1

Bernd Kadura

The Enhanced Functional IS Model

Innovation System and Innovation System Support

2

Index 1 Innovation system and innovation policy ......................................................... 3

1.1 The enhanced functional IS model: features, components and use.............................3 1.2 Innovation policy and innovation-system support .........................................................7

2 Analysis of problems of innovation systems in partner countries of the German International Cooperation .................................................................... 9

2.1 Innovation and innovation-system support: Explanation of its importance also for newly industrializing and developing countries.....................................................................9 2.2 Problems of EZ partner countries and their need for innovation support: differences and similarities ....................................................................................................................10 2.3 Systematization and pinpointing of deficiencies in the innovation system..................12

3 Objectives of innovation-system support in international cooperation partner countries............................................................................................... 17

3.1 Overarching objectives of innovation-system support in NICs/DCs ...........................17 3.2 Strategic starting points for innovation-system support in NICs/DCs (based on the enhanced functional IS model) ...........................................................................................18

4 Instruments and impacts of effective innovation-system support ............... 21 4.1 Systematization of instrumental policies and programs of RTI support (with the aid of the enhanced functional IS model) .....................................................................................21 4.2 Success indicators of effective innovation-system support ........................................24

Diagram 1: Main Actors in the Innovation System Model.........................................................4 Diagram 2: Functional Subsystems, Primary IS Players and Intermediaries ...........................6 Diagram 3: National Innovation System: Transactions and Interactions..................................7 Diagram 4: Main Directions for Innovation-System Promotion...............................................18

3

1 Innovation system and innovation policy

1.1 The enhanced functional IS model: features, components and use

It makes sense for a number of reasons to adopt a systemic approach when looking at innovation and innovative behavior. Even the innovative behavior of an individual organization cannot be satisfactorily understood and manipulated without explicitly taking into account the explanatory and shaping factors of the ways in which it fits into its environment and interacts with the outside world. These environmental determinants are growing in importance in an economic environment that is increasingly interconnected, competitively dynamic and differentiated in terms of the division of labor. The kinds of value-net-based cooperation encountered today, in which the corporate boundaries between a large number of cooperating players become permeable, even fluid, are prototypical examples of this.

There is even greater need for a systemic view where innovative activity in a corporate population, in a sector, a region or an entire economy is to be looked at, evaluated and manipulated, as is the case in innovation policy and innovation support. No meaningful statements can be made here unless there is a describing and modeling framework in place for recording environmental factors and the quality and level of inter-institutional interaction as prerequisites for or catalysts of innovation processes and achievements.

The innovation system (IS) represents just such an empirical and analytical framework. It is constituted as a “biotope” of functional subsets, institutions and rules of the game, whose tailored fit and reciprocal relations (= interactions and transactions) determine performance in the areas of knowledge creation and dissemination as well as in those of knowledge application and use.

Innovation systems can be conceived as national, regional, sectoral or technological-field-specific innovation systems.

Institutionally, an IS comprises players from science & research, education & training, manufacturing & business, and public administration & politics. Functionally, it is composed of elements of the education and research system, the industrial system, the demand system and the political and administrative system. The rules of the game involve regulations, standard practices and institutional arrangements for exchanges between the IS players.

At its core, the (simplified) functional IS model contains four thematic subsets or subsystems containing groups of players, which are differentiated firstly according to the role they fulfil as knowledge

creators or as knowledge users and secondly according to whether they belong predominantly to the public or to the

private sector.

The four dimensions, whose configuration and interaction are considered key to the qualitative and quantitative innovation output of an IS, are: social and human capital, research capacity, technology and innovation performance and innovation absorption capacity.

4

Diagram 1: Main Actors in the Innovation System Model These four functional subsystems, which are independent of one another but have links to one another, are each characterized by their dominant functional purpose, namely:

(i) Social and human capital: Development of a critical level and standard of qualified personnel and quality-infrastructure services. What is important here is the willingness, capacity and power to produce sufficient “bright minds” with practical skills and a lasting ability to learn, and to instill a quality-oriented approach.

(ii) Research capacity: Development of a critical level and standard of research capacity and services. What is important here is the willingness, capacity and power to continuously renew the knowledge base and to produce sufficient new ideas and possible solutions.

(iii) Technology & innovation performance: Development of an adequate technological performance capability and innovation performance of the corporate sector. What is important here is the willingness, capacity and power to provide an adequate level and standard of innovative entrepreneurship and of targeted application-oriented R&D and innovation activity in the corporate sector1 .

(iv) Innovation absorption capacity: Development of an adequate technology and innovation-stimulating absorption capacity and performance of the markets for (innovative) goods and services. What is important here is the willingness, capacity and power to absorb, apply and profitably (re-)exploit new technologies and innovations2 rapidly and on a wide scale.

Based on their functional role, the social & human capital and absorptive capacity subsets are designated knowledge users and the technology & innovation performance and 1 Expressed for example in the creation of new innovative companies (e.g. NTBFs1), IPR1-centred

R&D activity or the percentage of a company’s revenue spent on innovation. 2 Can be portrayed by means of indicators which measure the breadth and depth of diffusion of

new technologies and innovations in a region or sector2

5

research capacity subsets knowledge creators. Based on whether they belong (predominantly) to the public or private sector, the first two aforementioned subsystems are assigned to the public sector and the last two to the private sector. (Interacting) groups of players can be assigned to the subsystems. Institutional examples of such primary IS players, which from the viewpoint of the system as a whole represent the microlayer of the IS, are3:

IS subsystems and primary IS players

Human & social capital Research capacity Technology & innovation performance

Innovation absorption capacity

Universities (of applied sciences)

(Vocational) schools Institutes of further

education

Metrology, standards, testing and quality assurance institutions

Universities

Non-university R&D institutions

Company R&D departments (technology, product and process developers)

Creative companies (NTBFs, etc.)

Follower firms Professional users

Intermediate and end users

However, the type, quality and intensity of relations between the various IS functional subsets and their players are also key to the proper functioning and performance capability of an IS. Accordingly, KTT4-intermediary organizations fall within the core set of institutions of any IS.

As “bridging institutions”, such mediating organizations take on interface and transfer functions between the various IS subsystems. These may, as research-based intermediaries in the shape of e.g. affiliated institutes5, transfer points or incubators at universities/public R&D institutions, deal with the connection between research and practical implementation and innovative application. They may, as industry-oriented brokers in the form of e.g. patent consultants, innovation agencies or funding institutions for industrial research associations, improve the technology-transfer and innovation-diffusion channels within the private sector. Or they may as independent or PPP6-intermediaries in the shape of e.g. regional centers, innovative cluster or competence network management units perform a systemic interface and transfer function in relation to all subsystem groups of players.

3It is by all means possible for institutions to be placed in several fields: Universities, for example,

may appear once as training institutions and once as research institutions. And state demanders of goods and services can also be classified under absorption capacity.

4 KTT=knowledge & technology transfer 5 Affiliated institute= organisationally and legally autonomous research institution which is affiliated

to a university 6 PPP=public-private partnership

6

Diagram 2: Functional Subsystems, Primary IS Players and Intermediaries The enhanced IS model includes a built-in consideration of direct environmental and other general conditions which exert a substantial influence, whether beneficial or obstructive, on the serviceability and performance of an innovation system in the narrow sense – in the age of the knowledge-based economy.

An efficacious immediate innovative environment (= meso-layer in the IS) must include, in particular, governmental or government-funded schemes, programs and institutions for direct and indirect R&D and innovation financing (e.g. risk capital funds, guarantee funds, etc.), as well as similar arrangements for the IPR/patent and quality control systems.

The other general conditions (= macro-layer in the IS) form the skeleton structure of the IS, so to speak:

ICT infrastructure and its availability, including Internet access Economic and institutional regime with relevant policy areas, governance and

LRF7 regulations relating to research/science, technology and innovation Education system and its facilities and design in terms of creative, research- and

technology-oriented and employability-capable training and further education and finally

a social system of values and culture that encourages or does not encourage innovative visions and attitudes and business and social entrepreneurship.

Ultimately, each IS under consideration does not operate in an international vacuum, but is embedded in structures of the international division of labor and international cooperation and in the global arena of innovation systems, and this principally in relation to all its functional subsets, players, and environmental and general conditions.

The enhanced functional IS model can be applied in practice in a multitude of ways: as a model for systematizing and locating weaknesses and shortcomings in the IS as a structure for correlating support policies, programs, mechanisms and

measures8 with RTI policy areas9

7 LRF = Legal & Regulatory Framework 8 see Annex II 9 RTI=research, technology and innovation

7

as a design model for deriving and designing strategic approaches to intervention and support in the IS and

as a model framework for a set of indicators for measuring and evaluating the serviceability and performance capability10 of IS.

Diagram 3: National Innovation System: Transactions and Interactions

1.2 Innovation policy and innovation-system support

The starting point for seeking to boost the innovative strength of an economy in respect of its economic entities through innovation-system support measures is a justification stemming from a combination of market and system failure and mission orientation. However, even where governmental support for innovation by way of innovation-system support is concerned, there are a number of measures of fundamental importance:

Just as innovation policy is by definition based on support for the corporate sector in the economic implementation of ideas which bring customer benefits and are in demand, so (public) innovation-system support must not lose sight of the fact that its ultimate target is the corporate sector, and the latter’s resources, capabilities and skills with regard to technological development and innovation should be at the focal point of its vision of support.

The context-aware vision of innovation-system support does not in any way dilute this mandate but simply perceives this mission in a way that is appropriate to the observable complexity and interdependent dynamics of innovation processes today.

10 see Annex III

8

According to this approach, while companies with their competencies are the main players in the introduction of innovations to the markets, the complexity of innovation processes and the dependency on other players in an economic system for achieving innovative performance are arguments for viewing all these players of relevance for innovations as a system. Successful innovation policy and innovation support are thus directed at the innovation system as a whole so as to support and influence the innovative capabilities and the absorption capacity of companies in such a way as to give rise first and foremost to a wide variety of innovations11. This diversity should be produced both by existing companies and by newly established (“young”) companies.

The winners in the subsequent selection process, which takes place in the various markets for goods and services, will be the innovative services and companies that are best able to win over their customers.

It is this joined-up understanding of innovation and addressing of innovation systems which underscore firstly the horizontal nature of a policy to promote technological and non-technological innovation and secondly the enormous importance of coordination.

Competence-building to support innovation and strengthening of the innovative capability of the corporate sector call for efforts to be made in a variety of areas such as research and technology (infrastructure and technology transfer), education, financing, and in industrial, structural and regional policy as well as in competition policy.

11 Diversity can be stimulated in practical terms through supply-side and demand-side support for

various technological alternatives, a good technological infrastructure, support for the emergence of young, innovative, technology-based companies and/or an innovation-promoting system of financing.

9

2 Analysis of problems of innovation systems in partner countries of the German International Cooperation

2.1 Innovation and innovation-system support: Explanation of its importance also for newly industrializing and developing countries

In the last 20 years, the conditions of economic management have changed significantly, particularly for NICs and developing countries. Contributing factors are the increased liberalization of trade, the consolidation of the financial markets, labor mobility, and the spread of new information and communication technologies (ICT).

This development has opened up new areas of potential growth for developing and newly industrialized counties (DCs/NICs) and continues to do so. Low wage costs and/or large raw material reserves are no longer the sole decisive competitive factors for exploiting these areas of potential.

Knowledge, access to it, and its successful translation into innovative products, processes and services are gaining in importance as vectors of sustainable economic growth and as a means of securing and creating employment and earnings potential, including also in NICs/DCs.

Innovations help to increase productivity and competitiveness, but can also be a positive aid in solving social and environmental problems (climate change, water shortage, etc.).

Experience shows that ICT and innovative business models can help to reduce information asymmetries and improve access to products, basic services and development-relevant knowledge, particularly for poorer population strata.

And that means: Innovation capability and innovation performance have, under the conditions of the evolving new knowledge-based world economic order which is global, dynamic, networked, digital, increasingly knowledge-based and highly competitive in nature, become key factors behind competitiveness, growth and prosperity.

And this also applies to the wide range of different enterprise categories and industries, as well as in principle to countries at all levels of economic development.

The quality and quantity of innovation systems in which economic entities are embedded has a significant impact on the latter’s innovation capability. International competition has increasingly become a race for innovation, which consequently means that it has also become a competition between innovation systems.

Probably the only way to escape this trend comes at the cost of almost total isolation from the world market and world economic opportunities. Given that this general precept equally applies to newly industrialized and developing countries, it can be affirmed that innovative products, services and processes are a fundamental requirement for their organizations and especially companies if they wish to participate in markets and remain competitive over the long term.

In the course of globalization, many points of contact with new technologies and innovations have arisen not only for the NICs but also for developing countries – through trade, the import of capital goods and high-tech equipment, direct foreign investments and/or contacts with the international diaspora.

10

An increasingly rapid shift in the technology frontier is one of the noticeable and characteristic features of the knowledge-based economy (KBE).

For most developing countries, research on the technology frontier is utopian, but also not at all necessary. For the KBE offers NICs/DCs the alternative of generating (knowledge-based) innovative added value by following a route to innovation that consists of adopting, (imitatively) adapting and applying existing technologies and solutions.

For NICs/DCs, the capability to adopt and assimilate existing technologies and solutions, to adapt them to the local context, and to promote their widespread use and efficient utilization is thus nonetheless critical to their development.

In order for this to happen, they need to develop suitable institutions, policies and skills that will enable them to:

purchase and adopt foreign technologies and solutions,

create and market local technologies and solutions,

promote the widespread use/assimilation of foreign and local technologies and solutions.

Based on a profound understanding of innovation by all IS players, targeted innovation-system support, adapted to the bottlenecks, potential gains and priorities identified in each case, therefore also offers an appropriate pathway to competitive differentiation and sustainable growth12 for NICs/DCs.

2.2 Problems of EZ partner countries and their need for innovation support: differences and similarities

However, opportunities for generating innovations differ according to the situation of the developing and newly industrialized countries at the outset: resource endowment, industrial infrastructure and the existence of relevant institutions are significant influential factors.

Innovation capability is not (only) dependent on the use of certain technologies or the performance of research institutions. Other important aspects include the cooperation of players from private industry, education, research and politics, and networking with international innovation networks.

In the countries classed as NICs/DCs, the range of differences in standards and rate of change as far as the use of technologies, innovation rate and the status of the innovation system (IS) are concerned, is extremely diverse. In some developing countries, one can speak at best of potential nuclei of an IS which has yet to be established. At the other end of the scale we find countries such as, first and foremost, China, which are rapidly catching up on technological developments and setting new paradigms as they do so.

Accordingly, the magnitude and often also the type of IS deficiencies to be encountered in NICs/DCs, and their corresponding needs in respect of IS support, cover an extremely wide and varied range of requirements.

These diverse starting points demonstrate the need for an individualized IS assessment and a differentiated approach that takes into account the stage of development of each innovation system.

One of the methods used to differentiate countries in this context is based on their level of economic and technological development, dividing them into three groups:

12 see Annex IV for additional information

11

(i) production-factor- and input-cost-driven economies or countries at the technology adoption stage,

(ii) investment- and efficiency-driven economies or countries at the technology adaptation stage,

(iii) innovation- and unique-value13-driven economies or countries at the technology creation stage.

An alternative method is to divide countries into three groups based on the stage of development of their innovation system:

(i) countries with an embryonic innovation system

(ii) countries with an immature innovation system

(iii) countries with an advanced innovation system

With the aid of comparative case studies or based on sets of indicators, stylized profiles are drawn up of IS problems or IS challenges with which the NICs/DCs as a whole are essentially confronted.

The list of common problems14 revealed by comparative studies of NIC/DC innovation systems generally include:

the relatively weak performance of all IS players, chief among them a low propensity to innovate in the private sector, particularly among SMEs, and little usable R&D output from public and private R&D institutions

an absence of or little sign of relations (interactions and transactions) among the groups of IS players, but especially inadequate relations between universities and non-university research institutions and the private sector

inadequate technology and/or innovation absorption and diffusion capability on the supply side and the demand side, due to deficient public education and the lack of an appropriate technological infrastructure

a lack of mechanisms and proposals for the financing of innovation projects and innovative startups

poor incentives or an unfavorable legal and regulatory framework for private-sector R&D investment and innovative business concepts, one of the consequences of which is that smart brains with entrepreneurial aspirations emigrate to other countries or don’t return home after training

incoherent and uncoordinated policy measures in the educational, research, industrial and economic policy areas

inadequate international networking of the IS and its players, including insufficient collaboration with its diaspora.

Indicator-based benchmarking studies have identified the main common weaknesses shared by all NICs/DCs in terms of innovation input and innovation output as being related to their inability to sustain a high level of innovation capability and innovative performance in all innovation categories.

13 or unique value proposition 14 see Annex V for additional information

12

Innovation input and innovation output categories

Innovation inputs Innovation outputs

1 Innovation drivers “Level of education & learning behavior of the population”

1 Intellectual property “Establishment of patent, design & trademark rights”

2 Knowledge creation “R&D activity of IS players”

2 Applications “Commercial exploitation of new knowledge”

3 Entrepreneurship & innovation “Innovation behavior of SMEs”

2.3 Systematization and pinpointing of deficiencies in the innovation system

With the aid of the enhanced functional IS model, IS deficiencies (as well as IS potentials) can firstly be systematically categorized and secondly at the same time also traced in terms of their (systemic) links and interdependencies, quite independently of the stage of development or maturity in which an IS finds itself.

The reason for this is that the enhanced functional IS model represents the entire value chain of innovation-related activity15, integrating the key functional/thematic subsystems with their tasks and groups of players, their interrelationships, and multiple layers/levels of directly and indirectly influencing environmental conditions.

as the micro-layer, an IS representing the primary layer of activity with its four functional subsets/subsystems of social & human capital, research capacity, absorption capacity and technology & innovation performance, their groups of players as well as the interrelations of the latter. It constitutes the central observation and design reference system.

as the meso-layer, a set of five seconding (state intervention) schemes (=institutional provisions and mechanisms), representing the secondary layer of activity, which exert a directly catalytic or guiding influence on the configuration and interaction and/or serviceability and performance capability of the primary IS. The schemes differentiated here are financing, intellectual property rights, metrology, standards, testing & quality assurance, non-material support and public incentive schemes.

as the macro-layer, a basic framework of (policy) areas, representing the tertiary layer of activity, which among innovation aspects represent and provide important, fundamental framework conditions: education system, ICT infrastructure, economic and political institutional regime and normative/cultural suprastructure, and finally

as the global/international layer, which represents external communication and interaction, structures of the international division of labor and cooperation and international IS arenas in which the IS concerned is to a greater or lesser extent embedded.

15 The four functional areas/subsystems of the primary IS: social & human capital, research

capacity, technology & innovation performance and absorption capacity map the links of the innovation value chain: education, research, innovation and absorption, and people, ideas, entrepreneurship & cooperation (channels, markets, networks,)

13

The basic building blocks of the enhanced function IS model are functional areas, relational axes and layers of activity. They are at the same time the corner posts around which the IS model can be stretched to form a grid for differentiating phenomena on the basis of their relative position (=problems, potentials, activities, results).

As a differentiating matrix for complex, heavily interdependent IS processes, there subsequently emerges the differentiation on the one hand into (subsystem)-internal and (subsystem)-relational phenomena and on the other – from the micro-layer perspective or from the perspective of the primary IS system – into primary and (subsystem)-environment-related phenomena.

The differentiation of subsystem-internal and subsystem-relational phenomena is of fundamental importance here. It refers to the independent and equal ranking which from the systemic viewpoint relations have in comparison with elements. This differentiation applies generally and thus also to deficiencies/weakpoints.

One approach to transforming the model structure into an appropriate grid for systematizing and locating IS shortcomings/weakpoints involves scrutinizing the primary IS along its functional-area axes to locate shortcomings which are typical or identifiable in specific cases.

By way of example and without making any claim to be complete or universally applicable, the matrix diagram below illustrates the location, in a manner that differentiates between the subsystem-internal and the subsystem-relational, of stylized/typical shortcomings of NICs/DCs, which overall can be assigned to the micro-layer, on the functional-area axes of the primary IS.

14

Enhanced functional IS model – Micro layer Example of location of selected typical NIC/DC deficiencies on the functional-area axes

of the primary IS - Public sector Private sector

IS axis “Knowledge use in the public and private sectors“

Sub system Human & social capital

Relations between public and private

sector knowledge users

Subsystem Absorption capacity

Kno

wle

dge

use

rs

expenditure on education makes up a low proportion of GDP

low proportion of the population with tertiary education (coupled sometimes with questionable standard of degrees)

weak structure and low standard of input and output of vocational and college training system

very low proportion of working population taking part in lifelong-learning due to lack of adult education provision (adult education centers, etc.)

no/scarcely any entrepreneurship education or education and training provision aimed at fostering self-reliance among secondary school, college/polytechnic and university graduates

very weak structure and performance capability of technical, information-providing and quality-assurance institutions (metrology, standards, testing and quality assurance, consumer protection)

no/poor accreditation & certification practices in education & training and quality assurance areas

very low number of companies naming (semi)-governmental institutions from the education & training system or the quality control system as important sources of ideas/information/knowledge/know-how

scarcely any/few education & training arrangements and/or service relations (technical information, testing, consulting services, etc) between companies and (public) institutions from the education & training and quality control systems

low non-material involvement & scarcely any material involvement of the corporate sector in vocational training, further training & continuing education curricula/ programs for HR

scarcely any/few personnel exchanges /-collaborations in vocational./polytechnical training & further training between. educational establishments and companies (work placements, etc.)

no/scarcely any HR placement/brokerage or HR development structures (open universities etc.) between corporate sector and education /quality assurance system

low rate of companies and households with fast broadband Internet connection

low expenditure (absolute & relative) on IT by companies and limited spread of e-business

low company regeneration rate among SMEs and high proportion of innovation averse companies due to lack of learning culture, process and technological expertise and financial strength

low primary demand for & attractiveness of the corporate sector for well-qualified or highly-qualified people (brain drain vs. brain gain)

low turnover and demand (absolute & relative) for new products & services (new-to-market & new-to-firm) in b2b, b2c and b2a markets

low levels & rates of change of equipment, labor & TFP productivity of the corporate sector

very low proportion of total exports made up of knowledge-intensive goods & services

Know

ledge users

IS-a

xis

„Kno

wle

dge

prod

uctio

n &

Kno

wle

dge

use

in th

e pu

blic

sec

tor

Relations between public sector knowledge creators and knowledge users

Relations between public & private sector knowledge users and knowledge creators

Relations between private sector knowledge creators and knowledge users

IS-axis „K

nowledg

e productio

n & know

ledge

use in the private sector"

5

15

low job-to-job mobility of HR in science, technology and education & training

scarcely any/few collaborative programs between universities/R&D-institutions and education & training institutions (training by research etc.)

no/scarcely any IT infrastructure/information & KTT platforms for science, industry and interested parties among the public

scarcely any/little multi-lateral communication & interaction between categories of players of the various IS subsystems, due among other things to differing communication practices

low number of organizations (companies, R&D institutions, universities/colleges, associations and complementary service providers) taking part (of their own accord) in clusters, skills networks and/or technology platforms

inadequate power of initiative & skills shortfalls of players from research/science and industry/economy in the setup & management of multi-stakeholder networks/clusters

inadequate efforts by players from science/technology and economy to participate in international R&D and innovation programs (e.g. FP7, CIP etc.)

scarcely any production, distribution, interactive learning and/or technology alliances and networks between companies (intra- or cross-industry)

no/scarcely any joint R&D projects or alliances (cooperative/collective R&D or developer-user alliances) between companies (SMEs)

no/scarcely any KTT services (technology brokerage, R&D partners matching etc.) by professional bodies and organizations of the formal private sector

scarcely any technology scouting, technology awareness and/or technology demonstration initiatives by the (formal) private sector

Subsystem Research capacity

Relations between public sector and

private sector knowledge creators

Subsystem Technology & innovation performance

Kno

wle

dge

cre

ator

s

low public R&D expenditure (GOVERD & HERD)

low number (absolute & relative) of scientists & engineers

very low number (absolute & relative) of scientific publications & citations from the literature

low output of utilizable results & commercially-oriented services by public R&D institutions

no/scarcely any R&D arrangements and/or other service relations between companies and public R&D institutions

low personnel mobility between public R&D institutions and the economy

no/scarcely any KTT-mechanisms between public R&D institutions and the economy

no/scarcely any spin-offs of public R&D institutions or NTB joint ventures with the private sector

very low level (absolute & relative) of R&D expenditure by the corporate sector (BERD)

very low proportion of companies’ total turnover allocated to non-R&D innovation expenditure

scarcely any/little utilizable R&D output from corporate sector in the shape of patents, trademarks, copyrights etc.

low number (absolute & relative) of innovative & NTB company foundations in total as well as of those with Early-Stage VC financing

Know

ledge cre

ators

IS axis “Knowledge creation in the public and private sectors”

Public sector Private sector

How the vertical perspective can be added in the model framework to the horizontal in the shape of a systematization of deficiencies which further differentiates according to the

16

four IS layers of activity, is shown by the example of the IS axis “Knowledge creation in the public and private sector” in the matrix diagram in Annex VIIa16.

The locating of shortcomings by means of the IS model enables a range of insights to be acquired not only as to the input and output status of the various IS functional areas, but also on the layout, design and interaction performance of their mutual relations. This makes it clear that as in a transmitter-receiver constellation, it is not only the power of the transmitter that plays a role in determining whether reception is good in each case but equally important is whether the receiver is ready to receive at all and whether the connection between them is not disrupted or, without special amplification, too weak.

This means in concrete practical terms: The elimination of shortcomings in a functional area/subsystem of the IS is normally not automatically associated with an uninterrupted trickling down of information and effects via the connecting channels into other subsystems upstream and downstream, as is simply assumed in cascade models. Rather, it is a question of focussing on analogous deficiencies along the IS axis(axes) under consideration on the connecting path(s) and in the correspondence subsystem(s) and, where applicable, to deal with these in parallel or in succession.

In this system view, four basic categories of deficiency can be established to begin with, taking into account the various layers of activity. They are:

General categories of IS deficiency in NICs/DCs in a systemic view

(i) Absence of entire functional subsystems from the IS (=“missing nodes“)

(ii) Inadequate functioning of functional subsystems in the IS (=“weak nodes“)

(iii) Absence or inadequate functioning of interfaces, connections or interactions between functional subsystems in the IS (=“missing or weak bridges & links between nodes“)

(iv) Absence or inadequate functioning of catalytic regimes seconding for the IS and of (policy) areas and institutions which establish framework conditions (=“missing or weak framing, shaping & fostering conditions for the entire node system“)

From different horizontally synoptic or vertically synoptic perspectives, more detailed or aggregate views (in longitudinal or transverse section) of deficiencies can be obtained from here and categories of deficiencies identified accordingly – depending on analysis and design concerns 17.

16 see Annex VII for a more detailed account 17 see Annex VIIb for an example of both the horizontal and the vertical perspective

17

3 Objectives of innovation-system support in international cooperation partner countries

3.1 Overarching objectives of innovation-system support in NICs/DCs

Successful innovation processes need as necessary input elements: access to results of knowledge-generating R&D and practice and/or an efficient

transfer system for new knowledge and technology,

manufacturing or service-providing companies with innovation potential, which are distinguished by having a pertinent corporate culture and strategy in place, earning and investment power, a suitable quantity and quality of skilled and managerial personnel and a cycle time that allows for innovation, and

sufficiently large markets and customer groups interested in innovative developments and promising in terms of their demand for innovations.

If the structural, systemic and behavioral conditions for successful innovation processes thus set out are not, or not to the complete satisfaction of the political and economic players, in place in the market or country, there are grounds for state intervention in the innovation system. Since innovation capability and innovative strength, as key factors of competitiveness, growth and prosperity in the KBE also of NICs and DCs, are shaped by systemic forces, innovation-system support is also of strategic importance in NICs/DCs. It is against this backdrop that the system of overarching strategic objectives of innovation-system support in Germany’s development cooperation has emerged:

System of strategic objectives of IS support (=paramount-objective layer)

Sustainable growth, competitive economy, attractive locations for (foreign) innovation investments and jobs with a secure future in a globalized competitive environment through improvement of the innovative strength and innovation performance of partner countries’ economies.

As its program objective, German development cooperation’s IS support is directly targeted at:

Program objective of IS support (=program layer)

Improvement of the capacities and capabilities in partner countries to develop, take up, absorb and utilize ideas, knowledge and technologies and in connection with this to improve the innovative performance of the economy/of economic entities and increase innovation success through more intensive interactive learning and broader and deeper knowledge spillovers.

Like the stylized IS problem profiles, the IS support program objective of bringing about greater innovation in partner countries can be broken down using sorting classifiers into various activity-steering/operational strategy (sub)objectives18 , the emphasis of 18 see also Annex IV

18

which may turn out differently depending on the starting situation and the position regarding priorities.

Diagram 4: Main Directions for Innovation-System Promotion The main directions of thrust in the operational implementation of IS support are traditionally selected and set using various policy prioritizing systems. In the OECD, the mapped (but technology and IL-heavy) system “Governance of the ITP system” is frequently used. However, from the systemic viewpoint, breakdown of the IS support program objective into the following strategic focus sub-objectives seems appropriate for NICs/DCs:

IS support focal objectives (=operational program layer) (i) Establishment of a continuous learning and innovation culture

(ii) Improvement of the diffusion of technology and innovation (iii) Fostering of networking and clustering (iv) Enhancement of the innovation leveraging effect of public RTI measures

and tools (v) Development of mechanisms for improving use of globalization

opportunities

3.2 Strategic starting points for innovation-system support in NICs/DCs (based on the enhanced functional IS model)

In a similar manner to the deficiency analysis, the enhanced functional IS model can be used for systematically deriving strategic approaches to IS intervention and support. As in the case of the weaknesses, policy approaches can first be assigned to basic categories, namely as policies, approaches and measures relating to:

(i) establishment of functional subsystems (“increasing the nodes harmoniously“)

(ii) reinforcement of functional subsystems ("reinforcing nodes")

19

(iii) interconnection of functional subsystems ("linking the nodes")

(iv) design, regulation & dynamization of the IS (“framing, shaping & fostering the entire node system“)

From here, the basic strategic approaches to IS support can be further differentiated and specified with operational implementation in mind, as follows:

Reinforcement approach

It places the emphasis of intervention on strengthening activities within an area/subsystem and its players. This can take place in the “Innovation absorption” subsystem, for example, through business-startup or SME support, strategic public-sector procurement policy, demand-side subsidies for the purchase of innovative goods/services, etc., in the “Human & social capital” subsystem, for example, through extension of the vocational training infrastructure, in the “Research capacity” subsystem, for example, through targeted support for young scientists and in the "Technology & innovation performance” subsystem, for example, through subsidizing of cooperative R&D or the setting up of seed capital funds.

Bridging approach

It places the emphasis of intervention on the processing of interfaces and the intensification of relations between the areas/subsystems and the various groups of IS players. This may mean building bridges between the “Research capacity” and “Technology & innovation performance” subsystems, for example, through the establishment of liaison offices/transfer points at universities, the setting up of spin-off/incubation facilities at public research establishments or the promotion of contract and collaborative research. It may avail itself of the technology and innovation diffusion links in the private sector between the “Technology and innovation performance” and “Innovation absorption” subsystems and, for example, establish technology brokerage facilities at chambers of commerce/industry or innovation relay centers. Or it may strengthen the link between the “Human & social capital” and “Innovation absorption” subsystems by establishing adult education provision at adult education centers/colleges or the provision of entrepreneurship courses for university and high school graduates.

Holistic approach (meso network or meso cluster approach)

This intervention approach, which is also termed systemic, pursues a holistic support approach through integrating the networks of multiple or all innovation-related subsystems and groups of players. This approach is prototypically implemented through the sponsored establishment of technology platforms, competence networks or innovative cluster programs with multi-stakeholder participation and an IS-system-wide agenda

Framework approach

The intervention focal point of this approach is on influencing the immediate and other framework conditions for innovative behavior and the innovation performance of IS player groups. The range of implementations of this approach can be differentiated according to whether the measures concerned should be assigned to the immediate environment (=meso layer) or to the other framework conditions (=macro layer).

In the meso-range, one is principally concerned with regimes, mechanisms and institutional provisions for essential innovation catalysts, namely innovation financing (financial sector provision of risk capital, and of guarantee and

loan facilities) innovation protection (IPR/patent, trademark protection, etc.)

20

innovation management (technical regulations, norms/standards, testing, etc.) innovation incentives (taxation/fiscal incentives, government procurement system,

etc.) innovation support (patent databases, information portals, practitioners’ communities

of practice, etc.)

To the macro area can be assigned initiatives to foster entrepreneurship & innovation culture & education, to raise technology awareness and technology acceptance, to create an innovation-supportive business & investment climate, as well as initiatives to improve the ICT infrastructure and FDI policy

Policy alignment & coordination approach

This policy advisory approach begins with the innovation-typical task of horizontal policy coordination and focuses on analysis, harmonization/alignment and coordination of different departmental policies from the central viewpoint of whether they are “innovation-supportive or innovation-obstructive” (industrial and structural policy, research, technology and education policy, labor market, employment and immigration policy, competition policy, stability and fiscal policy). For DCs/NICs in particular, it is virtually also a question here of harmonizing and influencing the international policy dimension.

The question of what specific mix of measures and instruments for IS support should reasonably be compiled and deployed operationally in each particular case is at the same time a question of what driving issue is considered to be the dominant or priority issue in a specific situation and at a particular stage. Such specific problems or tasks may, without making any claim to being representative, be, for example:

o How is the knowledge base (R&D, education, communication) for innovations broadened, deepened and improved?

o How are the rate of diffusion and extent of absorption of innovations increased? o How are innovations with a high “intrinsic” (=specific to them) diffusion potential

identified and supported? o How are the immediate, i.e. micro-and meso-economic, systemic and

environmental conditions for innovations improved? o How are the further, i.e. macro-economic and institutional, framework conditions

for innovation improved? o How are more innovations of a certain type (for example, technological innovations,

environmental innovations) or innovations from a certain target group (for example, SMEs) generated?

o How can innovators be supported and innovations protected in a certain situation?

21

4 Instruments and impacts of effective innovation-system support

4.1 Systematization of instrumental policies and programs of RTI support (with the aid of the enhanced functional IS model)

The two lists below show how the enhanced functional IS model is suitable for classifying science, technology, and innovation policies & programs. The first diagram displays a classification scheme of various policies & programs; the second diagram adopts the classification scheme and shows the policies & programs current in the EU

22

Simple Taxonomy of Science, Technology and Innovation Policies

Public Sector

Private Sector

K

now

ledg

e U

sers

Reinforcement Policies for Public Sector Knowledge Users Support for science/technology

educational institutions Support for government

‘knowledge workers’

Bridging Initiatives between Public and Private Sector Knowledge Users Public sector bodies providing

technical information services Public sector bodies providing

metrology services Public sector bodies providing

patent and license information Public sector bodies providing

consulting advice to firms

Reinforcement Policies for Private Sector Knowledge Users Mostly policies belonging to

other policy areas (business development, training, regulatory framework, etc.)

Subsidy for technology feasibility studies – technology audits

Subsidies for hiring technicians in firms

Bridging Initiatives between Public Sector Knowledge Users and Knowledge Creators ICT network infrastructure

support Training by research

Bridging Initiatives between Public and Private Sector Knowledge Users and Creators “Systemic STI policies”

Bridging Initiatives between Private Sector Knowledge Users and Creators Subsidized technology transfer

and adoption schemes Technology brokerage

schemes Support for the growth of

private sector ‘intermediaries’ Awareness campaigns Technology demonstration

initiatives

K

now

ledg

e C

reat

ors

Reinforcement Policies for Public Sector Knowledge Creators Support for research

equipment infrastructure in universities

Support for government labs Support for basic science Support for generic

collaborative research between universities

Support for networks of research excellence

Bridging Initiatives between Public and Private Sector Knowledge Creators Support for targeted

collaborative research between universities and industry

R&D services provided by Government labs to industry

R&D services provided by universities to industry

R&D partner search initiatives Technology transfer

infrastructure University/industry personnel

exchange schemes for R&D staff

Spin-off promotion policies University Liaison Offices Targeting R&D to areas with

commercial potential Hiring subsidies for scientists

Reinforcement Policies for Private Sector Knowledge Creators Subsidized market-oriented

R&D Product development

assistanceR&D tax incentives Innovation credits Favorable IPR regimes Inward investment schemes for

‘R&D intensive’ industries

23

Overview of Science, Technology and Innovation Policies at work in EU

Reinforcement Policies for Public Sector Knowledge Users Public support to education institutions

and programs

Actions to raise awareness on S&T

studies (many countries) and technical

vocational courses (NL), or awareness of

science in the larger public e.g. promotion

at primary and secondary schools (SE)

Creation of Interdisciplinary Graduate

Schools (DK), Graduate Schools system

(FI, SE)

Modernization of vocational schools (DE)

and apprenticeship system (UK)

Increased funding for Polytechnics

Public Bridging Initiatives between Public and Private Sector Knowledge Users Role of Polytechnics, technical lyceums to

support companies (AU, FR, DE),

Technocentres (NL)

Training in ICT (many countries)

Lifelong Learning initiatives (several

countries ) : e.g. Open Universities for

Adult Education (FI), retraining of labor

force (NL), Adult Education Programs

(SE)

Promoting positions for graduates (several

countries) : e.g. FR, IT, PT, KIM (NL),

TCS (UK)

Innovation and entrepreneurship courses

at high schools (most countries) : e.g.

Science Enterprise Challenge (UK)

Reinforcement Policies for Private Sector Knowledge Users Innovation-oriented Business support

structures (most countries) : e.g. Syntens

(NL), KETA (GR), Luxinnovation (LU),

ALMI (SE)

Support for technological development in

firms (most countries)

Support to counseling activities in firms

(most countries) : e.g. National Workplace

Development Programme (FI)

Support for training in firms (most

countries) : e.g. CRECE (ES)

SME specific financial programs (most

countries : e.g. KMO-Innovatie program

(BE), Danish Growth Fund (DK)

Entrepreneurship promotion programs

(many countries) : e.g. entrepreneurship

training (FI)

Incubators (most countries) : space;

finance and advice in the same place

Capital and seed investment (most

countries) : e.g. Sitra (FI)

Bridging Initiatives between Public Sector Knowledge Users and Knowledge Creators Collaborative programs between

universities and high education

establishments

IT infrastructures for science, industry and

public : e.g. DE

Bridging Initiatives between Public and Private Sector Knowledge Users and Creators Cluster policy : e.g. AU, BE, DK, FI,

Innonet in DE, GR, NL

Regional growth centers : co-operative

centers gathering technology services,

training, firms, R&D (DK); Centres of

Expertise (FI); Regional networking

initiatives InnoRegio, Innovative Regional

Growth Poles (DE)

Bridging Initiatives between Private Sector Knowledge Users and Creators Demonstration activities targeting

companies : e.g. TechnoKontakte (AU)

Mentoring schemes between large and

small firms : e.g. PLATO (BE)

Support for co-operative R&D projects

linking developers and users of new

knowledge

Reinforcement Policies for Public Sector Knowledge Creators Public support to universities and public

research labs (all EU) with focus on

“excellence” poles

Reform of public research organization

(e.g. DE, IT, GR, SE, UK) and of status or

career of researcher (e.g. GR, NL, UK)

New university or research centers

creation (ES, GR, LU)

Targeted business-oriented R&D

programs carried out by PRIs (many

countries), e.g. PAT (IE)

Support to Young Scientists (many

countries) : e.g. START (AU), DK, YPER

(GR)

Improvement of doctorate and post- doc

research (several countries) : e.g. ES, FI,

PENED (GR), IT, PT

Support for integration of research by

various PRI : e.g. inter-university

attraction poles (BE)

Support for internationalization of

research (most countries)

Attraction of foreign researchers : e.g. DE,

ENTER (GR)

Bridging Initiatives between Public and Private Sector Knowledge Creators Mobility programs for researchers in

industry (most countries) : e.g. FIRST

(BE), Torres Quevedo (ES), CIFRE &

CORTECHS (FR), PT, Industrial PhD

programs (DK, SE)

Spin-off promotion programs (most

countries) : e.g. A+B (AU), contest (FR),

EXIST (DE), PRAXE (GR)

Third Mission for universities (several

countries) : e.g. ES, SE

Legal changes in PRIs to promote spin-

offs : e.g. FR, ES

Liaison Offices at universities (most

countries)

Science Parks and technopoles (most

countries)

Grants for collaborative research projects

(most countries) or networks : e.g. large

cross-disciplinary research groups (DK),

PROFIT (ES), Tekes (FI), FR, Leitprojecte

(DE), LINK and Faraday Partnerships

(UK)

Public-Private Competence Centres : e.g.

Kplus (AU) and networks (DE), SE

Technology diffusion centers and

networks (most countries) : e.g. collective

research centers (BE), GTS (DK),

technological centers (ES), CRITT and

RDT (FR), AKMON (GR), Institutes of

Technological development (IE)

Support to R&D in PRIs with potential for

commercial exploitation (most countries)

Reinforcement Policies for Private Sector Knowledge Creators Support for R&D projects in companies :

grants, loans, capital investment,

guarantee mechanisms (most

countries) : , e.g. CDTI (ES), ANVAR

(FR), ProInno (DE), Agencia de Innovaçao

(PT), SMART (UK)

Support for R&D programs conducted by

business consortia : e.g. IT

Tax incentives for R&D in companies (AU,

BE, ES, FR, IE, IT, NL, PT, UK)

Risk and seed Capital Funds, Business

Angels networks (most countries)

24

4.2 Success indicators of effective innovation-system support There are various sets of indicators for measuring the performance and success of subsystems and groups of players in the IS. A relatively well-known system of indicators, one that is used in the context of NIS19 benchmarking, is the European Innovation Scoreboard (EIS) with 25-30 individual indicators which are spread over 5-7 input/output groups. The enhanced functional IS model offers a suitable framework for rendering such a set of indicators usable for measuring the success of the relevant IS subsystems and their connections. Such an assignment of indicators is shown in the diagram below.

IS and Reinforcement & Bridging Success Indicators

Public Sector

Private Sector

Kno

wle

dge

Use

rs

Reinforcement Policies for Public Sector Knowledge Users Population with tertiary education (% of population aged 25-64) Participation in life-long learning (% of population aged 25-64) Expenditures on education (% of GDP) Youth attainment level (%of population aged 20-24 having completed at least upper secondary education)

Bridging Initiatives between Public and Private Sector Knowledge Users Firm renewal (SME entries plus exits) (% of SMEs) Metrology & testing services provided by public bodies Share of companies quoting Government, universities or other HE20 institutes as important source of innovation

Reinforcement Policies for Private Sector Knowledge Users Internet access – level of Internet access of enterprises ICT expenditures (% of GDP) Sales of new-to-market products (% of revenues) Sales of new-to-firm-products (% of revenues) Knowledge-intensive services & products exports (% of total exports) Labor and Total Factor Productivity growth rate

Bridging Initiatives between Public Sector Knowledge Users and Knowledge Creators Job-to-job-mobility of employed HR21 in Science & Technology in %

Bridging Initiatives between Public and Private Sector Knowledge Users and Creators Number of organizations participating in clusters, competence networks and/or technology platforms

Bridging Initiatives between Private Sector Knowledge Users and Creators Innovative SMEs collaborating with others (% of SMEs) Domestic ownership of foreign inventions Technology balance of payments flows (% of GDP)

Kno

wle

dge

Cre

ator

s

Reinforcement Policies for Public Sector Knowledge Creators Public R&D expenditures (% of GDP) Proportion of scientists & engineers (% of workforce) Scientific publications per million inhabitants Scientific publications with foreign co-author

Bridging Initiatives between Public and Private Sector Knowledge Creators University R&D expenditure financed by business sector Public-private co-publications per million pop. Patents with foreign co-inventors R&D and other service provision arrangements between firms and PROs Share of innovating companies quoting government, private non-profit research institutes and universities as important source of innovation

Reinforcement Policies for Private Sector Knowledge Creators Business R&D expenditure ((% of GDP) Innovation expenditure (% of turnover) EPO patents/population & TBP payments & receipts/GDP Trademarks & designs per million population SMEs introducing product, process, marketing or organizational innovations (% of SMEs) Resource efficiency innovators (% of firms) Early stage venture capital (% of GDP) High-tech imports/FDI inflows % of GDP)

19 NIS = National Innovation System 20 HE = Higher Education 21 HR = Human Resources

25

26

ANNEX I The knowledge-based economy (KBE): key functional features If in this era of knowledge-based economies, the competitiveness and prosperity of countries or regions are dependent more than ever before on their capacity and capability to create, acquire and disseminate knowledge and to apply and utilize it in the economy, then the implications of this KBE for the functioning of the economy and for the way in which governments should shape their economic-policy strategies are substantial. In order to enable understanding of these implications, the key functional features of the KBE are summarized below: (i) Innovation is a permanent factor. The rapid pace of change, expressed on the one

hand in shorter demand, technology and product life cycles and on the other in higher innovation rates, is the difference between the KBE and earlier technological revolutions, which also drew very heavily on new information.

(ii) Innovation and the diffusion of new knowledge are not exogenous processes. Rather, seen from the economic viewpoint, they are endogenous in the sense that they depend on economically endogenous factors such as incentives, skills and environmental conditions to which they are exposed.

(iii) It is an economy of networks on different hierarchical levels. Global networks dominate the top of the pyramid, and an increasing number of (more or less excluded) entities (which in one way or another also constitute networks) form its base.

(iv) Information-related activities are spreading in all sectors of the economy, as a result of which – through a dramatic fall in transaction costs – the effects of economic liberalization policies are being amplified, promoting the creation of larger and increasingly global, transparent and highly competitive markets with increasingly sophisticated customers.

(v) New organizational forms are developing in terms of industrial/entrepreneurial cooperation (e.g. value nets), spatial concentration and polarization (e.g. clusters) and relations between the public and private sector (e.g. collaborative R&D).

(vi) It is being accompanied in particular by the breakdown of traditional dividing lines between industrial sectors and the reconfiguration of value chains in all branches of industry, a development that increasingly frequently transcends boundaries in several respects: spatially, sectorally and internally within a company.

(vii) Particularly noticeable in more advanced economies are trends showing a migration of value and shift of employment away from material and industrial production toward intangible or service production, away from capital-and labor-intensive production to knowledge-intensive production.

(viii) In connection with the rising importance of knowledge as a production factor, the phenomenon of a differentiation of work by level of knowledge (premium versus commodity skills) can be discerned. And knowledge-related investments (investments in intangibles like R&D, education, software, etc.) in advanced economies are drawing level with or are even higher than investments in fixed capital/assets.

(ix) Human capital plays a key role, and the ability to learn counts more than the level of knowledge. If secondary school leaving certificates were the trump card of the age of industrialization, in the KBE it is higher educational degrees, and life-long learning is essential.

(x) New technologies are very often “skills-biased” in the sense that they require highly qualified labor in order to be able to tap in at all to any technological potential for improving productivity and economic growth.

(xi) Tacit knowledge has to be codified and disseminated if an economy is to stand on its own two feet and be able to continue developing independently.

27

ANNEX II Reasons for newly industrialized and developing countries to pursue an active policy of innovation-system support The following are some of the reasons that make it is advisable not only for individual NICs/DCs but for the category of NICs/DCs as a whole to tackle the challenges of the KBE and actively pursue a policy of innovation-system support.

(i) Accession to the WTO and other economic liberalization treaties necessitates the liberalization of foreign trade relations and opening of markets also in these countries, and occasionally specifically in these countries. Very often, the direct consequence of this is that the competitiveness of domestic suppliers based in these countries is seriously threatened.

(ii) The internationally competitive production of commodities (requirement: economies of scale and process efficiency) is often not possible for companies based in these countries, because, among other reasons, they lack the appropriate production machinery and/or because they do not have adequate or developed access of their own to commodity markets (economies of scope and customer access) which would allow them to implement this specialization model in an internationally competitive way.

(iii) Because of cheaper supplies from low-wage countries (East Asia/South-East Asia/Eastern Europe), cost leadership or cost-price strategies often cannot be executed by them over the long term in the international market, and even in the opened-up domestic market.

(iv) In international market competition, suppliers from NICs/DCs come up against competitors who benefit from the positive external effects of having innovation systems that are relatively complete and function comparatively well in their main centers/countries of domicile, which they can capitalize on to the benefit of their competitive capacity and strength.

(v) Differentiation or niche or focus strategies are often the only way out or at least the only pathway to a “higher road of development”.

(vi) In the age of ICT and the knowledge-based economy, opportunities for leapfrogging and for higher-value-added-chain integration are essentially also open to organizations and companies from NICs/DCs.

(vii) Alleviation of the brain drain which these counties experience and which for them entails a considerable cost to the economy requires the creation of knowledge-intensive jobs in these countries which are sufficiently attractive to assure an adequate livelihood for “knowledge carriers” from these countries.

(viii) It seems likely that the development divide will deepen as the “knowledge gap” widens and that, as a consequence, the drifting-apart of prosperity and growth levels in different countries, a process which had already been set in train by the “income and digital divide”, will be accelerated further.

28

ANNEX III Central challenges for developing countries in the establishment of innovation systems The central challenges facing DCs in the establishment of innovation systems are: (1) Foreign direct investments are of eminent importance to establishing a technological performance

capability. They contribute substantially to the dissemination of new technologies and to macroeconomic productivity gains. However, the influence that can be exerted on R&D and innovation projects carried out by international companies to enable them to be utilized for domestic innovation and technology development through the adoption of ITP measures is very limited. Moreover, points of contact between international companies and the local SME economy are few and far between, so technology spillovers generally fail to materialize.

(2) Training of the population is a key requirement for innovation. This applies both to the production side (qualified workforce) and to the demand side (informed citizens forming a customer base generating a high local demand for innovations).

(3) Domestic demand plays a minor role as an innovation and technology driver because, firstly, the intersectoral connections between technology-oriented companies are often lacking and, secondly, the preconditions for high consumer demand (both by the state and by households) are less favorable than in OECD countries due to inequalities in income distribution and underdeveloped infrastructures.

(4) R&D and innovation is concentrated in just a few sectors. Non-research-intensive industries such as e.g. the agro-industrial sector, the raw-material processing industry or labor-intensive processing industries are of relatively major importance to endogenous technology development.

(5) There is a lack of large indigenous companies with a strong background in research, which could function as focal points for endogenously developing technology clusters.

(6) Companies in the technology sectors are specialized in labor-intensive segments, they depend heavily for their sales on companies from the OECD countries and the markets there and they are exposed to a high degree of competition from other non-OECD countries. This pushes them into intense price competition and weakens innovation-oriented strategies.

(7) For economies structured around small and medium-sized businesses and oriented toward local/regional markets, the incentives to introduce innovations tend to be small. This applies particularly to technological innovations as these are not likely to promise companies an improved market position. In the area of organizational and sales-end innovations (e.g. new distribution systems) there are more likely to be opportunities for achieving additional business revenue from such improvements.

(8) There is a dearth of specific innovation financing instruments such as e.g. venture capital, bank loans for more innovative projects or wide state support of R&D and innovation.

(9) In many countries, the academic sector dominates the system of research, innovation and technology, but is insufficiently geared toward companies’ requirements for technology and knowledge. There is little technological collaboration between science and industry.

(10) ITP measures are often viewed as part of general industrial policy, whose objectives are frequently geared toward diversifying the economy, increasing the real net output ratio, intensifying links between individual sectors and modernizing manufacturing and infrastructure technology.

(11) The availability and effectiveness of IPRs such as patent and trademark rights is restricted; the use of these protective mechanisms for intellectual property is limited.

(12) There is often a shortage of technological know-how among the workforce. Technology-oriented vocational training that is geared toward the needs of companies is frequently either unavailable or inadequate. At the same time, however, many countries are making up ground quickly where the formal education of young people is concerned.

29

ANNEX IV A fresh look at the economy and new government policy priorities Innovation systems, innovation policy and innovation-system support necessitate and entail a different and fresh look at the economy22. This involves:

1) Modeling new ways of thinking and developing new growth theories on internal and evolutionary growth, and applying these in practice. Knowledge and innovation are at the center of explanations of growth in endogenous growth theories. Here, innovations are generated "by the stock of existing technological blueprints in society. Ideas beget ideas.”23

2) Fostering technologies for new markets New technologies give rise to new products, production methods and markets, which are associated with secure jobs for the future.

3) Promoting research for a future worth living in Research should serve people, contribute to improving their quality of life, and safeguard their livelihoods in a way that is sustainable. Research in the fields of life sciences and sustainability is of key importance here.

4) Supporting research and development and innovation in the economy by establishing innovation-friendly conditions. Small and medium-sized companies, in particular, support structural change in the economy as a whole toward innovative technologies and are drivers in the creation of additional secure employment for the future. Innovation policy is therefore targeted in particular at improving general research-policy and innovation-policy conditions for new and innovative enterprises. Effective technology transfer from science to industry also requires the establishment of professional structures for the commercialization of patent rights held by public research institutions and increased integration of small and medium-sized companies, in particular, in top-level research networks. Innovations also need an adequate supply of risk capital, a certain degree of deregulation and, at the same time, a balanced system of intellectual property protection.

5) Modernizing the structure of the R&D landscape Due to the meteoric acceleration of research and innovation cycles and growing international competition between countries, research systems require constant monitoring, adaptation and development. This applies to university research as much as to non-university research.

6) Strengthening collaboration between science and industry Research and innovation projects nowadays frequently transcend traditional technological boundaries and levels of research and generally call for an interdisciplinary collaborative approach and the combining of basic research and applied R&D at an early stage. It is therefore essential to the scientific success and implementation of innovations that issues be tackled increasingly frequently within a framework of collaboration between partners from industry or else jointly with partners from science and industry.

7) Fostering and finding human resources Excellence in research and development depends on specialists, or to be more precise on outstanding researchers, who need the right conditions in which to carry out their research and development work. A large number of successful innovations require qualified personnel with an entrepreneurial spirit and attitude. Neither of these categories of people simply appear from nowhere; they are “produced”, cultivated and maintained by means of an entire set of factors and norms, including the education system, business culture, career opportunities, etc.

22 There are many ways of looking at the economy: For example, the business management view of the economy

focuses on the “company and its stakeholder environment”; micro-economics places markets (rather than locations, regions, macro-economic subsystems etc.) at the center of its observations, analysis and management proposals, while macro-economics concerns itself with the study and design of (expenditure) subsystems of the economic cycle or of macro-economic value creation (such as consumption, investment and net exports); distribution theory and policy focus on the income and wealth positions of various population groups, and environmental policy, for its part, concentrates on the environmental auditing of production, consumption, growth and distribution.

23 Innovation dynamics are characterized by increasing returns to scale, which accrue in the course of a kind of chain reaction which emanates from an initial stock of innovative ideas. Societies which have a critical mass of (technological) ideas can then take off on a self-sustaining path of growth, while societies which fail to reach this critical mass will have to endure ongoing stagnation. Those rich in ideas thus become richer, because existing ideas are the source of new ideas.

30

8) Promoting women in research and innovation Equal opportunities for women are not just an imperative for social justice, but at the same time an important factor in the success of a knowledge-based society. What is needed here is action to extend the range of occupations chosen by young women by encouraging them to study and train in scientific and technical subjects, to increase the proportion of women in leading positions in science and research and to support women in setting up their own companies.

9) Exploiting globalization for own research and innovation Research and innovation are areas of international competition. The aim of initiatives like “brain gain, not brain drain” is to increase the attractiveness of universities and research institutions.