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Innovation Trends and Policies

John DrydenDeputy Director for Science, Technology and Industry,

OECD

Istanbul Chamber of Industry – 6th Industry Congress,

Istanbul, 26 – 27 Nov. 2007

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Outline

• Trends affecting innovation

• Policies to strengthen innovation

• OECD Innovation Strategy

– The OECD Review of Innovation Policy in Turkey

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TRENDS AFFECTING INNOVATION

Globalisation Advances in generic technologies,

notably ICTs

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Source : OECD.

International trade and financial links have deepened

The global expansion is continuing

Cross-border lending and investment, in % of world GDP

% growth in real GDP1Non-OECD share in % of world GDP

Imports of goods and services, in % of world GDP

The importance of non-OECD economies has grown

22

24

26

28

30

99 2000 01 02 03 04 05 06

0

2

4

6

8

10

12

99 2000 01 02 03 04 05 06

China

IndiaRussia

Brazil

OECD40

41

42

43

44

45

46

47

99 2000 01 02 03 04 05 06

At purchasing power parity

At market exchange rates

6

8

10

12

14

16

99 2000 01 02 03 04 05

At market exchange rates

Globalisation is advancing rapidly…

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… and Turkey is one of the active participants (Exports plus imports of goods and services as a ratio of GDP, %)

Source, Presentation by Rauf Gönenç, OECD Economics Department, Country Desk for Turkey, September 2007

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The current phase of globalisation is characterised by several new trends:• The spread of global value chains: production is

increasingly fragmented across countries leading to more specialisation, even in traditional industries .

• Intra-firm trade by multinational enterprises accounts for a large part of global trade flows.

• Trade in services is growing rapidly, enabled by information and communications technologies.

• The integration of large emerging economies, notably China and India, also in more innovative areas of economic activity.

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Non-OECD countries are also of growing importance for global science and innovation

R&D expenditure in 2005(circles reflect size of spending in billion USD PPP)

• China, already among the largest investors in R&D globally, targets 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 Scoreboard 2007

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Why the growing interest in innovation in this global economy?

Innovation is part of the response to globalisation:– countries move up the value chain, increase productivity growth

and become more competitive;– Innovation can help address global challenges in the environmental

(climate change, energy security) health (diseases, aging society, water) and development (poverty reduction, income disparity) domains.

The global economy also offers new opportunities for faster innovation:– New technologies (information technology, the Internet) enable

more rapid innovation, notably in services.– Globalisation broadens access to markets and enables greater

efficiencies and specialisation.– More resources can be devoted globally to research and

innovation.

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Innovation plays an important role in economic growth …

WelfareWelfare

Economic growthEconomic growth

Productivity growthProductivity growthEmployment growthEmployment growth

InnovationInnovation Human Human capitalcapital

Investment in Investment in CapitalCapital

Technological innovation Technological innovation (often linked to R&D and (often linked to R&D and scientific discovery)scientific discovery)

Non-technological Non-technological innovation innovation (changes in (changes in processes, processes, organisations, etc.)organisations, etc.)

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Investment in innovation is rising in several OECD countries (R&D expenditure as % of GDP)

Source: OECD, Science, Technology and Industry Outlook 2006.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0% 1995 2005

11

0

20

40

60

80

100

120

11

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.

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Business R&D Other R&D (1)

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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.

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Innovation is more than R&D: Investment in many intangibles is rising

• In the U.S., intangible investment now exceeds tangible investment (machinery and equipment and buildings) as % of output.

• Investment in intangibles includes investment in software, R&D and factors such as training and firm organisation.

• These intangibles (investments in knowledge) play a growing role in growth performance.

Source: Corrado, Hulten and Sichel (2007).

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Outcomes still differ substantially …Relative prominence of cited scientific literature, 2003 (1)…

Source: OECD, Science, Technology and Industry Scoreboard 2007.

• 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 also reflect greater quality of the research, as well as greater linkages to research in other countries

(1) “Relative prominence” is the ratio of a country’s share of S&T literature cited by the rest of the world to its share of S&E articles (NSF).

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… also in terms of patenting:(Key international patents (triadic patents) per billion dollar of GDP, 2005)

Note: (1) Triadic patents refer to patents applied for at JPO, USPTO and JPO.Source: OECD, Compendium of Patent Statistics 2007, www.oecd.org/sti/ipr-statistics

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Countries with strong innovation performance share common characteristics

• 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, into• 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• Networking among innovators, notably strong linkages

between science and industry• Openness to foreign sources of knowledge

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Many OECD countries have had difficulties in strengthening innovation : – The EU’s Lisbon agenda has made slow progress.– Many OECD countries have had weak productivity growth in recent

years, despite new opportunities. Why?

– Business, not government, is the main innovator.– Innovation depends on many factors: business-friendly

environment, strong education and science system, good links between science and business, etc.

– Co-ordinating policies across policy domains is difficult.– Improving innovation often requires a long-term policy commitment – Stronger innovation may imply winners and losers: insufficiently

innovative firms may disappear and there may be job losses. Sharing experiences and good policy practices can help.

POLICIES TO STRENGTHEN INNOVATION

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Good framework conditions are key

OECD analysis emphasises :

– Strong competition, especially in the services sector– Openness: A low level of restrictions on FDI; openness to

foreign talent– Stable macroeconomic conditions and low real interest rates– The availability of internal and external finance: Improved

corporate profitability and higher stock market capitalisation– Intellectual property rights, which provide the incentive to

innovate Much reform has been undertaken, but poor framework

conditions (e.g. lack of competition and lack of openness) still remain a constraint on innovation in many OECD countries.

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Policies towards Public Research are changing

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 underway:• Fewer, larger universities (e.g. Denmark)

• Greater university autonomy (Japan) and performance targets

• Improved performance in public research institutions (Spain)

Growing focus on excellence and relevance:• Ensure best research is funded – focus on excellence

• Growing emphasis on competitive funding

• Growing focus on evaluation of programmes and policies; new quality assessment frameworks in several OECD countries (e.g. Australia, Austria, Norway)

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Science-industry links can be further improved:Firms collaborating in innovation with higher education

institutions, by size, 2002-04

0

10

20

30

40

50

60

Austr

alia

Gre

ece

NZ

L

Can

ad

a (3)

UK

Po

lan

d

Jap

an

Sp

ain

Italy

SLO

V

Icela

nd

Hun

gary

Fra

nce

Po

rtug

al

Ko

rea

Irela

nd

CZ

E

Germ

an

y

Luxem

bo

urg

Neth

erl

ands

No

rway

Den

mark

Austr

ia

Belg

ium

Sw

ed

en

Fin

land

SMEs Large firms%

Source: OECD, Science, Technology and Industry Scoreboard 2007.

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Policies to foster business innovation

Governments support business innovation through several channels, including tax relief and direct support (e.g. grants).

These policies are changing across OECD countries:

– Increasing reliance on R&D tax credits, less direct support in a number of countries

– Some streamlining – support programmes often too complex for firms

– More competitive-based funding

– Supporting networks and clusters, instead of individual firms R&D tax credits are being reformed (e.g. in Belgium, Spain,

Netherlands) Overall: “smarter ways” to support business innovation.

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Developing coherent policies for innovation

Coordinating strategies towards research and innovation remains a challenge for many OECD governments

A long-term perspective on innovation enhances trust.

Better 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 S&T policy debate, e.g. through foresight programmes.

• Growing importance of regional governments and actors in innovation policies (e.g. Spain and Belgium).

In sum, despite major policy efforts to improve innovation capabilities, OECD countries still have a long way to go.

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New dimensions of innovation policies

The scope of policies to foster innovation is broadening: 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.

Non-technological innovation – e.g. changes in organisation, in processes, in marketing, in design, etc. –recognised of growing importance, in particular in the services sector.

The globalisation of innovation – how can national policies be adapted to the changing global landscape for innovation?

Innovation for global challenges and not only economic growth, “global public goods” – eco-innovation, health innovation, etc.

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The view of innovation is moving away from a linear model…

Discovery Development Delivery …Diffusion

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Connectivity&

Interoperability

DEVELOPMENT

IDENTIFICATION of NEED

DIFFUSION

DELIVERY

ResearchPolicyand BehaviourNetworkscollaborations

DISCOVERY

Industry PolicyStructurePractice

PolicyEnvironmentEnergyHealthEtc

MarketDemandToolsFlexibility

Regulatory/LegislativePolicyIncentives?

Decisions

Match innovation and market needs

Enabling environment?

COMMERCIALISATION

…towards a continuous innovation paradigm

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TOWARD AN OECD INNOVATION STRATEGY…

The OECD Ministerial Council of May 2007 mandated an OECD Innovation Strategy:• Provide new facts and evidence depicting innovation performance in

OECD countries, based on statistical, empirical and thematic analysis.

• Provide explanations for the differences in innovation performance across OECD countries.

• Provide comprehensive and forward-looking policies to strengthen innovation, involving good policy practices and recommendations. This will also seek to address the new dimensions of innovation.

It will provide governments with a stronger evidence basis and good practices to reform and strengthen innovation policies.

Country-specific recommendations (including through voluntary reviews.

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…to build on OECD’s existing role

develop statistics and indicators to compare science and innovation performance.

analyse innovation policies and determinants of performance: to improve the understanding of factors and policies driving

performance to identify good policy practices

foster international co-operation in science and innovation, e.g. through the OECD Global Science Forum

provide country-specific policy analysis and recommendations Country reviews of innovation policy have been finalised for

Switzerland, Luxembourg, New Zealand, South Africa, Chile and China; are underway for Norway, Korea, Turkey, Mexico, Greece and Hungary; and are under discussion with Brazil, Germany, Japan and Russia.

The OECD Economic Surveys have also covered innovation for several OECD countries.

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The Review of Turkey’s Innovation Policy

Agreement of principle reached with the Government Review commissioned by TÜBITAK, other agencies to

be involved, including the Ministry of Industry and Trade, in particular on SME and enterprise issues

Terms of Reference agreed; Final Report in mid- 2008 Goals of the Review:

– To provide an independent and comparative assessment of the strengths and weakness of Turkey’s innovation system

– Formulating concrete recommendations for reform– Highlight the successful practices and outcomes that

already exist in Turkey

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Focus of the Review How well is the innovation system related to past and

present growth? Does the policy mix match evolving policy priorities? Are existing instruments for promoting business R&D

effective? What else may be needed? Focus on SMEs Are PROs managed in a way to promote excellence ? How effective are industry-science relationships; what role

do clusters play? How well are Turkish innovators positioned to benefit from

global innovation and research networks, including the EU FPs?

What is needed to match the supply and demand for Human Resources in S&T?

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john.dryden@oecd.org

www.oecd.org/sti