INCLUSIVE INNOVATION

ECOSYSTEMS IN THE DIGITAL

ECONOMY

OPPORTUNITIES AND CHALLENGES FOR SMES

4th ERC State of Small Business Britain Conference

7 September 2017

Caroline Paunov

Digital transformation offers many opportunities for SMEs

if the imbalances it creates are addressed

Allowing SMEs to leverage opportunities matters to inclusive growth

Regional patenting intensity in OECD countries (average 2011-13)

Patents per million inhabitants, TL3 regions, OECD-wide quintiles

Spatial concentration of knowledge economy

factors persists

The top 20% regions in OECD countries account for:

Spatial concentration of knowledge economy

factors persists

… 1/3 of tertiary educated workers

… 1/2 of countries’ patent applications

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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PC

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Top

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OEC

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DP

Top 1% income share Total PCT patent applications

ICT PCT patent applications Mechanical engineering PCT patent applications

Chemistry and metal PCT patent applications

Digital innovation and the top 1% income share

Top 1% income share and PCT patent applications for selected OECD countries, 1987-2009

Source: The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/ (accessed on 15 July 2015) for the 1% income share data; OECD Patents Statistics for PCT patent applications. Note: The statistics are based on a GDP-weighted average for the following 13 OECD countries: Australia, Canada, Denmark, France, Germany, Japan, Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. The selection is based on data availability over the 1987-2009 data period. The data annex provides further information.

Opportunities for SMEs in the digital economy

Imbalances affecting SMEs

What can policy do?

1

2

Structure of the talk

7

3

Source: Guellec, D. and C. Paunov (2017) Digital Innovation and the Distribution of Income, Contribution to the NBER CRIW Conference on Measuring and Accounting for Innovation in the 21st Century.

Sources of opportunities

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• i. Digital innovation New products and

processes based on software code and data

– Digital non-rivalry of knowledge makes the market production different from tangible goods

– Winning idea can easily be supplied to market with low costs of dissemination of digital goods

• ii. Entry barriers are lower

-> “scale without mass”/ “cloud computing”/ platforms

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Disruption is more important with the digital

economy

iii. Radical innovation opportunities to challenge

incumbents arise from digital technologies

Emerging digital technologies

ICT applications

E-commerce E-learning E-health

Big data analytics

Blockchain

Artificial intelligence

E-government

Internet of Things

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Market opportunities arise across the

innovation-intensive economy

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Estimates of selected sectors’ betas relative to the entire financial market for US firms over 2008-12

Source: Guellec and Paunov (2017) based on data by Aswath Damodaran (2015), computed from data from Bloomberg, Morningstar, Capital IQ and Compustat.

iv. Opportunities for catching up are also higher

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0.002

0.004

0.006

0.008

0.010

0.012

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Coeff

icie

nt

Quantiles

Firms in small agglomerations

Firms in big agglomerations

Source: Paunov, Caroline, and Valentina Rollo. "Has the Internet fostered inclusive innovation in the developing world?." World Development 78 (2016): 587-609.

• Firm performance gains from IT-enabled knowledge spillover opportunities based on 50,013 firm observations from 117 countries in 2006–11

Market opportunities for SMEs in the digital economy

Imbalances affecting SMEs

What can policy do?

1

2

Structure of the talk

14

3

Source: Guellec, D. and C. Paunov (2017) Digital Innovation and the Distribution of Income, Contribution to the NBER CRIW Conference on Measuring and Accounting for Innovation in the 21st Century.

Imbalances

Digital non-rivalry & markets

knowledge production is subject to massive economies of scale: the more products sold, the lower the average cost

market concentration

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“Winner-take-all” markets

Resulting market power creates rents the

traditional & necessary fuel to innovation (Schumpeter)

Innovation and “winner-takes-all” dynamics

Current context is one of increased concentration

(& less investment): Evidence on growing winner-take-all

markets for the United States (Autor et al., 2017; De Loecker

and Eeckhout (2017).

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Market concentration in the digital economy

Distribution of the 100 largest firms in terms of sales among the top R&D firms within the software and

computer services and heavy industries sectors in 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 4 7

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49

52

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58

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Software & Computer services Heavy industries

Number of firms in decreasing order of sales

Shar

e in

sal

es o

f le

adin

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&D

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Source: EU (2016), EU R&D Scoreboard 2016.

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• Business strategies allow retaining rents for a period of time: economies of scale and scope, network economies, big data

• Capital and networks to upscale and sell innovations render acquisitions effective but may challenge dynamic competition

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Advantages for incumbents

Market opportunities for SMEs in the digital economy

Imbalances affecting SMEs

What can policy do?

1

2

Structure of the talk

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1. More competition market conditions result with fewer opportunities to exploit network effects, less platform dominance, fewer leading technical standards and better data

2. Critically depends on policy: anti-trust, entrepreneurship and IP rights re-designed for the intangible economy

3. Avoiding possible biases towards large players in policy support tools

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Policy imperatives

• Building support for SMEs with competitive potential by offering funding, advice and technology support

• Examples of inclusive innovation policies in support:

– Korea: Centres for Creative Economy and Innovation

– Ireland: Competitive Start Fund for Female Entrepreneurs

– Lithuania: European Progress Microfinance Facility Programme

– China: Innovation fund for SMEs

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What specific innovation policy approaches

can support wider opportunities?

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Korea: Centres for Creative Economy and

Innovation

• Objective: Promote business start-ups and innovation by SMEs in all provinces

• Policy instruments:

– Business consultation services for start-ups

– Creation of networks (linking SMEs and innovation actors)

– Assistance in R&D and marketing, among others

Ireland: Competitive Start Fund for Female

Entrepreneurs

• Objective: Empower (women-led) start-ups that face financial constraints to launch new competitive products internationally

• Policy support:

– Equity investment of up to EUR 50,000

– Mentoring

• Digital transformation offers many opportunities for SMEs if the imbalances it creates are addressed

• Policy needs to ensure innovators are rewarded for innovations while market conditions provide opportunities for challengers

• This policy approach supports growth & inclusiveness

Conclusions

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Further ongoing project of the OECD Working

Party on Technology and Innovation Policy (TIP)

Objective

Define how innovation policy

frames and instruments should adapt to the digital

transformation

More on the project

https://innovationpolicyplatform.org/TIPdigital

Project’s website at: http://oe.cd/inclusive

Innovation Policy Platform page: https://innovationpolicyplatform.org/inclusive

Open and inclusive innovation:

https://innovationpolicyplatform.org/TIPdigital

Contact:

Caroline Paunov: caroline.paunov@oecd.org

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Further information

Inclusive innovation policy toolkit

Policy cases from Chile, China,

Colombia, Germany, Hungary,

India, Ireland, Israel, Japan, Korea,

Lithuania, Mexico, New Zealand, South

Africa, United States, EU-wide programmes

Programmes to support women

entrepreneurship

Programmes to support integration of

minority groups in productive activities

Programmes to foster

productivity in lagging areas

https://innovationpolicyplatform.org/inclusivetoolkit

• OECD (2017), Making Innovation Benefit All: Policies for Inclusive Growth

• Digital Innovation and the Distribution of Income (2017), Contribution to the NBER CRIW Conference on Measuring and Accounting for Innovation in the 21st Century (with D. Guellec)

• "Has the Internet fostered inclusive innovation in the developing world?." World Development 78 (2016): 587-609 (with V. Rollo)

• “Inclusive Innovation Policies: Lessons from international case studies”, OECD Science, Technology and Industry Working Papers, 2017/02, OECD Publishing, Paris (with S. Planes Satorra)

• “Innovation and Inclusive Development: A Discussion of the Main Policy Issues", OECD Science, Technology and Industry Working Papers, No. 2013/01, OECD Publishing, Paris.

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References