How to improve the national innovation systems of the catching-up economies ?

1. How to improve the national innovation systems of the catching-up economies ? Urmas Varblane University of Tartu

2. THE PATH DEPENDENT MODEL OF THE INNOVATION SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN THE CASE OF A SMALL COUNTRY Aim - to develop the model and implementation mechanisms of the national innovation system for the small country, which accounts for the path dependency, considers late-comer advantage and ensures sustainable economic development

3. THE PATH DEPENDENT MODEL OF THE INNOVATION SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN THE CASE OF A SMALL COUNTRY • Which characteristic features and problems of the national innovation system are caused by the path dependency? • Which should be the structure of the national innovation system in order to account for path dependency? • Which are the major advantages and disadvantages of latecomers and how to utilise those advantages by the national innovation system? • How does the country size affect the formation and development of national innovation system? • Which implementation mechanisms are suitable for the path dependent national innovation systems of small countries?

4. The framework of the research proposal

5. The implementation plan of the project – subtopics, working groups • NIS partly overlaps with the three systems: economic-; education- and political system => Workinggroups: • Innovation capabilities, its factors and development in the economic system • Human- and social capital: the role of education, research and knowledge in the national innovation system • The role of the public policy and public sector in the innovation system. • Methodology: how to measure innovations and their effects.

6. Structure of the presentation • development of the concept of the national innovation system, its elements and function • applicability of national innovation system approach in different groups of countries • advantages and disadvantages of catching up economies as latecomer economies • major path dependency related problems in the building up of the national innovation systems in catching up economies • Conclusion and recommendations for using appropriate policy measures.

7. Theoretical perspective on innovation and learning: as socially embedded (Lundvall, 2003) • Innovation is a process that is: • Cumulative • Nonlinear • Path dependent • Context dependent • Continuous • Interactive – Firms do seldom innovate alone • Innovation and learning • You learn from what you do • Innovation as joint production of innovation and competence • Learning is a socially embedded process – social capital is important

8. Development and diffusion of the concept NIS • Historical roots (Friedrich List,1841) - ’national systems of production’ - a wide set of national institutions including those engaged in education and training as well as infrastructures such as networks for the transport of people and commodities • Freeman 1982 and Lundvall 1985 – National Innovation System • innovation process should be treated in a systematic manner - need for systemic approach, which integrates institutions to create, store, and transfer the knowledge, skills and artefacts. (OECD,1999 • understanding innovation as a complex interactive learning process • learning is important => key element in both the dynamics of the system and as a key agent in binding the whole system together. • comparative - could not be an ideal NIS, which fits different nations with their specific socio-economic, political and cultural background.

9. Definitions of NIS • Innovation System - a system for generating and diffusing new technologies - every country has such a system, even if it is weak or low in capacity. • C. Freeman (1987, p. 1) ‘the network of institutions in the public and private sectors whose activities and interactions initiate,import, modify and diffuse new technologies’. • B.-A. Lundvall (1992, p. 12) narrow NIS ‘organisations and institutions involved in searching and exploring – such as R&D departments,technological institutes and universities’. • broader NIS includes ‘all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring – the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place’.

10. Definitions of NIS • “The elements and relationships which interact in the production, diffusion and use of new, and economically useful, knowledge… and are either located within or rooted inside the borders of a nation state” (Lundvall, 1992; p.12) • “A set of institutions whose interactions determine the innovative performance of national firms” (Nelson, Rosenberg, 1993; p.5) • “The national institutions, their incentive structures and their competencies, that determine the rate and direction of technological learning (or the volume and composition of change-generating activities) in a country” (Patel and Pavitt, 1994; p.12)

11. Definitions of NIS • “That set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies” (Metcalfe, 1995;p.462-463)

12. Definitions of NIS • C.Edquist (1997) - includes “all important economic, social, political, organizational, institutional and other factors that influence the development, diffusion and use of innovations” • Galli, Teubel (1997)- “a historically grown subsystem of the national economy in which various organizations and institutions interact and influence each other in the carrying out of innovative activity”. • NSI as the set of organizations, institutions, and linkages for the generation,diffusion, and application of scientific and technological knowledge operating in a specific country.

13. Systemic approach to innovation • According to Ingelstam (2002): • 1. a system consists of two kinds of constituents: there are firstly, some kinds of components and secondly, there are relations among them. The components and relations should form a coherent whole (which has properties different from the properties of the constituents); • 2. the system has a function – that is, it is performing or achieving something; • 3. it must be possible to discriminate between the system and the rest of the world; that is, it must be possible to identify the boundaries of the system. If we, for example, want to make empirical studies of specific systems, we must, of course, know their extension.

14. Elements in the system of innovation • Players or actors. Organizations : firms (normally considered to be the most important organizations in Sis), universities, venture capital organizations and public agenciesresponsible for innovation policy etc. • Rules of the game. Institutions are “sets of common habits, norms, routines, established practices, rules or laws that regulate the relations and interactions between individuals, groups and organizations,” (Edquist & Johnson, 1997).

15. Nauwelaers, 2003

16. Edquist, 2001

17. A generic national innovation system (Arnold, E., Kuhlman, S, 2001, RCN in the Norwegian Research and Innovation System. Available at www.technopolis-group.com)

18. Boundaries of innovation systems – types of systems • Spatially, sectorally,functionally=> • National Innovation Systems (Freeman, 1987; Lundvall, 1992; Nelson, 1993); • Regional Innovation Systems (Camagni, 1991; Cooke et al., 1997; Braczyk et al., 1998; Cooke, 2001; and Asheim & Isaksen, 2002); • Sectoral innovation systems ( Breschi & Malerba, 1997, Malerba, 2004). • “Technological innovation systems” (Carlsson, 1995; Carlsson & Stankiewicz, 1991)

19. Roots of the systemic approach to innovation • evolutionary theory (Nelson & Winter, 1982). • firms are a bundle of different capabilities and resources (Eisenhardt & Martin, 2000; Grant, 1996; Spender, 1996) which they use to maximize their profit. • knowledge is not only information, but also tacit knowledge; it can be both general and specific and it is always costly. • Knowledge can be specific to the firm or to the industry (Smith, 2000). • The innovation process is interactive within the firms and among the different actors in the innovation system.

20. Activities in the system of innovation(Chaminade, Edquist, 2005) function of SIs is to pursue innovation processes: todevelop and diffuse innovations. ‘activities’ in SIs are those factors that influence the development and diffusion of innovations. Four approaches • innovation production process, looking at the different activities needed to turn an idea into a new product or process.Edquist, (2004), Furman, Porter et al., (2002) • knowledge production process - how knowledge is created, transferred and exploited (emphasis on the channels and mechanisms for knowledge distribution).(David & Foray 1994; Johnson & Jacobsson, 2003; innovation systems as learning systems (Lundvall, Johnson et al., 2002).

21. Activities in the system of innovation(Chaminade, Edquist, 2005) 3) organizational performance - organizations as the starting point, identifying the activities of the different organizations that have an impact in the innovation system (Borrás,2004). 4) innovation policy as a focal point => what activities (and organizations) in the innovation system can be stimulated by public intervention (OECD and other international organizations) criticism - it considers only those activities that can be directly affected by public intervention

22. Chaminade, Edquist, 2005 • what is the division of labor between private and public actors in the performance of each activity. This will provide policymakers with a new perspective on: a) what role they can play in stimulating different activities in the system of innovation; b) once the complex division of labor between public and private actors has been unfolded, what could be the appropriate instruments to do this; c) how to identify future research needs.

23. Activities in the system of innovationproposed by Chaminade, Edquist, 2005 • Provision of knowledge inputs to the innovation process 1. Provision of R&D - creating new knowledge, primarily in engineering, medicine and the natural sciences. 2. Competence-building (provision of education and training, creation of human capital, production and reproduction of skills, individual learning) in the labor force to be used in innovation and R&D activities. II. Provision of markets – demand-side factors 3. Formation of new product markets. 4. Articulation of quality requirements emanating from the demand side with regard to new products

24. The linear model of innovation is dead Basic research gives birth to an idea and relevant new knowledge The old belief was that industrial innovation waspredominantly the result of ideas born in universities and transformed by companies. Applied research turns the idea into something practical Industry development of new products and processes The company brings the new product to the market NIFU-STEP, 2005

25. Activities in the system of innovationproposed by Chaminade, Edquist, 2005 III. Provision of constituents for IS 5. Creating and changing organizations for the development of new fields of innovation (e.g.enhancing entrepreneurship to create new firms and intrapreneurship to diversify existing firms, creating new research organizations, policy agencies, etc.) 6. Provision (creation, change, abolition) of institutions(e.g. IPR laws, tax laws, environment and safety regulations, R&D investment routines, etc) - influencing innovating organizations and innovation processes by providing incentives or obstacles to innovation. 7. Networking via markets and other mechanisms, incl. interactive learning between organizations (potentially) involved in the innovation processes. Integrating new knowledge elements developed in different spheres of the SI and coming from outside with elements already available in the innovating firms.

26. Activities in the system of innovationproposed by Chaminade, Edquist, 2005 IV. Support services for innovation firms 8. Incubating activities (e.g. providing access to facilities, administrative support, etc. for new innovating efforts). 9. Financing of innovation processes and other activities that can facilitate commercialization of knowledge and its adoption. 10. Provision of consultancy services of relevance for innovation processes, for example, technology transfer, commercial information and legal advice.

27. Problems of the building the national innovation system in catching-up economies • National innovation system approach- proposed based on the experiences of high income economies, (strong accumulated knowledge base, stable and well functioning market system, developed institutional and infrastructure support of innovation activities). • Catching-up economies are different: lower income level, less accumulated knowledge, weaker institutional support etc.plus • Path-dependency => common command economy past, which has influenced the whole logic of building up their national innovation system

28. Problems of the building the national innovation system in catching-up economies • Catching-up economies own latecomer advantages - extremely high dynamism=> special requirements also to the innovation system. • Impossible automatically transplant the national innovation system concept based on the technology frontier countries from Western Europe in the catching-up economies of Eastern Europe.

29. Advantages and disadvantages of coming late • Gerschenkron (1962) initial ideas‘patterns of industrialization’(imitation, scale economies, access to the modern technology at lower costs; access to already established markets etc.) • Perez and Soete (1988) - potential disadvantages of latecomers - showed that scale economies are industry-specific and technology-specific. • Bell and Pavitt (1997) not sufficient for the catching-up country simply to install large plants with foreign technology – the capacity to absorb the new technology into the human capital stock is also critical. • Active learning policies are needed to create “absorptive capacity” defined as “the ability of a firm to recognise the value of new, external information, assimilate it and apply it to commercial ends” (Cohen, Levinthal 1990, p. 128

30. Advantages and disadvantages of coming late Abramovitz (1994) accepted the potential for catch-up by latecomers, but suggested that exploitation of the potential is not an automatic process. He proposed that differences in countries’ abilities to exploit this potential might be explained with the help of two concepts: technological congruence and social capability. technological congruence- degree to which the leader and the follower country are congruent in areas such as market size, factor supply, etc. social capability -capabilities that the developing countries have to acquire in order to catch up, especially the improvement of education and business infrastructure and more generally technological capabilities (R&D facilities etc.). Freeman (1999) added capacity to make institutional changes (social capability for institutional change - to overcome learning and technology divide(Arcena, Sutz,2003)

31. “Social capability” (M.Abramowitz)(1986, pp. 387-390; 1994a, pp. 34-35; 1994b, p. 88): not only individual skills (acquired through education) but “collective capabilities” - what organizations in private and public sector are able to do and how it is supported (or hampered) by broader social and cultural factors. Social capability • technical competence (level of education), • experience in the organization and management of large scale enterprises • financial institutions and markets capable of mobilizing capital on a large scale • honesty and trust • the stability of government and its effectiveness in defining (enforcing) rules and supporting economic growth.

32. Technological capability (Chandler, 1977) “the scale and scope” paradigm • focused on the economics of large, integrated companies and the social, economic and organizational capabilities needed to support and finance them. Nonaka and Takeuchi (1995) - concept “the knowledge-creating company” • emphasis on exploration and exploitation of technology and getting the organizational prerequisites for that right (Japanese success stories). Cohen and Levinthal (1990) absorptive capacities - “the ability of a firm to recognize the value of new, external information, assimilate it and apply it to commercial ends” (Kim 1997, p. 4) “technological capability” - “the ability to make effective use of technological knowledge in efforts to assimilate, use, adapt and change existing technologies.” • Kim - three aspects of it: innovation-, production- and investment capability

33. Capabilities and development - an integrated framework (Fagerberg, Shrolec, 2007)

34. National Technological Learning (Watkins, 2007) S&T learning capacity S&T learning opportunities + Knowledge generation capacity Knowledge absorption capacity Diaspora and Expats Internet Capital imports Licensing Education Export Customers R&D Inward FDI S&T co-operation

35. ‘Tree’ of national technological learning Human capital accumulation Creative-cooperative Autonomous Active FDI-dependent Creative- isolated Aid supported Passive FDI-dependent Slow learning Time

36. Six models of national technological learning (Watkins, 2007) • Traditionalist slow learning, • Passive FDI-dependent, • Active FDI-dependent, • Autonomous, • Creative-isolated, • Creative-cooperative.

37. Advantages and disadvantages of coming late • Big gap in technology =>potentialfor a rapid catch-up=>a wide diffusion process of innovations needed(UNIDO 2005). • East Asian vs.Latin America =>the importance of the technology diffusion management • market-induced imitation and organizationally-induced technology transfer. • Matthews (1999) indicates that those are passive • East Asia =>active model of the technology diffusion management, which leveraged those innovations and quickly turned into technological capabilities and competitive products • Linkage – Leverage - Learning • Instead of establishing typical R&D support institutions suggested by the experience of high income economies, they developed a whole network of institutions for technology diffusion and also organisational capabilities management.

38. Favourable condition for the diffusion of modern technology Three major groups of factors allows faster technology diffusion 1) Latecomer advantage 2) Openness to foreign trade and investments 3) Foreign direct investments support diffusion of technologies in host countries R.Perkins, E.Neuymayer (2005) controlled on three technologies: continuous steel casting; shuttleless textileweaving looms,digital telephone mainlines Results: First and second holds, third not

39. Favourable condition for the diffusion of modern technology Additional factors supporting faster technology diffusion 4) Geographical location of the country – diffusion is geographically localised” (Globermann et al, 2000;Milner, 2003) 5) Level of education. Well educated workers are more likely aware about the new technologies and bale to master them profitable.(Caselli, Coleman, 2001) 6) Social system heterogeneity. Learning through social interaction.New technologies spread more slowly in socially mixed populations (Takada, 1991, Dekimpe et al, 1998)

40. How technologies spread? • Technologies do not spread instantaneously – diffusion is a long process • Models disagree about the reasons behind it • Epidemic models =>information (Griliches,1957). Some firms contact earlier with technologies • Firms heterogeneity (Ireland, Stoneman, 1986) differ by organisational, environmental etc. variables (firms capital stock, human capital, available credit) => economic returns on adoptation are different (Blackman 1999). CONSEQUENTLY = countries with skilled labour, high capital labour ratio, low interest rates are first adopters. They could also better absorb potential losses from the absorption of technology (Bell, pavitt, 1997; Todaro, 2000)

41. Why and how latecomer economies could diffuse technology more rapidly Key assumptions 1. Latecomers could take advantage of technological advantage made by first-comer Directly - FDI, technology purchases (importing, licensing) Indirectly – knowledge spillovers (imitation, reverse engineering, transfer of know-how by movement of employees etc. They can obtain technology cheaper – not paying the full costs of R&D=>leapfroging decades of technological porgress (Teece, 2000)

42. Why and how latecomer economies could diffuse technology more rapidly 2. Latecomers are able to diffuse new technology across their economic structure faster due to latecomer advantage Two sources of latecomer advantage: a) Level of capital stock. They need to install capacity – may choose technologies. Less inertia in technological change (Clark, Wrigley, 1999; Amiti 2001) b) Learning investments and increasing net returns to adoption over time (they can take advantage of accumulated learning of frontrunners about using the new technologies). (Dekimpe et al, 2000)

43. General Background of IndustrialDevelopment of Taiwan

44. 1.2 Economic Take-Off with Outward-looking Development Strategy (5/5) Wig Textile Automobile KOREA - Changes in Export Commodity Profile: From Light Industry to Heavy Industry Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. Export Commodity Profile Semiconductor 79.8% HCI Product 50% Light Industry Product 14.1% Agricultural Product 6.1% 1980 1990 2003 1960 1970 1999

45. Example of building a National Innovation System: Korea (1) Original condition: • Unbalanced industrial development • Strong final assembly industry, but weak capital goods and system integration industry • Unbalanced National Innovation System • Underdevelopment of university research system • Dormant industry-academic cooperation • Lack of infrastructures for creative innovation • Lack of investment in basic science • Weak protection of intellectual property rights • Underdevelopment of venture financing and support system

46. Korea (2): Innovation Strategy Promote balanced National Innovation System • Vitalization of university research • Networking among Industry, academia, govt Sustain infrastructure for creative innovation From supply push To demand pull • Mission-oriented governmental • R&D programs • Technology targeting • Sustained investment for basic science (KIAS) • Increased protection for intellectual property rights • Promotion of venture companies

47. Latecomer firms (Mathews, 2007, 2005, 2002) • strategic goal - to catch up with the advanced firms and to move as quickly as possible from imitation to innovation. • able to exploit their late arrival to tap into advanced technologies (do not replicate the entire previous technological trajectory) • bypassing some of the organizational inertiathat holds back their more established competitors. • Linkage with the global value chains as suppliers. • Through linkage latecomer firm could acquire from more advanced firms knowledge, technology, and market access • It is this capacity to secure more from a relationship than the firm puts in, that we call leverage. • linkage and leverage can be repeated over again until firm or group of firms enhance their capabilities and become, potentially, advanced players (industrial learning).

48. Latecomer firms (Mathews, 2007, 2005, 2002) • The institutional innovations involved are all concerned with the capture of technologies in timely fashion; • the building of capabilities in these technologies, such as in government-owned R&D institutes; • the diffusion of these capabilities as rapidly as possible to the private sector (e.g. through a sequence of targeted R&D consortia). • Mathews calls it as the national system of economic learning • the process involved is the management of technological diffusion, or technology diffusion management. • Technology Leverage Institution (TLI) is needed (like Taiwanese Industrial Technology Research Institute, ITRI) • task of the TLI is to identify technologies of interest to a developing country, fashion strategies for acquiring technologies, adopting, adapting and diffusing them to the firms in the country, where they can be used to build new businesses and industrial sectors.

49. Technology Leverage Institution (TLI) • not be engaging in fundamental scientific research. • would be concerned strictly with identifying and evaluating available technologies. • provide shared R&D services for existing and emerging industries in the developing country. • Technologies already being used are subject to testing to see how they can be improved; • technologies used by rivals and competitors are constructed and analyzed; • potential technologies that could substitute for the ones in use are being evaluated.

50. Overview Industrial Technology Research Institute (ITRI)