Innovation: the transfer function of Science and Technology

1. Innovation: the transfer function of Science and Technology J.P.CONTZEN Instituto Superior Técnico Lisbon, February 6th, 2004

2. INTRODUCTION

3. Introduction (1) • Innovation is a word that politicians and media like to use without understanding fully its meaning • Innovation is not an end product: it is a transformation process • “L’Innovation, c’est la rencontre d’une idée et d’un marché” (Anvar)

4. Introduction (2) • Innovation is only successful if you know what you wish to do with it; serendipidity is OK at basic research level; innovation requires governance • Innovation is not a single input, linear transfer function. The “Juke Box” concept does not apply • Innovation means managing complexity and risk at the same time. Not all factors are deterministic.

5. Introduction (3) • Due to the complexity of the transfer function, it is hard to measure its efficiency, even harder to determine its success: • Type and intensity of inputs? Only R&D? • Type and intensity of outputs? Only number of patents? • For which objectives? Economic growth, job creation, poverty reduction, military power, better quality of life, knowledge of the Universe, sustainable development?

6. Introduction (4) • Over which time span? Time constants in the Input/Output function of the Innovation process and the subsequent application of innovation outputs can reach 10 years to 20 years in certain cases. Time is an important factor, often ignored • In many cases, confusion is created between input and output parameters of the total chain, data from the same year are used for comparison purposes ignoring time constants.

7. functioninnovation 10+ system redesign improvedenvironmentalefficiency(factor) system optimization 5 2 5 10 20 time horizon (in years) Source: D. P. Van Vuuren, B. J. Strengers, and H. J. M. De Vries, Long-term Perspectives on the World Metal Use: A Model-based Approach (Bilthoven: RIVM Report 461502 021, 1999).

8. Description of the Innovation Chain

9. Innovation at the core of a complex chain(1) • Innovation enables results of Knowledge Creation to be applied eventually in Society. This chain involves many parameters and contains feedback loops. Each component should be clearly identified.

10. EXTERNALFACTORS SYSTEMPARAMETERS EXTERNALCONDITIONS OTHERINNOVATIONINPUTS INNOVATIONOUTPUTS KCINPUTPARAMETERS APPLICATIONSIN SOCIETYINT. or EXT. KNOWLEDGECREATIONINT. or EXT. KC OUTPUT INNOVATION SOCIETALDEMAND SOCIETALDEMAND

11. Knowledge Creation (KC) (1) • Knowledge Creation could be internal (to your firm, your region, your country, your grouping of countries) or external (somebody else does it) • Input parameters for KC: • Money • Education • People • Infrastructures

12. Knowledge Creation (KC) (2) • Outputs of KC: • R&D results • Shaping factors affecting the success of KC: • Cultural,working and regulatory environment • Expression of a societal demand

13. The Innovation transfer function (1)

14. The Innovation transfer function (2) • Input parameters: • Results from internal or external (spin-in) sources of Knowledge Creation • Money (distinct from R&D money- problem in EU and ex-Soviet Union) • People (not necessarily the R&D people) • Infrastructures (incubators, technology parks)

15. The Innovation transfer function (3) • Output parameters for radical innovation: • New products (digital cameras, cellular phones, high speed trains, jet aircrafts) • New processes (biopolymers, Fuel cell energy conversion) • New services (DHL/Fedex/UPS/etc, low-cost airlines)

16. The Innovation transfer function (4) • Output parameters for radical innovation (cont.): • New systems (Software utilities, logistics e.g. intermodality, Eco-restructuring “function innovation”, urban management) • New organizations (networks vs. matrix structures, Toyota just-in-time) The three latter outputs are more recent and bear a lot of promises for the future

17. The Innovation transfer function (5) • Output parameters for incremental innovation: • Improved products (cars) • Improved processes (steel production, electricity production) • Improved services (ADSL on Internet) • Improved systems (banking system) • Improved organizations (University)

18. The Innovation transfer function (6) • System parameters shaping the success of Innovation: • Expression of a societal demand, internal or external • Availability of financial resources • Regulatory environment • Design capacity • Creativity • Entrepreneurship • Networking capability for cross-fertilization

19. Resistance to Innovation (from Financial Times, December 5th, 2001)

20. Applications in Society (1) • Innovation outputs are not the ultimate end. They lead to applications in Society. These applications are either internal or external. They correspond to different societal demands: • Economic growth: it is estimated that half of this growth comes from innovation • Job creation: not applicable if productivity is the main aim • Poverty reduction: issue of income redistribution. Bangalore’s Silicon Valley does not benefit to Mumbai’s homeless.

21. Applications in Society (2) • Stronger Military Power: has always been a driving force for innovation. Essential for High Tech development after WW II, somewhat diminished importance since the 80’s • Better Quality of Life: health is main preoccupation. Care for the ageing population and increase in leisure opportunities are new features

22. Applications in Society (3) • Increased Knowledge of our Universe: Science leads to Innovation, Innovation is a key to the advancement of Science (High Energy Physics, Space Exploration, Deep Sea Exploration, Astronomy)

23. Applications in Society (4) • Achieving Sustainable Development: a recent objective that has already become a major driving force for innovation: • Pollution control (air, water, soil) • Alternative energy sources, alternative fuels • New industrial processes e.g. steel reduction • Waste management, recycling, secondary raw materials • Risk management of catastrophic events either natural or anthropogenic

24. Applications in Society (5) • The success in transforming Innovation outputs into Applications is not automatic. Excellent Innovation does not necessarily mean commercial success. It depends on internal and external factors. • Internal factors: • Marketing capability • Financial resources • Pricing policy • Risk taking • Timing of introduction

25. Applications in Society (7) • External conditions, often uncontrolled and unforeseeable: • Political events (Suez oil crisis and Concorde) • Change in exchange rates (Airbus 380 in $ zone) • Accidents (Shuttle accident leading to new US space policy) • Public opinion (GMO’s)

26. Models for an Innovation Strategy

27. Innovation models (1) • Innovation is not a process that can be left to chance, counting only on the strength of the input (weakness of EU approach). To be successful, it requires a well-thought strategy corresponding to the specificity of the actor.

28. Innovation models (2) • For establishing such strategy, various models, or their combination in different variants, should be considered. • These models differ essentially by three features: • Knowledge Push or Societal Demand Pull • Recourse to Internal or External KC outputs • Internal or External markets as targets

29. EXTERNALFACTORS SYSTEMPARAMETERS EXTERNALCONDITIONS OTHERINNOVATIONINPUTS INNOVATIONOUTPUTS KCINPUTPARAMETERS APPLICATIONSIN SOCIETYINT. or EXT. KNOWLEDGECREATIONINT. or EXT. KC OUTPUT INNOVATION SOCIETALDEMAND SOCIETALDEMAND

30. Innovation models (3) • This leads to 6 models of Innovation: • Push – Int. – Int. • Push – Int. – Ext. • Pull – Int. – Int. • Pull – Int. – Ext. • Pull – Ext. – Int. • Pull – Ext. – Ext. • In addition, one should not forget the special case of the non performance of the Innovation process!

31. Innovation models (4) Special case: No Innovation performed internally • The outputs of someone else’s Innovation are used to satisfy the demand or develop markets. Such case has different motivations: • Many Less Developed Countries are below the level at which Innovation can be performed, everything is imported and sometimes imposed to them. It maintains an hopeless level of under–development. Introducing a minimum of S&T and Innovation in LDC’s constitutes a great challenge for a balanced future of the planet.

32. Innovation models (5) Special case: No Innovation performed internally (cont.) • Many countries are adopting for enhancing job creation the policy of attracting the so-called “screwdriver factories”. They export high tech products developed and engineered elsewhere. The internal contribution to innovation is quasi zero. The basic requirement is a well-educated manpower and a favorable economic environment. China, Ireland were pioneers in this field.

33. Innovation models (6) Special case: No Innovation performed internally (cont.) • This also the case of SME’s with no Research and Development or even technical adaptation capability. Survival is possible if there is talent for recognizing outside sources that could fulfill internal needs. • Finally, globalization with the absorption of many national firms by giant multinationals limit these national firms to a production role, with R&D and Innovation moving to the centers of decision of the multinationals.

34. Innovation models (7) Model 1: KC Push. Internal KC base. Internal applications. • The model for the mightiest who detains a strong S&T capability and governs a large market capable of absorbing innovation outputs that have not been subject to a demand a priori. It requires a lot of entrepreneurship • The United States at national level, big corporations fall in this category (e.g. SONY or NTT: importance of Japanese market as a primer).

35. Innovation models (8) Model 1: KC Push. Internal KC base. Internal applications. (cont.) • Could the European Union follow this model? The size of the market now exists but customers are more conservative (The first customers for the Airbus 380 were not Europeans). The S&T capability would be sufficient but the entrepreneurship spirit is less vivid.

36. Innovation models (9) Model 2: KC Push Internal KC base. External applications. • This model is valid for countries with a strong S&T potential but with little internal demand: typical cases are Israel, South Korea and in a way Russia. They surf on the wave of globalization. • This model could lead to very fragile situations due to the volatility of the markets. Keeping excellence at its highest level must be a constant preoccupation.

37. Innovation models (10) Model 2: KC Push Internal KC base. External applications. (cont.) • At company level, especially in the European Union, it represents for many the obligatory approach for growing or simply surviving (e.g. STMicroelectronics or Airbus). It requires strong innovative outputs and aggressive marketing. It is subject unfortunately to random external forces.

38. Innovation models (11) Model 3: Demand Pull Internal KC base. Internal applications. • The perfect example is in the military area for big nations. The military requirements are driving forces for Knowledge Creation and Innovation. The ex-Soviet Union and in some way still now the US with the Homeland Security program were and remain perfect examples of this model. It represents the easiest model to implement.

39. Innovation models (12) Model 3: Demand Pull Internal KC base. Internal applications. (cont.) • Sustainable Development applied locally constitutes a new application of such model. Urban management, waste management, mitigation of local pollutions could be a driving force for locally developed innovative outputs. • Most countries and regions with some S&T capability should seek to apply this model. It allows developments less dependent from outside events.

40. Innovation models (13) Model 4: Demand Pull Internal KC base. External applications • Some countries or companies seek to respond to a demand generated elsewhere. This is the case of small countries like Finland and Sweden, of Taiwan in IT or the case of Russia or Armenia with no internal demand for the time being.

41. Innovation models (14) Model 5: Demand Pull External KC base. Internal applications • All countries or companies having detected an internal demand should not hesitate, when their own KC base is insufficient, to innovate using an external KC base. This strategy is better than just importing ready-made innovation products. • The United Kingdom is fostering such strategy. Japan has done it for a long time.

42. Innovation models (15) Model 6: Demand Pull External KC base. External applications • The country or company is essentially an Innovation processor relying on external KC and an external demand. • Such case is justified if favorable system parameters do exist. Brazil, notably with its aerospace industry should be considered in this case. IT in India is in the some way a similar case.

43. Innovation models (16) Model 6: Demand Pull External KC base. External applications • For its success, it requires the existence of a sufficient internal KC base capable of absorbing adequately the external inputs.

44. Innovation models (17) • These 6 models are not mutually exclusive and the combination of some of them corresponds probably to the best strategy. Specific conditions of the Innovation environment should dictate the choice. • Are they better models than others? Model 1 is probably reserved to a happy few. In general, demand pull models 3 to 6 are easier to implement

45. Innovation models (18) • A push model such as 2 could nevertheless be extremely rewarding when developing niches of excellence. Innovative Breakthroughs do exist! The risk lies in the volatility of markets. IBM made a rather unfortunate experience when sticking to model 2.

46. Innovation models (19) What about Portugal? • Any mode except 1? • A combination of model 3 (for sustainability issues, for reinforcing own automobile industry), model 4 (developing niches of excellence) and model 5 (learning to import a outside KC base)? • Be very ambitious and develop model 2 (requires utmost excellence) as well as model 6 (requires a change in the environment for becoming competitive)?

47. Innovation models (20) What about Switzerland? A superb educational system that does not prevent industrial stagnation if not decline. Where lies the problem?

48. Governance in the Innovation Process: the role of the different actors

49. Governance - General (1) • Many actors are involved in the Innovation process. It is essential that they intervene at the right level. Innovation is essentially the responsibility of industry but the public sector has an important role to play. • Public policy in Innovation should aim at orienting the support to be given to the activity, not to dictate by decree what Innovation should be.

50. Governance - General (2) • In the current stratification of the public power in different levels, the main issue is to determine the best level of governance and of partnership with industry