UPM EU ACTIVE WEEK 21-25 Nov 2011 Business

Innovation Policy

Drs. Norman Dytianquin

Teaching Fellow University of Maastricht
N. Dytianquin
This project is funded by the European Union

AGENDA
ECONOMICS OF INNOVATION POLICY Solow growth model Endogenous or New growth theory Schumpeterian Growth theory Evolutionary Growth theory EU INNOVATION POLICY Goals Evolution EU Innovation Scoreboard Community Innovation Survey National systems of innovation

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ECONOMICS OF INNOVATION POLICY

Three strands in the theory of innovation Solow or neoclassical growth theory

Endogenous or New growth theory Schumpeterian Evolutionary theory

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ECONOMICS OF INNOVATION POLICY-2

Solow growth model: Y = AKL

where Y is output, K and L are capital and labor inputs, respectively, A is a parameter representing technology, and and are the respective output elasticities of K and L In the model, constant returns to scale is assumed, hence +=1, so to prevent diminishing returns from occurring the A parameter shifts the production function outward. However, Solow assumed this technology as manna from heaven or available for all countries to exploit. Given access to this free technology, then there is a convergence phenomenon where countries starting at low initial per capita GDPs will grow faster and catch-up with industrial countries.
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Solow-Swan Growth Model

Developed independently by Robert Solow (1924- ) and Trevor Swan (1918-1989) although model is more popularly known as Solow model or neoclassical growth model. Designed to show how growth in capital stock, growth in labor force, and advances in technology interact and affect a nations total output Shown in the production function of Cobb-Douglas form Y = (AL)K1-
Where A represents technological progress, K is capital stock and L is labor, and the superscripts and 1- indicate the output elasticities of capital and labor respectively. If we solve for growth rates: g(Y) = g(A) + *g(L) + (1-)*g(K) This is known as growth accounting. Growth can come from either growth of inputs of K and L (accumulation) or technological progress (assimilation)

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Solow-Swan Growth Model

Model basically shows: Model is expressed in per capita terms, thus: Y/L = A f (K/L) or per capita output is determined by capital per worker. Y/L is denoted as y and K/L as k. Model assumes diminishing returns to capital as denoted by slope of production function y=f(k) Capital per worker is determined by 3 variables Investment (savings) per worker Population growth (denoted by n), increasing population decreases the level of capital per worker, k. Depreciation (denoted by d). Capital stock declines as it depreciates
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Solow-Swan Growth Model

WITH EXOGENOUS TECHNOLOGICAL CHANGE If all parameters (savings rate (s), population growth (n), depreciation rate (d), output per worker (y) and capital per worker are all growing at same constant rate, how then can growth be sustained in the long run? Only through upward shift of the production function y=f(k) curve made possible through technological progress. Technological progress shifts production function upward so output per worker increases. But where does this technology come from? To Solow, technology is manna from heaven or exogenous

y* y0 A

(n+d+ )k s Y* = Af(k) B y = Af(k)

k0

k*

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Solow-Swan Growth Model

Thus in the steady state output per worker grows at the rate of the technological progress.
Thus with the introduction of technological progress, it is possible for an economy to experience sustained growth in per capita income (output) at rate of the technological progress. Thus, the farther an economy is from its steady state value, the faster it grows given access to same technology. The model predicts that given access to this free technology, poor countries will catch up to the richer countries (absolute convergence) with end result of having same per capita GDPs However growth rates have not been faster in developing countries than in developed countries. Empirical evidence show tendency for countries having similar characteristics to have convergence of their average incomes (conditional convergence).

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Solow-Swan Growth Model

Based on unrealistic assumptions Full employment Substitutability of capital and labor (not complementarity) Diminishing returns to capital Homogeneity of capital (as opposed to embodied in assets and hence lumpy) and labor Exogenous technological progress

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NEW GROWTH THEORIES

Endogenous or New Growth Theory

Neoclassical growth model is not clear as to who produces and shoulders the cost of technology. If technology were manna from heaven, it assumes a public good character. Which means it is obtainable at zero costs. Endogenous or new growth theory introduces monopoly power and spillover effects (positive externalities) as means of appropriating technology. We have Romer and Lucas models which show how technology creates positive spillovers. Romer introduced R&D that produces innovation while Lucas introduced human capital (education, skills) that produces knowledge.

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NEW GROWTH THEORY

Thus the new models emphasize the importance of
investments in human capital (Lucas model) and

Y = AK a H 1- a h b
H is investments in human capital (education and training) which increases the average human capital (h) and this creates a positive spillover in the workforce.

investments in R&D or knowledge (Romer model)

Y = AK a + b x 1- a
Represents knowledge (experience, learning by doing) which generates positive externalities. In a later model he develops, represents intermediate goods which embody blueprints or investments in R&D by the research sector,

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NEW GROWTH THEORY

Cricticisms of new growth theory are: The new growth theory remains dependent on some of the traditional neoclassical assumptions that are inappropriate for developing countries The empirical studies of the predictive value of endogenous growth theories show limited results. Most empirical results are used to test the neoclassical growth theory rather than endogenous growth theory itself.

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SCHUMPETERIAN GROWTH
Joseph Schumpeter (1883-1950) saw innovative entry by entrepreneurs as the force that sustained long-term economic growth Introduced the concept of creative destruction where competition for monopoly profits leads to technological progress old technologies are replaced by new ones

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SCHUMPETERIAN GROWTH
Types of innovation creating creative destruction
New markets or products New equipment New sources of labor and raw materials New methods of organization and management New methods of transportation and communication New methods of marketing and advertising New methods of inventory management New financial instruments

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SCHUMPETERIAN GROWTH

Schumpeter linked growth theory with theory of business cycles. When economy reaches a stationary state, the entrepreneur disturbs this equilibrium by creating a new innovation which is the cause of economic development. Tying this up with Kondratieff cycles (50 years) or long waves, a whole new invention or innovation changes entire economic and productive structure.

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SCHUMPETER AND DEMISE OF CAPITALISM Like Marx, Schumpeter believed in the demise of capitalism. But unlike Marx who believes socialism will replace capitalism, Schumpeter thought that capitalism would crumble because of
Obsolescence of the entrepreneurial function:
innovation becomes routinized so entrepreneurs lose their function in the economy

Destruction of political strata:

Big business will destroys small and medium sized firms and weaken position of the industrial bourgeosie

Destruction of institutional framework

Governments play larger role in the economy so that institutions that make markets work will be replaced by state planning, government control, nationalization of industries, welfare state, etc.

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Carlota Perez: A GREAT SURGE OF TECHNOLOGY EVERY HALF CENTURY

The Age of biotechnology, nanotechnology and bioelectronics?

20??

The age of information technology, knowledge and global telecommunications

1971

The age of oil, automobile, air travel, petrochemicals and mass production
1910

The age of steel, electricity and transcontinental communications

1875

The age of railways, coal and the steam engine

1830

The Industrial Revolution in England

1771
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NETWORK OF TECHNOLOGY SYSTEMS

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EVOLUTIONARY THEORY
Starts from Schumpeters ideas that growth emanates from innovation or technological change But adds on Darwinian theory of evolution where we find principle of natural selection (survival of the fittest) Describes firms as displaying three principles
Search and selection (of routines and decision rules by the firm) Hereditary mechanism (organizational competence, knowhow, skills are passed on to next generations through codification, imitation, take-overs, labor mobility or piracy) Generation of variety or novelty (firms differentiate themselves from competitors through product and process innovations)

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EVOLUTIONARY THEORY
Evolutionary theory differs from other theories in following respects: Multiplicity and uncertainty of outcomes could lead to disequilibrium and/or multiple equilibria. In mainstream theory, the growth path was linear. Likelihood of inefficiency Path dependency (differences in initial conditions determine long-run outcomes) Possibility of lock-in solutions (inferior technology can be dominant: economy can be locked into using an inferior technology, e.g., QWERTY keyboard) Evolutionary models were introduced by Nelson and Winter, Dosi et al., Silverberg-Verspagen, etc.

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EVOLUTIONARY THEORY

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EVOLUTIONARY THEORY

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EVOLUTIONARY THEORY
Growth path is characterized by instability or chaos as shown in the following possibilities.

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EVOLUTIONARY THEORY
Nelson and Winter model

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Economics of Positive Externalities

Innovation creates positive externalities such that social marginal benefits exceed private marginal benefits. With externality, Q1 is produced where PMC=PMB. Q2 would have been produced (PMC=SMB) if externality is paid for.To internalize the positive externality, there is a need to SUBSIDIZE the activity producing the positive externality according to Pigou.
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EU Innovation Policy

Economics of innovation policy Goals of innovation policy Evolution of EU innovation policy EU Innovation Scoreboard and major findings Community Innovation Survey National systems of innovation
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GOALS OF EU INNOVATION POLICY

To strengthen innovation capacity of European firms To promote rapid diffusion of new technologies To enhance effectiveness and coherence of existing innovation and technology transfer instruments To disseminate knowledge concerning innovation processes

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EVOLUTION OF EU INNOVATION POLICY

EU innovation policy combines overall analysis provided by a Communication entitled Innovation in a Knowledge-Driven Economy in 2000 and the annually published European Innovation Scoreboard which is based on results of the Community Innovation Surveys Earlier in 1995, Green Paper identified European paradox of strong research performance but weak innovation. This called for:
Large scale production for successful exploitation of innovation Large-scale consumption to build scale economies Clusters and industrial districts to generate high innovation rates Tolerance of high degree of social and economic upheaval Individualism as motivator of innovation
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EU Innovation Scoreboard

EU innovation scoreboard provides overview of relative national innovation performances In 2005, EIS is based on 20 indicators which are then combined into a Summary Innovation Index. This was expanded to 25 indicators in 2006.
Includes innovation performance of EU-27 + Croatia, Turkey, Iceland, Norway, Switzerland, USA, Japan, Australia, Canada and israel Innovation indicators expanded into 25 and arranged into 5 dimensions:

Innovation drivers Knowledge creation Innovation & entrepreneurship Applications Intellectual property
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EU Innovation Scoreboard 2009 (2)

Major Findings of EIS 2009 1. Country clusters according to innovation performance

Innovation Leaders
Denmark, Finland, Germany, Sweden, Switzerland, UK

Innovation Followers
Austria, Belgium, Cyprus, Estonia, France, Iceland, Ireland, Luxembourg, Netherlands, Slovenia

Moderate Innovators
Czech Republic, Greece, Hungary, Italy, Lithuania, Malta, Norway, Poland, Portugal, Slovakia, Spain

Catching-up
Bulgaria, Croatia, Latvia, Romania, Serbia, Turkey
Note: In 2009, non-EU countries included in 2007 and 2008 EIS were excluded . These are Australia, Israel, USA, Canada, Japan. N. Dytianquin Candidate countries were also included aside from EU-27.

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EU Innovation Scoreboard 2009 (3)

Figure 3: Convergence in innovation performance

Colour coding matches the groups of countries identified in Section 3.1: green are the Innovation leaders, yellow are the Innovation followers, orange are the Moderate innovators, blue are the Catching-up countries. Average annual growth rates as calculated over a five-year period. The dotted lines show EU27 performance and growth.

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EU Innovation Scoreboard 2009 (4)

2. EU innovation gap with USA and Japan

Figure 10 shows that the innovation performance of the US and Japan is well above that of the EU27. The EU27-US gap has dropped significantly up until 2007, but in the last 3 years the relative progress of the EU27 has slowed down. The EU27-Japan gap has remained stable between 2005 and 2009 although the gap has decreased up until 2008 but has increased again in 2009.
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EU Innovation Scoreboard 2009 (5)

Figure 11: EU27-US Comparison

2. EU innovation gap with USA and Japan

USA ahead in 11 out of 15 indicators EU ahead in S&E graduates employment in medium & high-tech manufacturing Community trademarks knowledge-intensive services Narrowing gap in tertiary education public R&D expenditures broadband subscriber business R&D expenditures Venture capital Widening gap in patents
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EU Innovation Scoreboard 2009 (6)

Figure 12: EU27-Japan Comparison

Japan ahead in 12 out of 14 indicators enablers firm activities outputs EU ahead only in Community trademarks KIS employment KIS exports Narrowing gap in S&E graduates tertiary education broadband penetration Public R&D expenditures Widening gap in Business R&D spending PCT patents
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EU Innovation Scoreboard 2009 (7)

Innovation comparison with the BRIC Strong and stable lead to Brazil Declining lead to China

Strong but slowly declining lead to India

Stable lead to Russia

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EU Innovation Scoreboard 2009 (8)

3. Growth performance
The analysis of the EU27 growth rate in innovation performance shows an average annual growth rate of 1.8% over a five year period. This improvement is particularly due to Human resources (2.3%), Finance and support (6.5%) and Throughputs (3.8%) where the EU27 has progressed most compared to 2005 (Figure 8). In Economic effects (0.9%) improvement has been small and in Firm investments (-0.4%), Linkages & entrepreneurship (-0.6%) and Innovators (-1.3%) improvement has worsened.
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EU Innovation Scoreboard 2007 (9)

The growth in innovation performance has been calculated for each country and for the EU27 as a block using data over a fiveyear period
The average growth rates for the 4 country groups show that there is between group convergence with the Innovation followers growing at a faster rate than the Innovation leaders, the Moderate innovators growing faster than the Innovation followers and the Catching-up countries growing at a faster rate than the Moderate innovators. The overall process of catching up, where countries with below average performance have faster growth rates than those with above average performance, can also be observed at the level of most individual countries.
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EU Innovation Scoreboard 2007 (10)

Within the individual indicators, the EU27 is showing relative strengths n Youth education, Public R&D expenditures, Broadband access, IT expenditures, Knowledge-intensive services employment, Medium-high and high-tech manufacturing exports, Knowledge-intensive services exports and Sales of new-to-market products . The EU27 is showing relative weaknesses in S&E and SSH doctorate degrees, Lifelong learning, Innovative SMEs collaborating with others, Technology Balance of Payments flows and Resource efficiency innovators.
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Community Innovation Survey

In 1960s-1980s, individual member states mostly Scandinavian countries, France, Germany, Netherlands undertook separate innovation surveys In 1992, Oslo Manual harmonized national methodologies and standardized data collection on innovation activities of EU firms. Eurostat developed a standard questionnaire that allows for international comparability. Questionnaire came to be known as CIS and contains inquiries about types of innovation done by firms reasons for innovating sources of information for innovation impact of innovation on firm performance obstacles to innovation expenditures on innovation government incentives and effectiveness in affecting innovation

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Community Innovation Survey (2)

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Community Innovation Survey (3)

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Community Innovation Survey (4)

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Community Innovation Survey (5)

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Community Innovation Survey (6)

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Community Innovation Survey (7)

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Community Innovation Survey (8)

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Community Innovation Survey (9)

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Community Innovation Survey (10)

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Community Innovation Survey (11)

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Community Innovation Survey (12)

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Community Innovation Survey (13)

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Community Innovation Survey (14)

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Community Innovation Survey (15)

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Community Innovation Survey (16)

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Community Innovation Survey (17)

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Community Innovation Survey (18)

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Community Innovation Survey (19)

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Community Innovation Survey (20)

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Community Innovation Survey (21)

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Community Innovation Survey (22)

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Community Innovation Survey (23)

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Community Innovation Survey (24)

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National Systems of Innovation

What is the national systems of innovation? Network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies (Freeman, 1987) Elements and relationships which interact in the production, diffusion and use of new and economically useful knowledge (Lundvall, 1992) Set of institutions whose interactions determine the innovative performance of national firms (Nelson & Rosenberg, 1993) Constituted by the institutions and economic structures affecting the rate and direction of technological change in society (Edquist & Lundvall, 1993) National institutions, their incentive structures and their competences that determine the rate and direction of technological learning (Patel & Pavitt, 1994) Set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and provides the framework within which governments form and implement policies to influence the innovation process (Metcalfe, 1995)
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National Systems of Innovation (2)

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National Systems of Innovation (3)

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EU Institute of Innovation and Technology (EIT)

In 2008, the European Institute of Innovation and Technology (EIT) will be launched. It is the first European initiative to integrate fully the three sides of the "Knowledge Triangle" (Higher Education, Research, Business-Innovation) and will seek to stand out as a world-class innovation-orientated reference model Based on partnerships known as Knowledge and Innovation Communities (KICs) highly integrated public-private networks of universities, research organisations and businesses the EIT's activities will be coordinated by a Governing Board (to be appointed end June 2008 along with possible headquarters) ensuring its strategic management The mandate of the EIT are: Serving EUs strategic priorities (7-year Strategic Innovation Agendas: first Agenda to be submitted in 2011) Connecting EU business and research (commercialize research findings) Providing higher education (MAs and PhDs with EIT label and innovation partnerships) Setting up incremental development path (phased introduction of KICs: slection fo first KICs by end 2009) Leverage for business (integrated knowledge transfer and networking)
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Sample Innovation Survey Questionnaire from Malaysia

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Sample Innovation Survey Questionnaire from Malaysia

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Sample Innovation Survey Questionnaire from Malaysia

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Sample Innovation Survey Questionnaire from Malaysia

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Sample Innovation Survey Questionnaire from Malaysia

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MYEULINK

Thank you.

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