measuring innovation lecture 2dec.ec.unipg.it/~fabrizio.pompei/lecture2.pdf · 2018-01-25 ·...

Measuring InnovationLecture 2

Fabrizio Pompei

Department of EconomicsUniversity of Perugia

Economics of Innovation (2016/2017)(II Semester, 2017)

Pompei Measuring Innovation Academic Year 2016/2017 1 / 28

Contents of the Lecture*

1 Key problems in innovation indicators

2 Traditional Innovation Inputs and Outputs

3 New Innovation Indicators

4 Community Innovation Survey (CIS)

5 Alternative forms of Knowledge ProductionFunctions

6 Statistics on the CIS

7 Questions for lecture 2

*The Oxford Handbook of Innovation, Fagerberg, Mowery and Nelson R. (2013),chapter 6,


Key problems in innovation indicators

Commensurability and Novelty

Two main problems affect measurements: Commensurability andNovelty

Commensurability means that we have to find what can and what cannotbe measured in innovation

Very often innovation involves multidimensional novelty in aspects oflearning of knowledge organization that are difficult to measure orintrinsically non-measurable

Another fundamental definitional issue is what we actually mean by ’new’

Does an innovation have to contain a basic new principle that hasnever been used in the world before, or does it only need to be newto a firm?

Does an innovation have to incorporate a radical novel idea, or onlyan incremental change?

More in general, what kinds of novelty count as an innovation?


Traditional Innovation Inputs and Outputs

Knowledge Production Function accordingto the neo-classic approach

Notwithstanding innovation is a multidimensional process with nothingclearly measurable about many aspects of the underlying process

Many attempts have been made to deal with innovation and knowledgecreating process from an economic point of view

Starting from Griliches (1979) and Griliches and Pakes (1984) a strand ofliterature concentrated on innovation as aknowledge production function (KPF) in which innovation is the

transformation of innovative inputs in innovative outputs

Of course, both inputs and outputs should be represented by means ofeconomic entities

For this reason, originally, inputs such as R&D (expenditure and researchpersonnel) and output such as patents (rights about inventions perfectlyaccountable) have been selected for representing the KPF

Patents = f(R&D)



Traditional Innovation Inputs:R&D

Despite problems of clear identification, R&D is still one of the most importantindicator for innovative inputs

The key OECD document for the collection of R&D statistics is the StandardPractice for Surveys of Research and Experimental development better known asthe Frascati Manual (the actual version is the Frascati Manual 2015)

It has been an international standard for more than fifty years and now theFrascati Manual is a world standard on collecting R&D statistics

This manual defines R&D as comprising both the production of new knowledgeand new practical applications of knowledge and including: i) basic research; ii)applied research and iii) experimental development.

The basic criterion for distinguishing R&D from related activities is thepresence in R&D of an appreciable element of novelty and the resolution ofscientific or technological problems

The following activities are excluded from R&D statistics: i) Education andTraining; ii) Market Research; iii) Acquisition of Licences; iv)Product Design; v)Trial Production; vi) Acquisition of machinery related to product or processinnovation

R&D indicators refer to expenditure and personnel



Traditional Innovation Inputs:R&D (II)

R&D is often classified according to multiple criteria

sector of performance: i) business enterprise; ii) government; iii) highereducation; iv) private non-profit

source of finance: i) domestic; ii) international

field of research: in this case information and communication technology(ICT) turns to be the largest single category in all countries

The advantage of this indicator relies on the long period over which it hasbeen collected (long time series data) and on the good harmonization acrosscountries

The most widely-used indicator is the R&D intensity, that is the ratioof R&D expenditure to some measure of output

a) For a firm it is usually the R&D/Sales ratio;b) for an industry or a country it is the ratio of business expenditure onR&D (BERD) to total production or value addedc) for a country it is the gross domestic expenditure on R&D (GERD) toGross Domestic Product (GDP).



Traditional Innovation Inputs:R&D (III)The R&D/GDP ratio is used in two primary ways:

1 R&D(BERD)/GDP at industry level identifies high-technology activities (see table below)2 R&D(GERD)/GDP at country level identifies technological progressiveness and

commitment to knowledge creation

Currently OECD and Eurostat use a four-tier model to classify manufacturing



Some Statistics: Gross domestic expenditureon R&D (GERD), 2005 and 2015 (% of GDP)

Sweden was the best performer in Europe in terms of R&D intensity (3.25% of GDP)Austria and Denmark show percentage of R&D expenditure above 3%Italy (about 1.33%) is below the EU average (2.03%) and the Euro Area Average (about2.12%) 2005=red bar; 2015=blue bar



R&D(GERD)/GDP ratio between 2004 and2014

In Italy (green line) the R&D/GDP ratio slightly increased and our country overcameSpain in the last years

1,75 1,74 1,77 1,771,84

1,93 1,93 1,97 2,01 2,03 2,04

1,78 1,78 1,8 1,811,89

1,99 1,99 2,04 2,1 2,11 2,14

2,42 2,42 2,46 2,452,6

2,72 2,712,8

2,87 2,822,89

1,04 1,11,17 1,23

1,32 1,35 1,35 1,33 1,29 1,27 1,24

2,09 2,04 2,05 2,02 2,062,21 2,18 2,19 2,23 2,24 2,24

1,05 1,05 1,09 1,13 1,16 1,22 1,22 1,21 1,27 1,311,38

3,39 3,393,5

3,26

3,5 3,45

3,22 3,25 3,28 3,313,15

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

R&Dexpenditure/GDP(%)

EU(28countries) Euroarea (19countries) Germany Spain France Italy Sweden



Business enterprise expenditure on R&D(BERD), 2005 and 2015 (% of GDP)

BERD is of course lower than GERD, EU28 average (1.3% vs 2.03%)Italy BERD is almost half of GERD (0.74% of GDP), far from the EU28 average (1.3%)



Traditional Outputs:Patents

A patent is a public contract between an inventor and a government that grantstime-limited monopoly rights to the applicants for the use of a technical invention

The patent system gathers detailed information about new technologies into aprotracted public record of inventive activity

The patents are granted for inventive technologies with commercial promise, theyrecords important information about the inventions and relate them to relevanttechnologies

The patent system is an old institution providing a long history (it is the onlyinnovation indicator extending back over centuries)

For all these reasons patents are the most important indicator for innovationand we will dedicate a whole unit to the Economics of Patents right after

At this stage, it is only important to remark that patents also show someweaknesses, for example they are indicator of invention rather than innovation:they mark the emergence of a new technical principle, not a commercial innovation

Patent indicator misses many non-patented inventions and innovations: sometypes of technology are not patentable


New Innovation Indicators

New conceptual foundations of innovation

During the 1970s and the 1980s Nathan Rosemberg and Steven Kline (Rosemberg, 1976;1982; Rosemberg and Kline, 1986) contributed to the clarification on what innovation wehave to measureTheir work influenced the OECD’s Innovation Manual (also called the Oslo Manual) andtheir main concerns focused on:The preliminary phase of innovation is not always based on research-based discovery (thatis, on R&D) and there is not always a clear-cut separation between the innovationemergence and its diffusionTherefore the following basic concepts have to be taken into account:

1 Innovation is not a sequential (linear) process but one involving manyinteractions and feedbacks in knowledge creation

2 Innovation is a learning process involving multiple inputs3 Innovation, also when it is R&D-based, tend to be undertaken as

problem-solving within an ongoing innovation process4 Novelty should include not just completely new products or processes,

but also small-scale and incremental changes5 Also non-R&D inputs to innovation are important, such as design

activities, enginering developments and experimentation, training


New Innovation Indicators

Linear vs the Chain-Link Model of Innovation


Community Innovation Survey (CIS)

Innovation Surveys

Recent years have seen attempts to create new and better designedindicators focused directly on innovation

The European Commission has supported large-scale efforts to improveavailability of direct data on industrial innovation and to improve ourknowledge of outputs, sources instruments and methods of innovation

There are two basic types of innovation surveys:

1 Object approach to innovation indicators: significant technologicalinnovations are identified by means of expert appraisal or through newproduct announcements in trade journals or other literature;For example the science policy research unit (SPRU) at the University ofSussex, used a panel of 400 technical experts to identify major innovationacross all sectors of the UK economy

2 Subject approach: focus on firm level innovation activity, asking aboutgeneral innovation inputs (both R&D and non-R&D) and output.



Measuring Innovations and InnovationActivities: the CIS

One of the most important survey within the group of the ’Subject Approach’ isthe Community Innovation Survey (CIS)

In the early 1990s the OECD attempted to synthesize the results of earlier trialinnovation surveys by carrying out an innovation manual called the Oslo Manualaimed to capture the multifaceted aspect of innovation

Subsequently, the European Commission and Eurostat, on the wake of the OsloManual implemented the Community Innovation Survey (CIS), that is a large-scaleattempt to collect internationally comparable direct measures of innovation inputsand outputs.

The CIS is a harmonized survey designed to provide information on theinnovativeness of sectors by type of enterprises, on the different types of innovationand on various aspects of the development of an innovation, such as the objectives,the sources of information, the public funding, the innovation expenditures etc.

The CIS provides statistics broken down by countries, type of innovators, economicactivities and size classes.

According to the CIS, an innovation is the introduction of a new orsignificantly improved product, process, organizational method, or marketingmethod by an enterprise.



Innovation Activities

According to the CIS, the following activities can take place to introduceproduct/process innovations:

1 In-house RD: Research and development activities undertaken by an enterprise tocreate new knowledge or to solve scientific or technical problems (include softwaredevelopment in-house that meets this requirement)

2 External RD: RD that an enterprise has contracted out to other enterprises(including other enterprises in your group) or to public or private researchorganisations

3 Acquisition of advanced machinery, equipment, software buildings

4 Acquisition of existing knowledge from other enterprises or organizations

5 Training for innovative activities Personnel training to improve products orprocesses

6 Market introduction of innovations: market research and launch advertising

7 Design: In-house or contracted out activities to design or alter the shape orappearance of goods or services

8 Other: feasibility studies, testing, tooling up (to prepare for an activity or job withnew equipment), industrial engineering.



New Innovation Inputs and Outputs

All the activities mentioned above can also be considered as inputs of theinnovation

As regards innovation outputs, they can be more or less formal outputs

For example, they are probably less formal innovations if they are measured bymeans of self-declaration in the CIS

According to CIS, product and process innovations are new or significantly newproducts or processes that must be new to the enterprise, but they do notneed to be new to the market

In this case we detect both radical (innovations new to the enterprise and themarket itself) and marginal (innovations only new to the enterprise but not to themarket) innovations

On the contrary if we take patents (that is a temporary property rights of aninvention), this is probably a more formal innovative output

This is because patent applications to protect innovations is a very costly practicefor enterprises

Therefore, when a firm apply for a patent it is very often aware that it is animportant innovation (hence, a radical innovation) to protect



Sources of information for product andprocess innovations

Besides innovative activities, community innovation survey (CIS) also gathersimportant data on sources of information for innovation

For example, product or process innovation can be achieved by:

Internal sources: both RD and LBD could be carried out within enterprise

Market sources:Suppliers of equipment, materials, components, or softwareClients or customers from the private or public sectorCompetitors or other enterprises in the industryConsultants and commercial labs

Education and research institutes:Universities or other higher education institutionsGovernment, public or private research institutes

Other sources:Conferences, trade fairs, exhibitionsScientific journals and trade/technical publicationsProfessional and industry associations


Alternative forms of Knowledge Production Functions

Innovations driven by R&D and/orTechnology Acquisition

By implementing new innovation inputs mentioned above a firm can achieve (ornot achieve) product or process innovation

Due to uncertainty of the innovation, performing innovation activities does notguarantee ’per se’ to get innovative outcome

Thus, we can again formalise the innovation process by means of a knowledgeproduction function (KPF) in which now the innovation output is an entity largerthan patents and innovation inputs are not only R&D

Let’s take for example the following KPF

Innovation = F (RD;TA)

where RD is a formal innovation input (such as in house RD or external RD); andTA is a variable describing the Technology Acquisition, that is the sum ofembodied technological change (equipment and machinery) that a firm buys onthe market and the acquisition of other external (dis-embodied) technology(contracted out know-how, projects and consultancies, licenses, software).

In other terms, TA are some innovation activities listed in slide 16 and notproduced in-house (points 3; 4; 5; 6; 7)



Innovations, R&D and Learning By Doing

Another innovation input very often enters the KPF is the learning by doing(LBD)

Innovation = F (RD; LBD)

Besides formal RD activities the passive accumulation of production experience byfirm is associated to productivity growth and to innovation output

So, the LBD can be interpreted as the experience of a firm at any given age

LBD can be measured in a number of ways including:the age of firmthe cumulative prior outputthe average tenure of its employeesthe average length of related work experience of its employees

Since LBD is an incidental and costless byproduct of a firm’s production activities,this passive learning will be said to move along a learning (or experience) curve

Very often RD and LBD are complementary: for example, through RD, newinnovation processes (new machinery or equipment) are introduced in the firm butthe use of this new processes is not immediately optimal. The accumulation ofexperience could complement with these processes (LBD) and makes it possible toimprove the original innovation.



Learning By Doing and Learning CurveThe learning curve originates from observations that workers in manufacturingplants became more efficient as they produced more units

Arrow (1962) formalized a model explaining technical change as a function oflearning derived from the accumulation of experiences in production

In its original conception, the learning curve referred to the changes in theproductivity of labor which were enabled by the experience of cumulativeproduction within a manufacturing plant.

Others developed the experience curve to provide a more general formulation ofthe concept, including not just labor but all manufacturing costs and aggregatingentire industries rather than single plants

Since LBD is an incidental and costless byproduct of a firm’s production activities,this passive learning will be said to move along a learning (or experience) curve

An important implication of the experience curve is that increasing accumulatedexperience in the early stages of a technology is a dominant strategy both formaximizing the profitability of firms and the societal benefits of technology-relatedpublic policy

In the learning curve model, experience is the the explanatory variable, whereaschange in cost typically provides a measure of learning and technologicalimprovement, and represents the dependent variable.



An example of learning curves inmanufacturing energy technologies

Experience Curves for Six Technology Cases, According to Cumulative InstalledCapacity around the World and Capital Costs (2004 dollars).

PV=photovoltaic; SWH=solar water heating; STE=solar thermal electric;FGD=flue gas desulfurization; SCR=selective catalytic reduction; Wind= windpower

The y-axis represents the cost of installing new systems in dollars per Watt ofcapacity



An example of learning curves inmanufacturing energy technologies (II)

The figure above shows that the larger the learning rate (in terms of cumulativecapacity installed), the more a technology declines in cost with each additionalunit of new capacity..

For example, a learning rate of 0.10 means that the cost of that technology willdecline by 10% for each doubling of installed capacity

In their own study, Taylor and Nemet (2006) calculated learning rates for each of 6technologies and found that they cluster in three groups. In the first cluster,Photovoltaic (PV) and Windpower had the highest learning rates at 22.9% and16.8% respectively. Both of these technologies have benefited from economies ofscale in larger PV manufacturing plants and larger wind turbines.

In the second cluster, selective catalytic reduction has a learning rate (SCR) of12.6% and flue gas desulfurization (FGD) has one of 9.6%.

In the final cluster, technological change was less favorable to capital costs. Solarthermal electric (STE) plants declined in cost at the rather slow learning rate of3.4%. Solar water heaters (SWH), on the other hand, actually increased in cost;SWH had a negative learning rate (-4.3%).


Statistics on the CIS

Innovative enterprises in Europe between2010 and 2012 (CIS)

This figure show the percentage of innovative enterprises to total enterprises inEU countries

All types of innovations that must to be new to the enterprise and not to themarket (radical and incremental innovations) are included in this statistics

Germany is the leader in Europe and, interestingly, Italy is placed above theEU averageBulgaria, Poland and Romania are at the bottom of the distribution

0

25

50

75

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EU

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Ger

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Italy

Sw

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Innovative enterprises by types of innovations(CIS)

Table 1: Share of innovative enterprises by main type of innovation, 2010–12 (¹)(% of all enterprises)

Innovative enterprises(including enterprises with abandoned / suspended or

on-going innovation activities)

Productinnovativeenterprises

Processinnovativeenterprises

Organisationinnovativeenterprises

Marketinginnovativeenterprises

EU-28 48.9 23.7 21.4 27.5 24.3Belgium 55.6 31.5 31.1 29.3 21.9Bulgaria 27.4 10.8 9.3 12.4 14.2Czech Republic 43.9 25.3 24.0 20.5 22.4Denmark 51.1 24.8 22.9 32.2 29.4Germany 66.9 35.8 25.5 32.2 34.4Estonia 47.6 20.7 23.8 21.7 21.9Ireland 58.7 27.8 25.9 21.8 35.7Greece 52.3 19.5 25.6 30.2 36.8Spain 33.6 10.5 15.1 19.4 13.2France 53.4 24.2 24.1 34.2 25.4Croatia 37.9 16.4 19.0 22.9 23.5Italy 56.1 29.1 30.4 33.5 31.0Cyprus 42.1 20.9 28.2 26.2 29.5Latvia 30.4 10.4 12.7 16.9 16.5Lithuania 32.9 11.6 13.1 17.5 19.3Luxembourg 66.1 30.3 32.8 46.8 32.4Hungary 32.5 10.6 8.3 16.5 19.7Malta 51.1 23.9 26.4 34.7 32.6Netherlands 51.4 31.9 25.9 27.3 23.2Austria 54.4 26.6 28.7 36.4 29.5Poland 23.0 9.4 11.0 10.4 10.6Portugal 54.6 26.0 33.5 32.8 32.8Romania 20.7 3.4 4.6 14.1 13.8Slovenia 46.5 23.6 22.5 26.3 28.5Slovakia 34.0 14.4 13.5 18.6 19.3Finland 52.6 31.0 29.3 29.7 26.5Sweden 55.9 31.5 23.9 25.3 30.4United Kingdom 50.3 24.0 14.1 34.2 16.8Norway 44.7 19.1 11.9 21.7 23.2Serbia 47.5 24.5 22.0 32.6 32.2Turkey 48.5 17.7 20.4 31.7 34.7

(¹) The survey reference period covers the three years from 2010 to 2012.Source: Eurostat (online data code: inn_cis8_type)



The importance of sources of information forproduct and process innovation in all Europe

4.0

6.0

6.4

5.5

8.1

7.1

12.4

12.2

26.1

43.9

20.3

24.4

31.9

34.9

47.2

44.7

56.6

56.5

57.0

45.6

31.0

59.3

71.6

62.1

58.8

47.3

47.2

36.4

31.1

30.8

28.4

25.1

20.4

0 25 50 75 100

Government, public or private research institutes (³)

Universities or other higher education institutes (³)

Clients or customers from the public sector (⁴)

Professional and industry associations (³)

Consultants or commercial labs institutes (³)

Scientific journals and trade/technical publications (³)

Competitors or other enterprises in the sector

Conferences, trade fairs, exhibitions

Clients or customers from the private sector (²)

Within the enterprise or enterprise group

Suppliers of equipment, materials, components or software

High Medium and low Not used

Themost important sources of information are the internal ones, and thosefrom specialized suppliers and customers



The importance of information of specializedsuppliers

0

25

50

75

100

Cyp

rus

Slo

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Gre

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Rom

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Por

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Finl

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Bel

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Sw

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Mal

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Ger

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Pol

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Not used Medium and low High


Questions for lecture 2

MULTIPLE CHOICE QUESTIONS FOR LECTURE 2

1. According to the Frascati Manual which one among the following elements are not included in R&D: a) Basic Research b) Market Research; c) Experimental Development; d) Applied Research.

2. Gross Domestic Expenditure in R&D (GERD) is larger than Business Enterprise Expenditure in R&D (BERD): a) No, the opposite holds; b) Yes, because GERD includes business and government expenditure; c) No, because BERD includes business and government expenditure; d) Yes, because GERD includes business, government, education and private no-profit expenditure 3. For Community Innovation Survey (CIS): a) Innovation is represented by patents; b) Innovation is represented by product and process innovations; c) Innovation is represented by improved product, process, organizational method, or marketing; d) Innovation is represented by R&D expenditure. 4. According to Community Innovation Survey which one among the following elements are market sources of innovation: a) Learning by doing; b) Intra-mural R&D; c) Suppliers; d) Universities and Government.


measuring innovation lecture 2dec.ec.unipg.it/~fabrizio.pompei/lecture2.pdf · 2018-01-25 ·...

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