Innovation Systems in Innovation Systems in Latecomer DevelopmentLatecomer Development

Banji Oyelaran-OyeyinkaBanji Oyelaran-OyeyinkaProfessorial Fellow, United Nations Professorial Fellow, United Nations

University-Merit, Director, UN-University-Merit, Director, UN-HABITATHABITAT

Emerging Economy Perspectives and Emerging Economy Perspectives and Priorities in a Multi-Polar World Priorities in a Multi-Polar World

November 2011November 2011

CONTENT CONTENT

What is Development in the context of What is Development in the context of Innovation studies?Innovation studies?

How do we view development in light of How do we view development in light of Innovation and Learning StudiesInnovation and Learning Studies

What have we learnt in this Dialogue and What have we learnt in this Dialogue and the extant Framework?the extant Framework?

On the Role of Policy and Institutions for On the Role of Policy and Institutions for Innovation Innovation

Thoughts on FutureThoughts on Future

How Has Development been How Has Development been interpreted? interpreted?

What are key issues emerging from the more What are key issues emerging from the more than five decades of learning, theorizing and than five decades of learning, theorizing and experimentation? experimentation?

They are complex issues that can be classified They are complex issues that can be classified into a number of stylized facts. into a number of stylized facts.

How do we understand lessons from the How do we understand lessons from the Dialogues?Dialogues?

Three stylized categories:Three stylized categories:

1.1. Underdevelopment has a single causeUnderdevelopment has a single cause

These “causes’ have evolved over time and These “causes’ have evolved over time and include the following: include the following:

Shortage of physical and financial capitalShortage of physical and financial capital . The . The debate conceptualized economic development as debate conceptualized economic development as a process requiring complex shifting of factors of a process requiring complex shifting of factors of production from low-productivity, traditional production from low-productivity, traditional sectors plagued with diminishing returns to the sectors plagued with diminishing returns to the more productive industrial sector characterized more productive industrial sector characterized

by increasing returns.by increasing returns.

The high end is an economy with high levels of The high end is an economy with high levels of human capital and knowledge with an economy human capital and knowledge with an economy corresponding to “increasing returns to scale” corresponding to “increasing returns to scale” and corresponding path is a high-factor-and corresponding path is a high-factor-productivity, high growth and high levels of per productivity, high growth and high levels of per capital income. capital income.

Ineffective government:Ineffective government:

Recently “governments matter” (Chang, 2001; Recently “governments matter” (Chang, 2001; Stiglitz, 2001) and that “the role of the state must Stiglitz, 2001) and that “the role of the state must be at center stage” (Stein, 2001)be at center stage” (Stein, 2001)

What we Know from Development What we Know from Development and Innovation Studiesand Innovation Studies

The issues pivotal to the “new” development framework are:The issues pivotal to the “new” development framework are:

1. Development is a non-linear, non-sequential and 1. Development is a non-linear, non-sequential and complex process; complex process; Innovation is a non-linear, non-Innovation is a non-linear, non-sequential and complex processsequential and complex process

Example: East Asian firms reversed the sequence of innovation cycleExample: East Asian firms reversed the sequence of innovation cycle

2. Development paths are differentiated and non-2. Development paths are differentiated and non-unique; unique; Innovation trajectory is equally Innovation trajectory is equally differentiated.differentiated.

Examples: Foreign owned; Taiwan small firms, locally-owned; Malaysia. Examples: Foreign owned; Taiwan small firms, locally-owned; Malaysia. Large MNCs, foreign-owned; China: a new set of institutions and Large MNCs, foreign-owned; China: a new set of institutions and organizational forms. India complex sectorally-diverse modes (BPO organizational forms. India complex sectorally-diverse modes (BPO success)success)

3. Development is path dependent; 3. Development is path dependent; Innovation is path Innovation is path dependent.dependent.

Both shaped by initial conditions which affect Both shaped by initial conditions which affect subsequent paths of the process. subsequent paths of the process.

Examples: China’s dominance of computer hardware not a Examples: China’s dominance of computer hardware not a sudden success; India’s success in software rooted in long sudden success; India’s success in software rooted in long years of building engineering and science human capitalyears of building engineering and science human capital

4. Development paths are not fixed; 4. Development paths are not fixed; Innovation paths Innovation paths are not set in unalterable contoursare not set in unalterable contours

Both are subject to change through policy and Both are subject to change through policy and institutional changes.institutional changes.

5. Development process is shaped by the state; 5. Development process is shaped by the state; Innovation is shaped by state action.Innovation is shaped by state action.

What is “New” in the New What is “New” in the New Development Framework? Development Framework?

The new makes a decisive shift in focus and content of The new makes a decisive shift in focus and content of the factors explaining economic growth. the factors explaining economic growth.

1. That development is not only about capital 1. That development is not only about capital accumulation neither is it just about more human accumulation neither is it just about more human capital, important as these elements are. capital, important as these elements are.

2 Eliminating “big” government and simply 2 Eliminating “big” government and simply correcting for price distortions resulting from state correcting for price distortions resulting from state action has equally not solved the problem of action has equally not solved the problem of development. development.

3.3. Development is a long process of Development is a long process of organizational change that takes as starting organizational change that takes as starting point five fundamentals, namely, financing, point five fundamentals, namely, financing, technology, institutions, human capital and technology, institutions, human capital and policies. policies.

4.4. The role of institutions are critical, that The role of institutions are critical, that “history matters”, and that “history matters”, and that wealth wealth distribution is a spur to sustained distribution is a spur to sustained economic growtheconomic growth. .

5. Distributional inequalities perpetuate individual and 5. Distributional inequalities perpetuate individual and productive structures from one generation to productive structures from one generation to another. For instance an economy stuck in a low another. For instance an economy stuck in a low equilibrium production system will only be capable equilibrium production system will only be capable of supporting an incentive, contract and outcomes of supporting an incentive, contract and outcomes reflective of the kind of economic system.reflective of the kind of economic system.

STI: What Differentiates STI: What Differentiates CountriesCountries

Pattern of R&D and WealthPattern of R&D and Wealth CreationCreation: R&D : R&D spending is highly correlated with the wealth spending is highly correlated with the wealth of nations; the highest spending is found of nations; the highest spending is found within the OECD countries although a number within the OECD countries although a number of Asian countries are beginning to spend of Asian countries are beginning to spend substantial amounts on R&D;substantial amounts on R&D;

STI: What Differentiates STI: What Differentiates CountriesCountries

Pattern of Sectoral SpecializationPattern of Sectoral Specialization: Countries : Countries specializing in so called high-tech goods and specializing in so called high-tech goods and services tend to invest proportionally heavily services tend to invest proportionally heavily in R&D activities. in R&D activities.

   Pattern Public-Private of R&D SpendingPattern Public-Private of R&D Spending: :

Private firms in high income countries are the Private firms in high income countries are the dominant R&D playersdominant R&D players

What separates CountriesWhat separates Countries

Pattern of Basic Research Investment:Pattern of Basic Research Investment: Spending on basic research is also Spending on basic research is also concentrated in high income countries with the concentrated in high income countries with the sort of incentive structure and institutions that sort of incentive structure and institutions that promote advance scientific knowledge;promote advance scientific knowledge;

Differential InvestmentDifferential Investment in Skills Acquisition: in Skills Acquisition: There is a significant difference in the quality There is a significant difference in the quality of skills and knowledge of scientists between of skills and knowledge of scientists between developing and developed countries. developing and developed countries.

What separates CountriesWhat separates Countries

Identify Key Drivers of Innovation SuccessIdentify Key Drivers of Innovation Success: : Innovation capacity building effort in Innovation capacity building effort in latecomer countries must seek context-specific latecomer countries must seek context-specific Policies and Institutional solutions. Policies and Institutional solutions.

How will Institutions and Policies How will Institutions and Policies solve the Development Problem? solve the Development Problem?

In addition to what we do we need to include:In addition to what we do we need to include:

How technology, Institutions and Innovation How technology, Institutions and Innovation increase living standards and do we reflect increase living standards and do we reflect these in standards of health and literacy. these in standards of health and literacy.

The goal will be to eliminate poverty and The goal will be to eliminate poverty and inequalities as has been done at least in part by inequalities as has been done at least in part by most industrial societies. most industrial societies.

We need explicit formulation to include We need explicit formulation to include sustainable environment and all inclusive sustainable environment and all inclusive societal transformation. societal transformation.

We have pointed out differences in Systems of We have pointed out differences in Systems of Innovation, Innovation, Now we need to explain themNow we need to explain them and and finds way to articulate different systems in finds way to articulate different systems in emerging economies. emerging economies.

We need to help build We need to help build Policy and Institutional Policy and Institutional CapacityCapacity to build to build Innovation CapacityInnovation Capacity

What innovation isWhat innovation is

Much of Innovation in a developing context includes Much of Innovation in a developing context includes continuous improvement in product design and continuous improvement in product design and quality.quality.

Changes in organization and management routines, Changes in organization and management routines, creativity in marketing and modifications to creativity in marketing and modifications to production processes that bring costs down.production processes that bring costs down.

Increase efficiency and environmental sustainability. Increase efficiency and environmental sustainability. The ability to manage a portfolio of partnerships, to The ability to manage a portfolio of partnerships, to

form linkages and to learn through them.form linkages and to learn through them.

Innovation PolicyInnovation Policy

The focus of Innovation Policy is on the The focus of Innovation Policy is on the interaction between system actors and their interaction between system actors and their embeddedness in an institutional and policy embeddedness in an institutional and policy context that influences their innovative context that influences their innovative behaviour and performance. behaviour and performance.

Coordinating these different actors e.g. Coordinating these different actors e.g. agencies of government is difficult, complex agencies of government is difficult, complex and undermined by vested interests. and undermined by vested interests.

Innovation missing LinksInnovation missing Links The innovation system approach considers the demand-side. The innovation system approach considers the demand-side.

Demand flows amongst others signal the shape and focus of Demand flows amongst others signal the shape and focus of research, and the decision as to which technologies from research, and the decision as to which technologies from among the range of the possible will be developed and the among the range of the possible will be developed and the speed of diffusion. speed of diffusion.

Demand is not articulated at arms length through the market, Demand is not articulated at arms length through the market, but may take place through a variety of non-market mediated but may take place through a variety of non-market mediated collaborative relationships between individual users and collaborative relationships between individual users and producers of innovation (Lundvall: 1988, 35). producers of innovation (Lundvall: 1988, 35).

In broader systems terms demand may be intermediated by In broader systems terms demand may be intermediated by policies. policies.

Conventional S&T policy in poor countries has only come to Conventional S&T policy in poor countries has only come to terms with this reality. terms with this reality.

Innovation PolicyInnovation Policy

Government Innovation policy in industrial countries Government Innovation policy in industrial countries usually result in actions in three broad dimensions: usually result in actions in three broad dimensions:

Supply conditions which involve the provision of Supply conditions which involve the provision of financial and human capital, financial and human capital,

Macroeconomic conditions which include competition, Macroeconomic conditions which include competition, taxation and legal framework to allow for innovation taxation and legal framework to allow for innovation activities to thrive; activities to thrive;

Demand conditions which include procurement and Demand conditions which include procurement and purchases by central and local governments.purchases by central and local governments.

Elements of IPElements of IP

Supply Side: (a) Support for knowledge infrastructure Supply Side: (a) Support for knowledge infrastructure particularly R&D in public and private domains, particularly R&D in public and private domains,

promote research and professional associations, use of promote research and professional associations, use of competitive research grants; competitive research grants;

(b) general and technical education, support university (b) general and technical education, support university research, apprenticeship programmes. research, apprenticeship programmes.

(c) Information networks, library and database services.(c) Information networks, library and database services.

Elements of IP…..Elements of IP…..

Macroeconomic Conditions: Macroeconomic Conditions: (i)(i) Loans, subsidies to private provision of Loans, subsidies to private provision of

innovation, financial services, export credits; innovation, financial services, export credits; (ii)(ii) (ii) taxation: company, personal, indirect and (ii) taxation: company, personal, indirect and

payroll taxation and tax allowances; payroll taxation and tax allowances; (iii)(iii) Legal and Regulatory measures: patents, Legal and Regulatory measures: patents,

health and environmental regulations, health and environmental regulations, monopoly regulations and competition monopoly regulations and competition policy. policy.

Elements of IP….Elements of IP….

Demand Conditions: (i) Procurement policy: Demand Conditions: (i) Procurement policy: central and municipal government purchases central and municipal government purchases and contracts, R&D contracts, purchases; and contracts, R&D contracts, purchases;

(ii) Commercial instruments: trade agreements, (ii) Commercial instruments: trade agreements, tariffs, currency regulation. tariffs, currency regulation.

THOUGHTS ON STIPSTHOUGHTS ON STIPS

INNOVATIONINNOVATION POINTS FOR POINTS FOR

DISCUSSIONDISCUSSION

DEVELOPMENTDEVELOPMENT POINTS FOR POINTS FOR

DISCUSSIONDISCUSSION

ENDEND