitz)(1986, pp. 387-390; 1994a, pp. 34-35; 1994b, p. 88):

not only individual skills (acquired through education) but “collective capabilities” - what organizations in private and public sector are able to do and how it is supported (or hampered) by broader social and cultural factors.

Social capability• technical competence (level of education),• experience in the organization and management of large scale

enterprises• financial institutions and markets capable of mobilizing capital

on a large scale• honesty and trust• the stability of government and its effectiveness in defining

(enforcing) rules and supporting economic growth.

Technological capability

(Chandler, 1977) “the scale and scope” paradigm• focused on the economics of large, integrated companies and the

social, economic and organizational capabilities needed to support and finance them.

Nonaka and Takeuchi (1995) - concept “the knowledge-creating company”

• emphasis on exploration and exploitation of technology and getting the organizational prerequisites for that right (Japanese success stories).

Cohen and Levinthal (1990) absorptive capacities - “the ability of a firm to recognize the value of new, external information, assimilate it and apply it to commercial ends”

(Kim 1997, p. 4) “technological capability” - “the ability to make effective use of technological knowledge in efforts to assimilate, use, adapt and change existing technologies.”

• Kim - three aspects of it: innovation-, production- and investment capability

Capabilities and development - an integrated framework (Fagerberg, Shrolec, 2007)

National Technological LearningNational Technological Learning (Watkins, 2007) (Watkins, 2007)

S&T learning capacity

S&T learning opportunities

Knowledge generation

capacity

Capital imports

Inward FDI

S&T co-operation

+Knowledge absorption capacity

Education

R&D

Licensing

Diaspora and Expats

Internet Export

Customers

‘Tree’ of national technological learning

Slow learning

Passive FDI-dependent

Creative-cooperative

Aid supported

Creative- isolated

Autonomous

Active FDI-dependent

Time

Human capital accumulation

Six models of national technological learning (Watkins, 2007)

• Traditionalist slow learning,

• Passive FDI-dependent,

• Active FDI-dependent,

• Autonomous,

• Creative-isolated,

• Creative-cooperative.

Advantages and disadvantages of coming late

• Big gap in technology =>potential for a rapid catch-up=>a wide diffusion process of innovations needed(UNIDO 2005).

• East Asian vs.Latin America =>the importance of the technology diffusion management

• market-induced imitation and organizationally-induced technology transfer.

• Matthews (1999) indicates that those are passive• East Asia =>active model of the technology diffusion

management, which leveraged those innovations and quickly turned into technological capabilities and competitive products

• Linkage – Leverage - Learning• Instead of establishing typical R&D support institutions

suggested by the experience of high income economies, they developed a whole network of institutions for technology diffusion and also organisational capabilities management.

Favourable condition for the diffusion of modern technology

Three major groups of factors allows faster technology diffusion

1) Latecomer advantage2) Openness to foreign trade and investments3) Foreign direct investments support diffusion of

technologies in host countriesR.Perkins, E.Neuymayer (2005) controlled on three technologies: continuous steel casting;

shuttleless textileweaving looms,digital telephone mainlines

Results: First and second holds, third not

Favourable condition for the diffusion of modern technology

Additional factors supporting faster technology diffusion

4) Geographical location of the country – diffusion is geographically localised” (Globermann et al, 2000;Milner, 2003)

5) Level of education. Well educated workers are more likely aware about the new technologies and bale to master them profitable.(Caselli, Coleman, 2001)

6) Social system heterogeneity. Learning through social interaction.New technologies spread more slowly in socially mixed populations (Takada, 1991, Dekimpe et al, 1998)

How technologies spread?• Technologies do not spread instantaneously – diffusion is a

long process• Models disagree about the reasons behind it• Epidemic models =>information (Griliches,1957). Some

firms contact earlier with technologies• Firms heterogeneity (Ireland, Stoneman, 1986) differ by organisational, environmental etc. variables (firms capital stock, human capital, available credit) => economic returns on adoptation are different (Blackman

1999). CONSEQUENTLY = countries with skilled labour, high

capital labour ratio, low interest rates are first adopters. They could also better absorb potential losses from the absorption of technology (Bell, pavitt, 1997; Todaro, 2000)

Why and how latecomer economies could diffuse technology more rapidly

Key assumptions1. Latecomers could take advantage of technological

advantage made by first-comerDirectly - FDI, technology purchases (importing,

licensing)Indirectly – knowledge spillovers (imitation, reverse

engineering, transfer of know-how by movement of employees etc.

They can obtain technology cheaper – not paying the full costs of R&D=>leapfroging decades of technological porgress (Teece, 2000)

Why and how latecomer economies could diffuse technology more rapidly

2. Latecomers are able to diffuse new technology across their economic structure faster due to latecomer advantage

Two sources of latecomer advantage:a) Level of capital stock. They need to install capacity

– may choose technologies. Less inertia in technological change (Clark, Wrigley, 1999; Amiti 2001)

b) Learning investments and increasing net returns to adoption over time (they can take advantage of accumulated learning of frontrunners about using the new technologies). (Dekimpe et al, 2000)

General Background of IndustrialDevelopment of Taiwan

ExportCommodity

Profile

1960 1970 1990 1999

1980

HCI Product

Agricultural Product

Light Industry Product

50%

Wig Automobile SemiconductorTextile

2003

Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc.

79.8%

14.1%

6.1%

KOREA - Changes in Export Commodity Profile: From Light Industry to Heavy Industry

1.2 Economic Take-Off with Outward-looking Development Strategy (5/5)

Example of building a National Innovation System: Korea (1)

Original condition: • Unbalanced industrial development

– Strong final assembly industry, but weak capital goods and system integration industry

• Unbalanced National Innovation System– Underdevelopment of university research system– Dormant industry-academic cooperation

• Lack of infrastructures for creative innovation– Lack of investment in basic science– Weak protection of intellectual property rights– Underdevelopment of venture financing and support system

From supply push

To demand pull

Promote balanced

National Innovation System

Sustain infrastructure for

creative innovation

Vitalization of university research

Networking among Industry, academia, govt

Korea (2): Innovation Strategy

Sustained investment for

basic science (KIAS)

Increased protection for

intellectual property rights

Promotion of venture companies

Mission-oriented governmental R&D programs

Technology targeting

Latecomer firms (Mathews, 2007, 2005, 2002)

• strategic goal - to catch up with the advanced firms and to move as quickly as possible from imitation to innovation.

• able to exploit their late arrival to tap into advanced technologies (do not replicate the entire previous technological trajectory)

• bypassing some of the organizational inertia that holds back their more established competitors.

• Linkage with the global value chains as suppliers.• Through linkage latecomer firm could acquire from more

advanced firms knowledge, technology, and market access• It is this capacity to secure more from a relationship than the

firm puts in, that we call leverage.• linkage and leverage can be repeated over again until firm or

group of firms enhance their capabilities and become, potentially, advanced players (industrial learning).

Latecomer firms (Mathews, 2007, 2005, 2002)

• The institutional innovations involved are all concerned with the capture of technologies in timely fashion;

• the building of capabilities in these technologies, such as in government-owned R&D institutes;

• the diffusion of these capabilities as rapidly as possible to the private sector (e.g. through a sequence of targeted R&D consortia).

• Mathews calls it as the national system of economic learning • the process involved is the management of technological

diffusion, or technology diffusion management.• Technology Leverage Institution (TLI) is needed (like

Taiwanese Industrial Technology Research Institute, ITRI)• task of the TLI is to identify technologies of interest to a

developing country, fashion strategies for acquiring technologies, adopting, adapting and diffusing them to the firms in the country, where they can be used to build new businesses and industrial sectors.

Technology Leverage Institution (TLI)

• not be engaging in fundamental scientific research.• would be concerned strictly with identifying and

evaluating available technologies.• provide shared R&D services for existing and

emerging industries in the developing country.• Technologies already being used are subject to

testing to see how they can be improved; • technologies used by rivals and competitors are

constructed and analyzed; • potential technologies that could substitute for the

ones in use are being evaluated.

Overview Industrial Technology Research Institute (ITRI)

Sources of early mover and latecomer advantages

Generic Technological Capability Development Routes of Latecomer Firms (Poh-Kam Wong, 1999)

• "Reverse Value Chain" Strategy (from OEM to ODM to OIM or OBM)

OEM (Original Equipment Manufacturing);Original Design Manufacturers (ODM)

(Original Idea Manufacturing OIM); (Own Brand Manufacturing (OBM)).

• “Reverse Product Life Cycle” Innovation Strategy ("Late-follower" to "Fastfollower")

• Process Capability Specialist Strategy• Product Technology Pioneering Strategy• Applications Pioneering Strategy

Generic Technological Capability Development Strategies ofLatecomer Firms from Late Industrializing Economies

(Poh-Kam Wong, 1999)

Key Technological Learning Processes for the Five GenericTechnological Capability Development Routes

Dominant Generic Technological Capability Development Routes in National Innovation System Models of three NIE

(Poh-Kam Wong, 1999)

Innovation processes are path-dependent • Evolutionary characteristics - we do not know

whether the potentially best or optimal path is being exploited.

• The system never achieves equilibrium, and the notion of optimality is irrelevant in an innovation context. We cannot specify an ideal or optimal innovation system

• Comparisons between an existing system and an ideal or optimal system are not possible, instead comparison with the other countries is available.

• Instead of market failure the term systemic problems or systemic failures are used.

Systemic problems mentioned in the literature include (Smith, 2000; Woolthuis, Lankhuizen et al., 2005):

• infrastructure provision and investment, including the physical (IT, telecom, transport) and scientific infrastructure (universities, labs);

• transition problems – the difficulties that might arise when firms and other actors face technological problems or changes in the prevailing technological paradigms that exceed their current capabilities;

• lock-in problems, derived from the socio-technological inertia, that might hamper the emergence and dissemination of more efficient technologies;

• hard and soft institutional problems, linked to formal rules (regulations, laws) or nonformal (such as social and political culture);

• network problems, derived from linkages too weak or too strong (blindness to what happens outside the network) in the NIS;

• capability problems, linked to the transition problems, referring to the limited capabilities of firms, specially SMEs, their capacity to adopt or produce new technologies over time.

Development of the national innovation system in countries with command economy past

Development of the NIS in the countries with command economy past

• Movement from the one extreme – full state dominated model to the extreme laissez faire of model (subparts strongly isolated, role of the state weaker than in the Western countries)

• Systemic change created huge instability in the economy and society =>Being successful required a lot of efforts and therefore attempt to be able to solve problems individually (on the level of single person, firm or academic institution) became dominating.

• Competition was the key notion and cooperation was seen as the threat to the individual success.

Path dependency problem

• inefficiencies and ineffectiveness of NIS’s may be partly related to path dependence and lock-in situations (evolutionary and historical economics - Niosi, 2002).

• In the case of the new EU member-state - path dependency of the whole system of innovation.

• The change in 1980s was systemic, majority of the components of the innovation system changed, but at different speeds as some components were easier to change than others. Misfit between components of NIS (Replacement of fixed assets vs. introducing institutions guiding economic transactions like trust)

• Subjective factors - policy makers do not want to face up to this issue. Wishful thinking and neglect of path dependency is very dangerous; the result is action plans that are inadequate, and in any case not implementable.

Path-dependency problems of building the national innovation systems in the catching-up economies

• dominating role of the linear innovation model and neglecting demand;

• confrontation between high and low tech industries; • overvaluation of the role of foreign direct investments; • lack of social capital and network failures; • weak innovation diffusion system and low motivation to

learn.• underestimation of the role of public sector in the

national innovation system;

Passive FDI-dependent learning

• passively relying on FDI to bring in new technologies,

• low S&T learning capacity,

• no or weak government technological strategy,

• limited opportunities for technological learning,

• high risk of losing in economic competition with poorer, lower-wage countries.

Active FDI-dependent learning

• relatively high S&T learning capacity,

• active government strategy aimed at building national human capital and accelerating national technological learning from FDI,

• active targeting of the most beneficial FDI,

• much wider opportunities for technological learning from FDI,

• lower risk of losing in economic competition with lower-wage but lower-skill countries.

Weak innovation diffusion and low motivation to learn• Success of the catching-up economies depends on the

capability and willingness of actors within NIS to search for, adapt and utilise knowledge produced outside those countries.

• In this process they need specific skills – to understand the knowledge stock, and to be able to use it and adapt it to create new knowledge.

• Nonaka (1991) has argued that learning about new technologies requires significant levels of absorptive capacity as a condition of being able to diffuse technologies produced elsewhere.

• Knowledge needed to absorb new technologies is often not available in codified form. Since effective learning involves both tacit and formal components, a key task is to capture and codify – to make learning explicit.

Weak innovation diffusion and low motivation to learn

• Information about the innovations and technologies is neither free nor widely available, particularly for small firms.

• The majority of firms in catch-up economies are small in terms of the scope of management

• Mechanisms to raise awareness of the available innovations, and the means of access to the relevant channels of communication, need to be organised explicitly - to help firms to identify which technologies they need, and thus avoid the pitfall of inappropriate technologies.

• (Analysis of Estonian regional S&T intermediary system revealed - intermediaries do offer services like technology watch; collecting information on relevant existing technologies and technological audit, but the employees of these intermediaries are not competent enough. Usually the employees of SMEs know much more about new technologies and production possibilities existing in their area than intermediaries. Previous is mainly problem in R&D intensive industries).

Weak innovation diffusion and low motivation to learn• In latecomer economies with a command economy past, the

technology transfer problem is really a problem of learning in enterprises and intermediaries. To increase the learning capacity of the whole society.

• Rapid catch-up requires rapid learning. • But learning is not automatic – there must be

motivation to enter the learning cycle. Overcoming path dependency in thinking.

• Where catch-up is already proceeding rapidly (e.g. Baltics) the lack of extra-organisational stimulus to change can become a serious problem.

• As long as the existing business model continues to generate steady, rapid growth, it is extremely difficult to persuade the actors in the innovation system (not only firms, but also policy-makers and non-market institutions) to enter into the learning cycle in a serious manner.

Weak innovation diffusion and low motivation to learn

• The latecomer advantages have created short-run success, and this in itself has tended to result in very low motivation to create learning capabilities.

• Firms often fail to learn because they are isolated and lack support for key stages in the process, partly because of elements of path dependency stemming from the old planning system.

• Practical experience suggests that learning can be supported by structures and procedures to facilitate the operation of the learning cycle, and that this, indeed, is the mark of a properly functioning innovation system.

Conclusions for the improvement of the NIS in economies coming from systemic change

• Precondition - consider the path dependency problems: a) Linear innovation model should be replaced with the

balanced interaction based approach Innovation should not be equalised with R&D - understanding

that non-R&D dimensions of innovation are equally important for catching up economies.

b) Discrimination of low tech industries allocating majority of resources into creation of high tech sector is not appropriate policy – instead funding of the use of high technologies in traditional industries and services;

c) Support the development of the system of absorption and diffusion of knowledge produced outside and inside of the catching-up economies

Combining high technologies with traditional industries and services

• Traditional industries Services

ICT

Biotehnologies

It requires motivation from both side, adequate knowledge base needed

Instruments of innovation policy also play a role

Conclusions for the improvement of the NIS in economies coming from systemic change

d) On firms level: encourage motivation of firms to change; support the process of building absorptive capacities of the

firms. e) lack of managerial and organisational skills are very

important barriers of innovation (even more than better access to modern technology) and should not be overlooked.

f) Integration of local firms into networks of foreign investors should be supported. Selection must be used by FDI policy in catching up economies

g) Technological path-dependency could be used not as a threat but as an opportunity. Resistance to change is weak and offers an opportunity to skip the whole generation of technology and introduce new solutions.

The typology of services (Innovation in Services: Typology, case studies and policy implications)

• Problem solvers create value by solving specific and unique problems for their customers. Low standardization. Suppliers provide services that the clients are not able to produce themselves (law firms, medical doctors, engineers, architects, and researchers)

• Producers of assisting services generate customer value by taking over time consuming activities for firms and households that are easy to standardize (Security services and cleaning services)

• Producers of distributive services - value through facilitation of interaction between customers (e.g. selling goods and transporting commodities, passengers and information). A large sub-group operates predominantly through digital channels (telecom or financial services. Due to the large scale and productivity effects of operating in such channels split into digital and manual distributive service providers.

• Producers of leisure services generate values by stimulating the emotions, perceptions and spiritual experience of customers. Highly heterogeneous. (sports, arts, entertainment, restaurant services and media services).

Policy areas of importance to services

Innovation in Services: Typology, case studies and policy implications. ECON Report, 2006, Norway

Tertiary graduates by field of study (2002) Source: OECD (2004), Education at a Glance.

Source: OECD, Main Science and Technology Indicators database.

From science and technology policy to innovation policy (NIFU-STEP, 2005)

• 1st generation: Science and technology policy– Focus on research and especially research in universities and

laboratories– Ministries of industry/economy (industry policy) and

research/education (science policy)

• 2nd generation: Innovation policy– Focus on policy measures and institutions targeting the innovative

capabilities of firms– Ministries of industry/economy and research/education

• 3rd generation: holistic innovation policy– Focus on institutions and policy measures that directly or indirectly

influence the innovative capabilities of firms– Most ministries

Now: A more complex understanding of innovation

• Innovation takes place in complex systems of companies, knowledge institutions, financial institutions and within a extensive regulatory, social and cultural framework.

• Innovation is based on complex learning processes involving a large number of persons, all with different educational backgrounds and experiences.

• Innovation thrives on spillovers and unexpected combinations of persons, existing knowledge and technologies.

NIFU-STEP, 2005

The company centred model of the innovation system

Company

Suppliers

Customers

Policyorganisations

Research

institutions

Consultants

•Learning

•Networking

•Innovation

Financial institutionsRegulatory framework Cultural environment

International setting Industrial system

NIFU-STEP, 2005

The basis for systemic innovation policies (NIFU-STEP, 2005)

Traditional industrial policies

Modern innovation policies

Knowledge as a “free” commodity

Competence building as learning processes

Focus on research Including a broad set of innovation activities(incl. development, incremental improvements, design, branding, marketing)

Focus on “high tech” companies

Including “low tech” companies and services

Focus on R&D institutions Company centred

Focus on knowledge diffusion Focus on absorptive capacities and networking

A changing framework for A changing framework for inninnovation policy : ovation policy : National System of InnovationNational System of Innovation (Nauwelaers, 2003) (Nauwelaers, 2003)

Increased awareness of the role of innovation as crucial ingredient for economic development

Interactive view of innovation: innovation differs from R&D

System-based approach to innovation, emphasis on learning and diffusion / absorption of knowledge

Mobility of tacit knowledge embedded in humansbecomes a key performance factor

Glocalisation : localised nature of (tacit) knowledge spillovers - importance of global connections

Policies for innovation systems Policies for innovation systems (Nauwelaers, 2003)(Nauwelaers, 2003)

From “picking-the-winners” towards “addressing-weakest”System performance is mainly determined by the weakest node From “stocks” to “flows” as main focus of policy attentionFlows in the system need to be addressed in priority

From “raising resources” towards “promoting change”Performance is affected by learning abilities of firms and others

From “best practice” towards “context-specific” solutionsPolicies should be fine-tuned to specific system failures

From “standard” policy-making towards policy “learning process”There is a need for more strategic intelligence in policy-making

Policy Conclusions (I)Policy Conclusions (I)

• Effectiveness of innovation systems depends on balanced combination of 3 capacities :– creation of knowledge– diffusion of knowledge– absorption of knowledge

• Government’s role shifts from investor to facilitator - promotion of public/private partnerships and interface management

• Growing importance of framework conditions– entrepreneurship– competition rules– labour market conditions– social capital, ...

Policy Conclusions (II)Policy Conclusions (II)

• Danger of fragmentation of innovation policy : need for intra-government policy coordination

• Increasing role of regions for innovation : need for vertical policy coordination

• More efficiency through “Policy packages” rather than isolated instruments

• Need for more policy intelligence – monitoring and evaluation of policies– sound analyses of innovation systems– « intelligent » benchmarking practices– long term views– inclusive policy design processes

The Impact of RTDon Competitivenessand Employment (IRCE), EC, 2003

A Simple Taxonomy of Science, Technology and Innovation Policies

Social capital and the small country paradox(slide from B.A.Lundvall)

• Small size (cf. The costs of respectively production and reproduction of knowledge) and low tech specialisation should be a serious handicap for small countries and especially for Denmark but small countries perform better than big ones in the new economy – why?

• In ’the learning economy’ speedy adjustment, learning and forgetting is rooted in social relationships. Trust, loyalty and ease of communication is easier to establish in culturally homegeneous nations with shared responsibility for the costs of change.

Export Structure by Technology CategoryProducing “what” vs. producing “how”

Finland

Hi Tech22%

Medium Tech 30% Low Tech

10%

Resource Based 38%