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Innovation, Competitiveness and Economic Development

AFDC 2006 Forum, Session One21-22 September, 2006

Yoshiaki TOJOHead, Economic Analysis and Statistics DivisionDirectorate for Science, Technology & Industry

OECD

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Key Messages:

Innovation becomes increasingly important for sustainable growth and development in globalised, ICT driven, knowledge-based economy

Open Innovation paradigm is emerging, in which intellectual asset management and business models play a larger role.

Comprehensive package of efficient framework policies and science & technology policy is necessary to modernise national innovation system.

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Message 1

Innovation becomes increasingly important for sustainable growth and development in globalised, ICT driven, knowledge-based economy

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Investment in R&D has been increasing, Investment in R&D has been increasing, reflecting improved economic environment reflecting improved economic environment and growth of knowledge intensive and growth of knowledge intensive industries…industries…

Trends in R&D Intensity(1) by area, 1991-2004 (as % of GDP)

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Israel ChineseTaipei

Singapore Slovenia China RussianFederation

South Africa Argentina Romania

%1995 (1) 2000 (2) 2004 (3)

Non-OECD countries are also increasing their Non-OECD countries are also increasing their presence in worldwide R&D activities…presence in worldwide R&D activities…

R&D intensity in non-member countries % of GDP

Source: OECD, Main Science & Technology Indicators database

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Chinese Taipei

Russian Federation

India

China

Japan

EU25

United States

0

2

4

6

8

10

12

0 1 2 3 4

GERD as % of GDP

Researchers per 1 000 employment

211

285

114

85

21

17

14

R&D expendituresin billions of current PPP

Source: OECD, Main Science & Technology Indicators database

OECD STI Scoreboard 2005

… … and increasing their presence in worldwide and increasing their presence in worldwide R&D activities.R&D activities.

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China accounted for half of the non-OECD China accounted for half of the non-OECD share of the R&D expenditureshare of the R&D expenditure

Gross Domestic Expenditure on R&D in China, 1995-2003

Source: China Science and Technology Indicators, 2004

0

200

400

600

800

1000

1200

1400

1600

1995 1996 1997 1998 1999 2000 2001 2002 2003

current price constant price100 million yuan

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Increasing business-sector performed R&D Increasing business-sector performed R&D (BERD)…(BERD)…

Trends in BERD Intensity by area, 1991-2004 (as % of GDP)

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… … accounts for most of the cross-country accounts for most of the cross-country dispersion of R&D intensity…dispersion of R&D intensity…

Expenditures on R&D performed in the public and business sectors (as % of GDP, 2003)

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… … partly reflecting country-specific industry partly reflecting country-specific industry structure.structure.

R&D Intensity in the business sector adjusted for variations in industry structure, (average over 1991-2002, as % of business value added)

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Investment in knowledge (Investment in knowledge (R&D, education, & R&D, education, &

softwaresoftware) is catching up for that in tangible ) is catching up for that in tangible capital.capital.

Investment in knowledge versus investment in gross fixed capital formation

Knowledge Investment > GFCF

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In some countries intangible assets match In some countries intangible assets match fixed capital stock.fixed capital stock.

Intangible Capital Accumulation in the United States (% of business output)

IAs = 10~11%

GFCF = 11%

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Changes in business R&D expenditure are Changes in business R&D expenditure are mirrored by changes in patenting.mirrored by changes in patenting.

Trends in Triadic Patent Families

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R&D investment positively co-relates with R&D investment positively co-relates with triadic patent generation…triadic patent generation…

Number of Triadic Patents per million of working age population and business-sector R&D Intensity

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… … and innovation in manufacturing …and innovation in manufacturing …

Share of successful innovators and business-sector R&D Intensityin manufacturing

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… … but not with innovation in services…but not with innovation in services…

Share of successful innovators and business-sector R&D Intensityin services

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… … since there are various non-R&D since there are various non-R&D investments for innovation.investments for innovation.

Share of innovative firms engaged in different innovation activities, 2000 (%)

0

10

20

30

40

50

60

70

Acquisition ofmachinery and

equipment

Training Intramural R&D Market introductionof innovations

Design, production,deliveries

Acquisition ofknow ledge

External R&D

% Services Manufacturing

Note: Figures are merely indicative (simple average of available country shares) and should be considered as such.Source: Figure 4.13 in “Promoting Innovation in Services”, Chapter 4, inOECD Science, Technology and Industry Outlook 2004, based on Eurostat, CIS3 survey 2004 (OECD, 2004b).

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Investment in Intellectual Assets in the United States, % of business output

Non-R&D Investment

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Corrado, Hulten, Sichel (2006)Corrado, Hulten, Sichel (2006)

Intangible Capital Stock estimated for : inv (1998-00) δ

Computerized information $ 154 bil 33%

R&D, scientific $ 201 bil 20%

R&D, non-scientific $ 223 bil 20%

Brand equity $ 140 bil 64%

Firm-specific resources $ 365 bil 40%

Contribution to Labour Productivity 1973-95 1995-2003

Labour Productivity 1.63 3.09

Tangible Capital deepening .55 .85

Intangible Capital deepening .43 .84

Labour composition .25 .33

MFP .41 1.08

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Innovation is the key driver of economic growth - new and improved products, processes and services account for the bulk of economic growth since the Industrial Revolution.

Innovation is of growing importance to economic activity in OECD countries – global competition is forcing all countries to upgrade their economic activity and move up the value chain.

A growing number of countries has recognised the importance of innovation, e.g.:– Lisbon strategy in the EU– Policy strategies in the US, Japan and Korea to strengthen

innovation– Growing policy focus outside the OECD, notably in China.

Innovation becomes increasingly important Innovation becomes increasingly important for sustainable growth and development …for sustainable growth and development …

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Message 2

Open Innovation paradigm is emerging, in which intellectual asset management and business models play a larger role.

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Internal Technolog

y Base

Market

Development Commercialisation

Innovation model was recognised as closed and Innovation model was recognised as closed and unilinear.unilinear.

Research

Closed Innovation Model

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Internal Technolog

y Base Market

Development Commercialisation

Emerging open innovation paradigm has various Emerging open innovation paradigm has various input and output channelsinput and output channels

Research

Open Innovation Paradigm

External Technolog

y Base

Other firm’s Market

Technology Insourcing

Licensing, Technology Spin-offs

Technology Market

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Major Characters of Open InnovationMajor Characters of Open Innovation

Rise of Innovation Intermediaries and Their Markets– Equal importance given to external knowledge and

internal knowledge. – Outbound Flows of Knowledge and Technology

Centrality of the Business Model in Extracting Value from R&D– Dilemma in Innovation Management: – Proactive and Nuanced Role of IP management

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R&D R&D activities are increasingly globalisedactivities are increasingly globalised……

R&D expenditure of foreign affiliates, % of R&D expenditure of enterprise, 1995 & 2005

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Foreign ow nership of domestic inventions

0

10

20

30

40

50

60

70

% China EU-15 Japan United States

Domestic ow nership of inventions made abroad

0

5

10

15

20

25

30

35

40

%

China United States EU-15 Japan

Notes: 1. Share of patent applications to the EPO owned by foreign residents in total patents invented domestically.2. Share of patent applications to the EPO invented abroad in total patents owned by country residents.Data are according to the residence of the inventors. The EU is treated as one country; intra-EU co-operation is excluded.Source: OECD, Patent Database, March 2005.

出处 : China’s Progress Towards a Knowledge-Based Economy , M. Sharper (2005)

… … so the invention activites.so the invention activites.

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Guellec and van PottelsbergheGuellec and van Pottelsberghe (200 (20044))

Long-term elasticities of output with respect to R&D variables

Business R&D 0.132

Foreign R&D 0.459

Public R&D 0.171

Luintel and Kahn, mimeoLuintel and Kahn, mimeo

Mean elasticities of R&D variables

Business R&D 0.025

Foreign R&D 0.010

Public R&D 0.022

* Luintel and Kahn includes human capital, public infrastructure, hi-tech trade, and FDI in their GMM System estimation.

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Immigrants as a % of highly skilled native population

Emigrants as a % of highly skilled in the country of origin

Main Destinations

OECD STI Scoreboard 2005

Human resources for R&D activities also become mobile.Human resources for R&D activities also become mobile.

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Intangible investment

Research & Development

Training Education

Back Office Spending Marketing

Customer Relations…

Intellectual Assets

Accumulation

Knowledge(IPR, Product, Process)

Human Resources(Skills, Creativity,..)

Organisation / Network Reputation / Brand

Value Creation

Technology Market

Product Market

Productivity

Development/Control Commercialisation

Intellectual Assets should be developed, Intellectual Assets should be developed, retained, and commercialised for value creation retained, and commercialised for value creation by firms.by firms.

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Intangible investment

Intellectual Assets

Accumulation

Value Creation

Diffusion/Mobility

Commercialisation

Ability to create economic returns from Ability to create economic returns from intellectual assets also depends upon economy-intellectual assets also depends upon economy-wide business environments wide business environments (( IAs for Nation / IAs for Nation / Region / CitiesRegion / Cities).).

IA-based Management

• Product Market Reg.• Labour Market Reg.• IPR Regime• Entry and Exit

• Openness• Education• Public R&D

Knowledge PoolHuman Resource Pool

Creative Culture

National / Regional IAs

Development/ControlFirm-level IAs

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Major Findings of the IA-VC ProjectMajor Findings of the IA-VC Project Intangible determinants, including R&D, play substantial and

growing role in economic growth. They works in combination.

Treat R&D intensity as one of the benchmarks.

Good management is indispensable for earning economic returns from R&D/innovation activities.

Create innovation-friendly business environment,Efficient financial market and corporate governance, flexible market, good education, Public-Private

Partnership.. Insufficient comparable data, under-utilised micro-data.

Co-ordinate data gathering on intangible determinants Harmonised analyses on national micro-data .

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Message 3

Comprehensive package of efficient framework policies and science & technology policy is necessary to modernise national innovation system.

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Policy Impact on R&D intensity growth in 1990s 1. Science policies include R&D tax incentives, subsidies for private R&D, business funding of non-business R&D, non-business R&D intensity, intellectual property rights and absorptive capacity (capacity to understand and make use of foreign knowledge).2. Framework conditions include financial factors, real interest rates, real exchange rates, foreign exposure (foreign R&D stock and openness), import penetration, product market regulation, employment protection legislation, human capital and the domestic economy-wide average wage.Source: OECD (2005), Innovation in the Business Sector.

National innovation system is more than science National innovation system is more than science and technology policies.and technology policies.

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Framework policies that influence innovation performance-1

Education– Basic educational skills – Training of scientists and engineers

Financial markets– Access to financing important for innovation, especially to

risk/venture capital– Taxation, Portfolio restrictions in institutional investors;

barriers to cross-border M&A; bankruptcy procedures Labour markets

– Employment protection laws influence innovation via ability of firms to hire/fire and incentives to invest in training

Going for Growth 2006

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Framework policies that influence innovation performance-2

Openness for overseas knowledge pool– Foreign R&D makes large contribution to productivity

growth– Multiple channels: FDI, international mobility of human

resources, participation of foreign firms/researchers in R&D programmes, etc.

Market competition and IPR: striking balance– Strong PMR encourages investments in innovation to

stay ahead of competitors, but can weaken firm’s ability to appropriate returns

– Strong IPR can enable firms to appropriate returns from investment in innovation, but can jeopardise quality of patents and promote diffsion

Going for Growth 2006

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Innovation policies Governance of Public Research

Inter-ministerial coordination mechanisms New priority-setting mechanisms Changing funding models Revised evaluation

methods Increasing autonomy

Going for Growth 2006

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Innovation policies Industry-Science Linkage

Importance to innovation– Improve match between public research and industry

needs– Facilitate transfer of knowledge/technology to industry

Policy measures– Reforms governing the ownership of IPR resulting from

publicly funded research.– Funding for commercialisation of public-sector

technology and/or support of technology transfer offices

– Establishment of public/private partnerships to share cost, risks and jointly determine objectives

Going for Growth 2006

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Further OECD works are in preparation on Further OECD works are in preparation on intellectual assets and value creation as well as intellectual assets and value creation as well as open innovation paradigm, such as…open innovation paradigm, such as…

1. Business environment and corporate governance mechanism to improve IA-based management Industry-Specific Template for IA intensive firms IA-management Tools for Small-Cap Listed Companies

2. IAs for nation, region, economic clusters Internatinal / Domestic spill-overs (positive & negative) Best practices of Open Innovation Paradigm in Globalisation

3. Intellectual property rights and other institutional design to balance diffusion of knowledge and control of IAs

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Thank you

yoshiaki.TOJO@oecd.org