INNOVATION AND GROWTH

[Pages:29]INNOVATION AND GROWTH

RATIONALE FOR AN INNOVATION STRATEGY

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies.

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3 INNOVATION AND GROWTH: RATIONALE FOR AN INNOVATION STRATEGY ?

Pref ace

Undoubtedly the capability to innovate and to bring innovation successfully to market will be a crucial determinant of the global competitiveness of nations over the coming decade. There is growing awareness among policymakers that innovative activity is the main driver of economic progress and well-being as well as a potential factor in meeting global challenges in domains such as the environment and health. Not only has innovation moved to centre-stage in economic policy making, but there is a realisation that a co-ordinated, coherent, "whole-of-government" approach is required. Many OECD member countries have adopted national strategic roadmaps to foster innovation and enhance its economic impact. Even countries that have generally refrained from active industrial policy in recent years now seek new ways to improve the environment for innovation in order to boost productivity and growth. The United States, for example, came forward with the "Innovate America" strategy in 2005. The EU's "Lisbon Agenda", initiated in 2000, has now been updated and strengthened.

In addition to the rapid advances in scientific discovery and in general-purpose technologies such as ICTs and biotechnology, the accelerating pace of innovation is being driven by globalisation. These pervasive trends were picked up at the summit of the G8 at Heiligendamm in June 2007 which identified research and innovation as areas requiring high-level policy dialogue between the G8 members and major emerging economies.

A shorter version of this document was submitted to the meeting of the OECD Council at Ministerial level "Innovation, Growth and Equity" held in Paris in May 2007. It provided supporting evidence, based on the findings and recommendations emerging from recent OECD work, to underpin the Ministerial discussions on how policies should be updated to address the changing relationships between innovation and national progress. At that meeting, Ministers asked the OECD to develop a broad-ranging Innovation Strategy to build on existing work, address remaining knowledge gaps, and above all provide a cross-disciplinary mutually-reinforcing package of policy elements and recommendations to boost innovation performance.

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5 CHAPTER TITLE ?

Executive Summary

The challenge

Today, innovation performance is a crucial determinant of competitiveness and national progress. Moreover, innovation is important to help address global challenges, such as climate change and sustainable development. But despite the importance of innovation, many OECD countries face difficulties in strengthening performance in this area. Indeed, many OECD countries have seen little improvement in productivity performance in recent years despite the new opportunities offered by globalisation and new technologies, especially the information and communication technologies (ICT).

A reform agenda

Government policies can support innovation by continually reforming and updating the regulatory and institutional framework within which innovative activity takes place. In this context, reforms are needed to make public policy and regulatory framework more conducive to innovation in a range of policy areas from the general business environment -- especially in the services, particularly in the network industries -- to international trade and international investment, financial markets, labour markets, and education.

Governments can also play a more direct role in fostering innovation. Public investment in science and basic research can play an important role in developing ICT and other general-purpose technologies and, hence, in enabling further innovation. This highlights the importance of reforming the management and funding of public investment in science and research, as well as public support to innovative activity in the private sector. The latter calls for an appropriate mix of direct and indirect instruments such as tax credits, direct support and well-designed publicprivate partnerships, support for innovative clusters and rigorous evaluation of such public support.

In view of the changing environment for innovation, it is also important to consider whether the current system of IPR rules and practices continues to stimulate innovation while allowing access to knowledge. In certain cases the abuse of the control with which IPR owners are endowed could hamper competition, fair use and the diffusion of technology. However, regardless of issues related to the flexibility of the IPR system, stronger efforts are needed to combat counterfeiting and piracy, which are serious and growing problems.

The need for political leadership and resolve

Implementing reforms to foster innovation may prove difficult. Strong political leadership and efforts to develop a clear understanding by the various stakeholders of the problems and the solutions -- including the costs they involve -- can all help to communicate the need for reform and facilitate acceptance.

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6 ? INNOVATION AND GROWTH: RATIONALE FOR AN INNOVATION STRATEGY

INNOVATION AND GROWTH

Policy issues and challenges

The role of innovation for growth is strengthened by advances in new technologies, and a greater focus on knowledge creation and use ...

Much of the rise in living standards is due to innovation -- this has been the case since the Industrial Revolution. Today, innovative performance is a crucial factor in determining competitiveness and national progress. Moreover, innovation is important to help address global challenges, such as climate change and sustainable development.

But it is the application of advances in technology, in conjunction with entrepreneurship and innovative approaches to the creation and delivery of goods and services, which translates scientific and technological advances into more productive economic activity. This results in economic growth if market structures and the regulatory environment enable the more productive activities to expand. This said, the innovative effort itself, including formal research and development, remains the sine qua non of growth.

Evidence suggests that innovative effort is on the rise as a share of economic activity. Investment in knowledge has grown more rapidly than investment in machinery and equipment since the mid-1990s in most OECD countries, and has surpassed the latter in a few countries such as Finland and the United States (OECD, 2005c). R&D intensity of the economy has risen significantly in a number of -- smaller -- OECD countries, but remains more or less unchanged in the OECD area as a whole since 1995, and important cross-country differentials remain (Figure 1).

But intellectual assets taken as a whole -- a concept seeking to aggregate measures of human capital, R&D and capacity to conduct it, patent valuations as well as intangible assets such as brand value or firm-specific knowledge -- are rapidly becoming the key to value creation through a number of channels. Improvements in the skill composition of labour play an important role in productivity growth. Studies suggest that investment in R&D is associated with high rates of return. And investments in software have also contributed significantly to business performance and economic growth, accounting for as much as one-third of the contribution of ICT (information and communications technology) capital to GDP growth since 1995 in Denmark, France, the Netherlands, Sweden and the United States (OECD, 2007a).

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7 INNOVATION AND GROWTH: RATIONALE FOR AN INNOVATION STRATEGY ? Figure 1. Growth in R&D intensity (GERD1 as % of GDP), 1995-2005

% 5.0

1995

2005

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 IsraSewl edeFninlandJapanKSowrietzaerlanUIdcneitleadndStaGteesrmCaDnheyinnmesaerkTaipeAiuSsitnrigaTaoptaolreOECDFrancCeanaBdaeNlegtiuhmerlanAdussUtranliitaeEdUK-2iLn5ugxdeommbCouzrNegcohrwRaeypublicChinIarelaSnNldoevwenZiaealaRnduSsspiaainn FIetadleyratiHounSnoguathryAfriPcoartugaTlurkeGyrSeelocvPeaoklaRnedpuAbrlgicentinMaexRicoomania

1. GERD: Gross Expenditure on Research and Development Source: OECD: Main Science and Technology Indicators database, December 2006. 2005 data for some countries are the latest available.

...as well as globalisation and the intensifying economic challenge from non-OECD countries.

More recently, the importance of innovation has been reinforced both by globalisation and by rapid advances in new technologies, notably ICTs, which have enabled new forms of competition and opened new markets for the creation and delivery of innovative products and services. Globalisation has also increased the pressure on OECD countries to move up the value chain and engage in a continuous process of adjustment and innovation.

There has been a significant increase in R&D effort in a number of economies outside the OECD area (Figure 1), and, albeit starting from a low base, the associated growth of R&D capabilities in a number of major emerging market economies is making them competitive destinations for cross-border R&D. At least China among them is now a key global player in R&D in terms of absolute size as well as growth rates, with Gross Expenditure in R&D reaching USD115 billion in 2005 (at PPPs), compared to USD227 billion in the EU (provisional) or USD118 billion in Japan in 2005 (OECD, 2006c).

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8 ? INNOVATION AND GROWTH: RATIONALE FOR AN INNOVATION STRATEGY

As a result, major emerging market economies are no longer simply low valueadded producers but are adding their weight to the creation and commercialisation of innovative products, processes and services. Trade data on the four most significant economies (Brazil, Russia, India and China; "BRIC") show that these have become more active in higher technology industries over the past decade. Figure 2 shows that between 1996 and 2004 the share of high technology goods has doubled to reach about 30 percent of total trade (exports plus imports) in manufactured goods by the BRIC countries. It should be noted that most of this rise is accounted for by China. Most of China's exports of high-tech products is due to foreign firms, however, that use China as a location for some elements of their overall production network. When seen against the background of increasing focus and capabilities in innovation, expansion of R&D and rising human capital in BRIC countries, in particular China, this suggests that the challenge to OECD countries emanating from major emerging market economies is likely to intensify. At the same time, the emergence of these economies offers major opportunities for OECD countries, as these countries offer new markets for innovative products and provide access to a new supply of highly skilled workers. Figure 2. The changing structure of BRIC's1 manufacturing trade by technological intensity

35%

30%

25%

20%

15%

10% 1996 1997 1998 1999 2000 2001 2002 2003 2004

1. BRIC: Brazil, Russia, India and China. Source: OECD, Bilateral Trade Database.

High-tech Medium/low-tech

Medium/high-tech Low-tech

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