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BBL Summary (February 4, 2010)

OECD Innovation Strategy: Developing an Innovation Policy for the 21st Century

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Speaker Andrew W. WYCKOFF
Director, OECD Directorate for Science, Technology and Industry
Moderator NAKAO Yasuhisa
Director, International Economic Affairs Division, Trade Policy Bureau, METI
Materials Handout [PDF:1.18MB]

Summary

Andrew W. WYCKOFFAndrew W. WYCKOFF
The Innovation Strategy Project has been underway at the OECD since May 2007. The project is currently in the final stages of refining the policy recommendations that will be brought to the OECD ministers' meeting in Paris at the end of May 2010.

Innovation Strategy at the OECD is the largest horizontal project the OECD has ever undertaken. It includes 10 different committees that roughly mirror ministries in a country and seven different directorates of the OECD. This kind of a project is very hard to do, many questions go unanswered and there are very interesting conflicts, which will be highlighted in the report.

Innovation is important because of what it can do in terms of economic growth or social welfare. This goal must be kept in mind because the ultimate goals are easily forgotten. Innovation is a driver of growth with intangible capital investment accounting for an increasing amount of the change in growth over the past decade. This is needed because productivity among the OECD countries is declining. Innovation also has to be harnessed to address global challenges including climate change, infectious diseases, food security, and water scarcity.

What innovation encompasses has changed over the years. Innovation is broader than just R&D and includes design, marketing, organizational innovation, and science and technology policy. R&D needs to be bundled with other investments to make it have an impact, and focus cannot simply be put on high-tech firms. Finland is learning this firsthand as they are dependent on one high-tech firm and their growth is lagging as that firm runs into real competition from Japan, South Korea, and the United States.

Productivity growth must also come from services as the service sector makes up 70-80% of the OECD economies, leading to questions on how innovation can be introduced into services including the public sector. Many OECD countries are seeing the development of innovation that is not related to new R&D, hinting to the need for innovation policies to be broadened. In terms of the level of technology R&D, Japan is an example of a spread between high-, medium-, and low-tech R&D spending. This is important for keeping them competitive and having them move forward in what may not currently seem like glamorous industries. Finland, for example, is putting resources into learning how to grow, harvest and process wood from a high-technical point of view. Trademark registration is an interesting indicator for innovation that moves away from R&D. For some countries, services dominate new trademark registration. Though this is not the case in Japan, it shows that services can be innovative and think up new brands and products themselves.

The policy implications of this study are currently being refined. These include the need for a broader skills base including both hard and soft skills like entrepreneurship. Creating space for innovation and entrepreneurship to occur is also important, and a distinction needs to be made between small- and medium-size enterprises, and young firms, as young firms, regardless of size, tend to be more innovative, entrepreneurial and fast-growing. Furthermore, consumers must be empowered, as is the case in mobile telephony in the OECD. Mobile plans are very confusing for consumers, but consumers must understand what they are buying if they are to pull on what could turn out to be a dynamic, new market. Finally, the interaction of technology and non-technology needs to be recognized when creating a bundle of policies.

Innovation lies at the intersection of several disciplines, crossing geographic borders and institutional ones as well. This bridging becomes difficult to do, but is important for gaining value from innovation. This leads to more collaborative strategies and the advantage is linked to a greater degree to tacit knowledge, which is not codified, but is the know-how of a firm.

Almost all of the growth in scientific publications over the last 15 years has come from collaborative work. There has been a huge increase because science is becoming much more cross-disciplinary. This is also happening between firms as many are collaborating both domestically as well as internationally. Open innovation strategies are being employed by such firms. There is much confusion as to what "open" means, with many believing that "open" refers to open-source software. However, in this case, "open" refers to opening up systems to partner and share more, and also using the internet in novel ways to gain value by bringing in new ideas that would not have been found otherwise. Amazon and Apple are two companies that saw record profits during the depths of the financial crisis because they adopted open innovation strategies in areas of their business. Amazon has created a platform where any retailer can sell through their website, and Apple's iPhone has opened up the App Store which has become very popular. These two developments in particular are aided heavily by the Internet, though the Internet is still largely untapped as a source of innovation. With the increase of cloud computing, innovation through the Internet could increase.

More open modes of innovation can bridge institutions that can traverse different parts of the economy as well as different fields. Soft skills are needed that can understand different disciplines, cultures and languages due to the global nature of innovation. Labor mobility between academia, government and the private sector helps make innovation networks stronger. ICT is now a basic skill and heavily leads advances in many fields. Knowledge networks and markets need to be further developed so that firms can trade in intellectual assets such as patents, copyright or know-how locked in software. This area needs to be developed if innovation is to become a mainstream part of economic policy.

Innovation is still occurring in multinational corporations, but is increasingly occurring in young firms and at the borders of countries and there are some big new emerging players. The top 800 multinational firms account for half of the world's R&D, so R&D is very concentrated with multinational firms. Young firms are playing an important role in patenting, particularly in Nordic countries. Young firms are the ones that come up with radical ideas that do not threaten their business models and they are willing to run with them, whereas older businesses are worried that if they come up with a new business model, it might ruin their current profit stream. This can be seen in the music industry where older players were very unwilling to move to digital sales, but a firm coming from outside, Apple, broke that model and changed the industry. Global networks are emerging with foreign co-inventors becoming very important for some countries.

Apple is a company that was at the verge of bankruptcy and came out with a product that was not new, the iPod, because MP3 players had been out for some time. This product was made "cool" through interesting design and very good marketing. While the sophisticated technology for the device came from the UK and Japan, Apple undertook complex system integration to bring these parts together. Apple keeps half the sales price of each iPod, something that is very unusual in the consumer electronics sector, Part of the answer to why this happens is not due to the hardware, the software has really made the product appealing. Apple convinced the large music copyright holders to list their songs on iTunes, which then became the real moneymaking engine. iTunes now has 70% of the digital music market and this has been leveraged into other products. This is an interesting example of how firms can compete in global innovation networks and capture value locally.

The growth of world R&D between 1996 and 2001, and between 2001 and 2006 shows that China's contribution rose from 11% to 30%. Japan has done very well compared to the United States in this respect, but there is still a question as to how that increasing R&D effort can be capitalized on. This has altered the geographic dispersion of innovation. Looking at patents applied for in the U.S., the EU and Japan, and industry financed R&D, three groups of countries emerge. The leading group includes the U.S., Germany, France, Japan and the United Kingdom, the narrow leaders/adopters have specialized capabilities like Italy, Finland, Austria, Brazil and Russia, and adopters/followers are on the lower end. In the early 1980s, the G7 were dominant, and the second half of the 1980s was a terrific period for Japan where it was already at the frontier and pulling out ahead. In the early 1990s, Russia began to go backwards with the breakup of the Soviet Union and took Finland down with them. South Korea, China, Brazil and India begin to emerge at this time, and in the second half of the 1990s, the new economy era for the U.S. begins. Even though the U.S. is at the frontier, it begins to pull ahead. The Asian Financial Crisis brings problems for South Korea, but they quickly recover and begin to move forward with continuous speed into the future.

Some of the implications of this is that it is not only important to know how to innovate by oneself, but also how to absorb the innovation of others. It is important to look at how services are bundled with manufactured products, because services help to root the value of things at home. The role of universities are changing dramatically, now acting as nodes in the system as they were not before. Universities cannot play a passive role, and need more independence. They need to be local anchors for attracting talent from around the world, and also plugging in domestic players. This may necessitate a move to a system with a few world-class nodes. Building on existing strengths is important, as Spain is heavily putting resources into photovoltaics as it sees that as its strength.

The actors have changed to include a wide range of actors, including non-profit organizations. The Bill and Melinda Gates Foundation spends more on anti-malaria drugs than all the OECD governments combined, and just made a pledge last week to put in $10 billion more. Ministries are also important and Japan has advanced government mechanisms for innovation. Finland has experimented with how to govern a broad array of ministries involved in innovation policy. Many different levels of government are involved. Duplication needs to be avoided and coherence needs to be built between different levels. Measurement and evaluation is very important for achieving this.

The world has changed greatly since the innovation project started in 2007. Innovation must be done more cheaply, including diffusion, application and adaptation rather than development. Partnerships must be built between firms as well as countries. Creative destruction must also be given greater room to occur. Global challenges need to be addressed. Market mechanisms need to be introduced by getting prices right and stimulating innovation through a stable and long-term policy horizon, improved international S&T cooperation, new mechanisms and platforms for collaboration based on new partnerships, and enabling new actors to take part. Innovation requires demand-side policies as well as the traditional supply-side policies to bring in a broader set of people into the innovation process rather than just scientists or engineers. IP rights do not just have to be protected, but value needs to be created by sometimes sharing it, giving it away, or diffusing it through new mechanisms. Market mechanisms need to be mixed to get new mechanisms that will bring about more radical breakthroughs than what the market would naturally provide.

For Japan, challenges include little labor mobility, a dual labor market and limited foreign interaction. There is a very low degree of internationalization, low FDI and a low degree of international cooperation in innovation. There is relatively low productivity growth in the services sector and some sectors remain too heavily regulated. Also, starting a business in Japan remains too complicated.

Japan's strengths can be built on. These include exploiting high public and private R&D. This can be done by improving the linkages between public and private R&D, enhancing cooperation for R&D awards and using a strong base to tap into global networks. Strength in green innovation can be leveraged through push and pull, and leadership can be asserted in multilateral science and technology innovation cooperation for grand challenges. Furthermore, ICT can be applied for services productivity, especially services for the aged, and seizing upon the shift to mobile computing.

Questions and Answers

Q: It seems contradictory to gain value from knowledge while stressing a downstream approach with intangible elements. Also, what are the appropriate legal rights on data? For example, who has rights on personal data like health records?

Andrew W. WYCKOFF
Regarding tacit knowledge, it is very hard to create a market for this. To some extent, the lack of a market is what makes this even more valuable because they stick to the firm. There must be recognition of them as the elements in the system for capturing value locally. For example, Canada has a good public education system, but they lose a huge portion of their graduates to the US. It is hard for Canadian policymakers to defend taxpayer burdens for upkeeping this system. What must be done is finding answers for policymakers that help capture taxpayer money spent on innovation processes. Services, know-how and complex systems integration are important to develop and keep but they can not be marketed very well.

The importance of databases is increasingly important, as in the case of Google. This is useful in their business model, but there is a question as to who owns that data. There is no easy answer and work on revising the 1980 privacy guidelines is underway. There is a question as to whether new technologies fundamentally require a review of these guidelines, and how to fuel innovation and protect privacy at the same time.

Q: Regarding advice on how to encourage multidisciplinary programs in member economies, more often than not advice is usually given as to how to empower private actors rather than government.

Andrew W. WYCKOFF
Multidisciplinary work is important, but it is very hard to do. The OECD Innovation Strategy is an example of multi-disciplinary cooperation and has been given an incredibly high priority from the top of the organization. A specific position was created at the top of the organization to promote this and an increased budget helped this along. Also, there was a cooperative element to the push with no one directorate leading others. I do not know the role of METI in the Japanese context, though METI is known as one of the most prestigious and powerful ministries.

In terms of the government getting out of the way, it is not stressed enough in the report. This must be worked on the coming weeks, and it is partly due to the crisis where the government has stepped in. Government is an important player, but is not the only player. For example, it is hard for the private sector to do basic, fundamental R&D. Also, the government is better at making radical and breakthrough technologies. It is, however, important that businesses take this up too. There is a huge role for government getting out of the way once it has developed these, and it needs to push these out to get access to technologies to industries. Competition policy needs to be promoted amongst a wide assortment of industries. This may also need to happen in regards to foreign sectors as well as domestic.

Q: What is the current status of the OECD study on demand-led innovation and can you please give some examples of effective measures government should take?

Andrew W. WYCKOFF
Procurement can play a useful role in creating a market for novel new technologies that will induce firms to come into that market where they would otherwise feel it too risky. This can be seen in pharmaceuticals, other health technologies, environmental technologies and the defense sector. Other demand-led processes include regulations, sometimes even just the signaling of regulation, like in Denmark where new building codes were introduced that require much tighter energy efficiency in homes led to a demand pull on that sector. Adjoined to this is the area of standards, which can help lead to demand for technology that would not otherwise exist. Finally, better marshalling of consumer power to pull on innovation in a smart way is important. The role of consumers has changed dramatically in the last 20 years. Many markets have been deregulated, services have grown, the Internet has changed interactions between producers and users, and empowering consumers has become important. However, consumers do not just need to be given more information, how the information is given is important. The use of defaults, how the information is posed, trying to avoid known consumer problems, and other issues are important to keep in mind. The demand-side work is still in the early phases and will not be finished for the innovation strategy project.

Q: Can this method of analysis be applied to financial innovation?

Andrew W. WYCKOFF
There has been much discussion about how to handle financial innovation, and in-depth work has not been done on this. It is an area that deserves more attention because it is a very innovative area. Some of the innovations are very good, but what failed were not the innovations, but the regulatory frameworks surrounding them.

Q: Please say a little bit more about multinational enterprises as Japan is trying to open up its multinational firms.

Andrew W. WYCKOFF
Regarding the attractiveness factors that push and pull firms, it is not just all about taxes. Firms move around the world increasingly for human capital and opening new markets. In general, Japan and South Korea do poorly in many dimensions of openness and foreign collaboration. There are cultural and language barriers for these countries but Europe is fast getting over such barriers.

Q: How can regulators encourage innovation? Do you have any plans to study this particular topic?

Andrew W. WYCKOFF
Similar to financial regulation, this has not been addressed in the study. Regulators play an important role, and that role can be positive since some innovations can be bad. There must be a balance between the economic and the social gains from regulation, and the role to be played could be to pull on lead markets by setting regulations to drive innovation.

Q: Can this analysis be applied to large-size innovation like in nuclear technologies, space exploration or supercomputing?

Andrew W. WYCKOFF
Many mega-science projects are still at the fundamental research level and in some ways are more about invention than innovation whereas innovation commercializes and gains value from things that have already been developed. However, there are lessons that can be learned in getting ideas that occur in mega-science projects out into a broader innovative environment.

*This summary was compiled by RIETI Editorial staff.

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