Technological Innovation, Economic Growth and Sustainability

1. Technological Innovation, Economic Growth and Sustainability Luc Soete MERIT University of Maastricht Comments prepared for the workshop on “R&D, innovation and competitiveness”, Basque Country, Bilbao, March 8th 2004.

2. Outline • Factors of success and new challenges • Support policies: • From industrial to technology policy • From national to regional support policy • New organisational models: • Importance of systemic vision • From best practice to worst practice • Interesting experiences: what can we learn? • Basque Country: question of sustainable success

3. 1. Factors of success • Role of science and technology in post-war OECD countries: strong belief (but little evidence) in relationship with growth (only for the US, Solow) • Supply dominated view, centred around the importance of fundamental research in higher education, public and private research institutions • Importance of catching up • Economic arguments in favour of public support relatively straightforward: under-investment in research by private firms

4. Figure 1a: Relationship between BERD (1967) and productivity growth (1967-1972)

5. But also many failures • Not just S&T creation but also and primarily innovation and entrepreneurship • Recognition of particular role of demand side and particular role of private R&D • At the same time there are many structural factors (sectors/technology composition) determining specialisation and competitiveness • Importance of user linkages for knowledge creation and diffusion, of industrial clusters, formal and informal linkages

6. Figure 1b: Relationship between BERD (1995) and productivity growth (1995-2000)

7. New challenges • How to increase investment in knowledge creation, diffusion and innovation, willingness to take risks and entrepreneurship • Irrelevance of the 3% R&D/GDP Barcelona target • European vs national R&D&I policy challenges • Implications of enlargement for European Research policy, and in particular researchers’ mobility (not addressed here)

8. Risk taking, entrepreneurship and innovation in Europe • Links between nature of technological change (creative destruction vs incremental) and labour market institutions (Saint-Paul, 2002) • Trade-off between innovation and risk taking and labour market security, in particular high hiring and firing costs at knowledge end of the market… insufficiently recognized. • New areas: scientific entrepreneurs, technology transfer agencies on supply side

9. Regulatory barriers index (OECD)

10. On the 3% Barcelona target • Political “focusing device”, useful within the context of Lisbon • From a growth perspective irrelevant • Three major implementation problems: • Lack of credibility of the target, contrary to the other 3% target (public deficit) no fines attached • Lack of enforcement, not a harmonized target for all 15 countries like other Lisbon targets but an aggregate one. How to assess progress? • Lack of implementation: appears first and foremost a private business R&D target

11. European vs national R&D&I policy challenge • How to strengthen national benefits of public-private S&T partnerships in an international context: fill the holes or enlarge the holes? • Phenomenon of “Dutch knowledge disease”: • Crowding out of fundamental research in private sector • Crowding out of applied research in public sector • Specialisation in private sector within Europe • Improving quality and strengthening research capacities in public sector. Trend towards national research “autarchy” • Growing mismatch between national private and public research activities

12. 2. Support policies • Shift from industrial to R&D and innovation policies with strong impact on growth, structural change and “international competitiveness” • Growth: Abramowitz and in particular his analysis of European backwardness and expectations of catching up in the 50’s • Competitiveness: Posner, Vernon, Freeman, Pavitt, Fagerberg... • Today: many questions • Restricted scope for support industrial/R&D/innovation policies • Yet, industrial renewal and R&D investment insufficient in Europe • Lack of large European industrial complex in Europe • Limits to internal harmonisation (standards, national regulators) • Regional knowledge policies as outcome?

13. Growth of regional policies • Diversity of regional development is a reflection of mixture of factors: • Geographical ones: peripheral location • Physical endowments: agriculture, mining, logistics • Agglomeration effects: snowball size effect; population density closely linked to knowledge activities • New endowments: sustainability (pollution, congestion, urban development); ageing (health and care, mobility, housing) • Positive cluster effects vs negative cluster effects

14. New regional challenges • Europe unique laboratory of regional development policies, but social cohesion aims becoming questioned: • Effectiveness: national growth convergence within the EU, but regional divergence (national failure in first instance) • Physical borders of European solidarity being questioned with enlargement (strong political reasons for national regional policies) • Intrinsic limits of regional policy: peripheral regions; success implies discontinuation; hence vulnerability of created European goodwill

15. The regional dimension of the ERA • Social cohesion implications of ERA under-researched: • Likely internal EU migration effects of highly skilled • Regional/local implications of Mattheus effects of research excellence • Local knowledge cluster effects could lead to accentuation of regional (and national) growth diversity • Quid when EU nations (including accession countries) observe strong brain drain trends?

16. 3. New organising models • Growing recognition of importance of demand, of “applied”, problem oriented research • Need for link with other demand elements in the economy (functioning of markets (product regulation), place within the supply chain, consumers preferences (diffusion models), locational specificities, etc. • Focus on “systemic” aspects of the innovation system: NSI, RSI; link to external environment, network (cluster) effects • Complexity of policy conclusions? Policies shifting from specific issues towards systematic aspects: from best to worse practice?

17. Abramowitz reconsidered • From regional system of innovation perspective 4 elements appear particularly relevant for regional growth and development: • Quality of human capital formation • Openness of research capacity • Strength of innovative performance • Absorptive regional capacity

18. SOCIAL & HUMAN CAPITAL SUPPLY USERS ABSORTION CAPACITY RESEARCH CAPACITY DEMAND CREATORS TECH. & INNOVAT. PERFORMANCE

19. Regional human capital formation • Focus on local/regional higher education institutions: universities, polytechnics, professional training schools, including life long learning • Emphasis on quality, reduction in failure rates and drop outs • Improving attractiveness to “foreign” students, i.e. from other regions • Recognition of importance of exchange programmes as benchmark learning tools

20. Openness of research capacity • Strengthening of local research presence in regional economic, industrial and political tissue (seminars, (in)formal networks, local media, cooperation) • Joint public-private regional initiatives • Focused excellence where openness to “foreign” knowledge, researchers, institutes collaboration is dominant trend • Strengthening research infrastructure common regional aim

21. Local innovative performance • Recognition of importance of local scientific spin-off (scientific entrepreneurs) • Strengthening of links between public research institutes/researchers/teachers and local SMEs (local knowledge vouchers) • Embedment of large, dominant MNCs in public research infrastructure (anchorage, increasing costs of footlooseness) • Regional/local PR of innovative identity

22. Absorptive regional capacity • Focus on regional bèta users • Role of regional public authorities in terms of procurement • Regional presence “abroad” (fairs, etc.) • Focus on regional diffusion and knowledge distribution policies • Cooperation with other “foreign” regions

23. HUMAN CAPITAL USERS Sophistication: - Regional characteristics - Local dynamism SUPPLY: - from within the region - attraction from outside region ABSORTION CAPACITY RESEARCH CAPACITY CREATORS Universities, research labs: - Own expertise - Openness DEMAND: - Local SME spinn-offs - Large dominant players INNOVAT. PERFORMANCE

24. SOCIAL & HUMAN CAPITAL ABSORTION CAPACITY RESEARCH CAPACITY TECH. & INNOVAT. PERFORMANCE

25. 4. Interesting experiences • Regions of knowledge EU programme • Emphasis on role of local universities and/or public research institutes (particularly relevant to the Basque country) • Cooperation between highly advanced and social cohesion regions (interactive learning) • Cross-national border regions • Border regions and the underutilized growth potential beyond the national border • Use differences to own advantage

26. Case LEA: differences Belgium-Netherlands-Germany • Belgian/Flemish knowledge economy: • Dependent on foreign firms • Universities underfunded but attractors • Strong human and S&E capital • Dutch knowledge economy: • Dependent on Dutch MNCs which are internationalizing • Fragmented university/higher education policy • S&E shortages • German knowledge economy: • Nationally oriented higher education policy • Lagging behind: old knowledge economy

28. Code Name 1.2 Tertiary education 1.3 Lifelong learning 1.4 Med/hi-tech employment in manufacturing 1.5 High-tech employment in services 2.1 Public R&D 2.2 Business R&D 2.3.1 High-tech patent applications 2.4.1 Patent applications AT12 Niederösterreich 15.36 7.17 6.75 3.13 0.05 0.59 20.38 135.56 DE22 Niederbayern 16.95 3.79 15.61 1.93 0.08 0.38 27.30 187.86 DE30 Berlin 30.40 9.59 5.85 5.17 1.80 1.88 59.08 217.28 DE72 Gießen 20.60 7.97 9.70 2.89 0.97 0.77 30.10 257.95 DE73 Kassel 19.27 6.22 12.42 2.26 0.24 0.47 7.94 104.78 DEA5 Arnsberg 15.96 5.27 10.44 2.31 0.50 0.70 18.93 218.84 DEC0 Saarland 16.48 5.03 9.45 3.66 0.60 0.36 6.94 144.68 DEF0 Schleswig-Holstein 19.91 5.63 7.60 3.11 0.64 0.45 16.83 156.49 FR21 Champagne-Ardenne 15.54 2.09 3.82 1.23 0.14 0.35 7.82 78.62 FR23 Haute-Normandie 20.60 2.47 11.38 2.21 0.19 1.42 2.71 102.58 FI15 Pohjois-Suomi 28.34 16.63 7.59 3.71 1.07 3.29 151.11 323.44 FI17 Etelä-Suomi 30.31 18.69 8.88 3.30 0.76 2.49 112.30 327.87 IT11 Piemonte 9.60 4.43 13.17 4.06 0.29 1.35 10.14 110.15 IT32 Veneto 9.54 5.51 10.01 2.19 0.28 0.25 4.79 109.88 IT33 Friuli-Venezia Giulia 9.41 6.18 9.89 3.28 0.63 0.55 4.70 92.50 IT51 Toscana 9.84 4.97 5.45 2.38 0.71 0.30 4.65 67.73 NL22 Gelderland 23.87 15.44 4.30 4.11 0.99 1.05 14.33 146.47 NL34 Zeeland 18.12 14.97 7.63 1.68 0.10 1.03 4.92 106.91 MKB Leuven-Eindhoven-Aken 18.84 10.70 8.50 1.60 0.56 2.09 61.90 662.96 UKD North West 24.80 21.22 7.22 3.59 0.34 1.52 12.18 103.38 UKK South West 29.34 22.98 6.98 4.10 0.60 1.37 49.61 145.36 UKE Yorkshire & The Humber 25.09 21.76 5.59 3.16 0.46 0.40 15.34 86.92

29. Code Name 1.2 Tertiary education 1.3 Lifelong learning 1.4 Med/hi-tech employment in manufacturing 1.5 High-tech employment in services 2.1 Public R&D 2.2 Business R&D 2.3.1 High-tech patent applications 2.4.1 Patent applications AT12 Niederösterreich 15.36 7.17 6.75 3.13 0.05 0.59 20.38 135.56 DE22 Niederbayern 16.95 3.79 15.61 1.93 0.08 0.38 27.30 187.86 DE30 Berlin 30.40 9.59 5.85 5.17 1.80 1.88 59.08 217.28 DE72 Gießen 20.60 7.97 9.70 2.89 0.97 0.77 30.10 257.95 DE73 Kassel 19.27 6.22 12.42 2.26 0.24 0.47 7.94 104.78 DEA5 Arnsberg 15.96 5.27 10.44 2.31 0.50 0.70 18.93 218.84 DEC0 Saarland 16.48 5.03 9.45 3.66 0.60 0.36 6.94 144.68 DEF0 Schleswig-Holstein 19.91 5.63 7.60 3.11 0.64 0.45 16.83 156.49 FR21 Champagne-Ardenne 15.54 2.09 3.82 1.23 0.14 0.35 7.82 78.62 FR23 Haute-Normandie 20.60 2.47 11.38 2.21 0.19 1.42 2.71 102.58 FI15 Pohjois-Suomi 28.34 16.63 7.59 3.71 1.07 3.29 151.11 323.44 FI17 Etelä-Suomi 30.31 18.69 8.88 3.30 0.76 2.49 112.30 327.87 IT11 Piemonte 9.60 4.43 13.17 4.06 0.29 1.35 10.14 110.15 IT32 Veneto 9.54 5.51 10.01 2.19 0.28 0.25 4.79 109.88 IT33 Friuli-Venezia Giulia 9.41 6.18 9.89 3.28 0.63 0.55 4.70 92.50 IT51 Toscana 9.84 4.97 5.45 2.38 0.71 0.30 4.65 67.73 NL22 Gelderland 23.87 15.44 4.30 4.11 0.99 1.05 14.33 146.47 NL34 Zeeland 18.12 14.97 7.63 1.68 0.10 1.03 4.92 106.91 MKB Leuven-Eindhoven-Aken 18.84 10.70 8.50 1.60 0.56 2.09 61.90 662.96 UKD North West 24.80 21.22 7.22 3.59 0.34 1.52 12.18 103.38 UKK South West 29.34 22.98 6.98 4.10 0.60 1.37 49.61 145.36 UKE Yorkshire & The Humber 25.09 21.76 5.59 3.16 0.46 0.40 15.34 86.92

30. Challenges regional LEA policy • Cross border regional innovation platform developing systemic linkages • Alliance KUL, TUE, RWTH + other universities in region (LUC, UM) • Cross border cooperation of regional policy with respect to private-public knowledge investments (IMEC, VITO, Philips, ASML, Océ, DSM, Jülich, AGIT) • Creation of common human capital higher education and training

31. Conclusions: Beyond “nationalism” • “National competitiveness a dangourous obsession?” to paraphrase Paul Krugman • Knowledge economy is an economy without borders: pieces of knowledge acquired, bought, stolen, reshuffled form all over the world. • National targets (Barcelona) were ultimately primarily inspired by national statistics and national policy makers • New geography and agglomeration effects: regions are the natural environment for local anchorage of knowledge related activities.

32. Basque Country:in search of own clusters… • Significance of regional and/or local research and innovation activities/policies in Europe comparable to the US • Limited success on implementation of cross-border cooperation: dominance of nationalism in RTD and innovation policies • Diversified or fragmented as one prefers to take a positive or negative view with universities, businesses, local authorities generally involved • In search of European regional clusters only way to achieve Lisbon: Basque region interesting case.