Economic Survey of the Netherlands 2005: Making Better Use of Knowledge Creation in Innovation Activities

The following OECD assessment and recommendations summarise Chapter 5 of the Economic Survey of the Netherlands 2005 published on 15 December 2005.

How could reforms in framework conditions spur innovation activity?

Knowledge creation in the Netherlands is strong    scientific publications per capita are the sixth highest in the OECD and the citation impact is high    but innovation activity is only around the average for OECD countries according to the EIS Summary Innovation Index, undermining productivity growth. This combination of strong knowledge creation but only average innovation activity is characterised as the Dutch paradox. The authorities have started to address this weakness. They have established the “Innovation Platform”    a high-level group of government, business and academic leaders    in charge of formulating new policy initiatives. A number of reforms specific to innovation policy would help in this respect, as discussed below, but framework conditions could also make an important contribution to spurring innovation activity. The relatively limited number of enterprises undertaking non-technological innovations, process innovations, and introducing products that are new to the firm suggests that incentives to innovate are lacking. Increasing entrepreneurship and product market competition, and making social institutions more innovation friendly, would help to strengthen this aspect of innovation activity. While product market regulation limits competition and the entry rate of firms is average, there is much less experimentation than in the United States and fewer exits, undermining innovation activity. Moreover, surveys of social attitudes point to a culture that does not favour risk taking and the pursuit of excellence. The government is trying to change these attitudes through education programmes. Likewise, as noted, it is reforming bankruptcy law to reduce the personal costs of bankruptcy and increase the options for a quick re start of non fraudulent bankrupts. There are also other options that could be considered:

• Further easing strict EPL on regular contracts, as recommended above to enhance resilience, would also support innovation by facilitating work re organisation, especially in industries implementing radical innovation.

• Similarly, lowering barriers to entrepreneurship, as recommended above to increase product market competition, would increase pressure to implement radical innovations.

Dutch paradox: although knowledge creation is strong, innovation activity is only average
Ranking for scientific publications and EIS Summary Innovation Index

 Source: OECD (2005a), OECD Science, Technology and Industry: Scoreboard (2005); European Innovation Scoreboard; OECD calculations.

What can be done to make the Netherlands more attractive for knowledge development?

One of the most important innovation indicators, business R&D intensity, is relatively weak in the Netherlands, at 1% of GDP compared with an OECD average of 1.5%. About 60% of the shortfall in the business R&D intensity relative to the OECD average is linked to the specialisation of the Dutch economy in R&D extensive sectors. The remaining 40% can be explained by a number of factors among which, low R&D inflows adjusted for the openness of the economy. A key factor in making the R&D climate more attractive is to increase the supply of scientists and engineers.

• The government has recently reformed immigration laws to facilitate entry of knowledge workers but should go further by introducing a points system, as in other countries.

• Dutch universities should also be encouraged to compete more aggressively for foreign science and engineering students.

• Work permit rules should be relaxed to make it easier for foreign students to stay in the Netherlands after graduation.

Business R&D intensity, one of the most important indicators of innovation activity, is relatively weak
Business enterprise sector expenditure on R&D, Per cent of GDP, 2003 or latest available year

Source: OECD, Main Science and Technology Indicators, (2005).

The government aims to strengthen linkages between public research organisations (PRO) (many of which are specifically designed to create knowledge and transfer it to firms) and firms in order to increase (domestic as well as inward) private R&D. In a recent initiative to strengthen such linkages, the government introduced a system of innovation vouchers that can be used by small and medium-sized enterprises to buy knowledge from (semi ) public knowledge institutes (enhancing demand driven research). The government has also rationalised its financial support for R&D activity, which used to be dispersed among a variety of agencies with different objectives, so as to improve co-ordination. Finally, government has introduced an arrangement (Regional Action and Attention for Knowledge)to strengthen the relationship between higher (vocational) education and SMEs.

• The government should continue to strengthen the linkages between firms and knowledge institutes to enhance the use of (scientific) knowledge in new products, processes and services thereby helping to solve the Dutch paradox of strong knowledge creation combined with low levels of commercialisation.

• Linkages between public knowledge institutes and private firms could be strengthened by making university funding partly dependent on performance in diffusion of knowledge to firms.

• Flexibility in university pay scales should be more widely used to increase incentives for researchers to co operate with firms.  

Another key innovation indicator that is relatively weak in the Netherlands is the proportion of the population with tertiary education, which is below the middle ranking of the OECD countries included in the EIS Summary Innovation Index. This ranking is likely to deteriorate as the extent to which the proportion of the population with such attainment in the younger age group (aged 25‑34) exceeds that in the older age group (35‑54) is less than in most other countries. Low attainment in the younger age group is largely explained by the absence of differentiation in the supply of tertiary education. While enrolment of students in tertiary A (mainly theoretical programmes preparing for research and high‑skill professions) programmes is at about the OECD average, the absence of shorter (two or three years) tertiary vocational programmes explains low enrolment in such programmes and brings down total average enrolment. The low degree of differentiation in the supply of tertiary education is also evident from fixed tuition fees, relatively long duration of programmes and high barriers to entry for new suppliers of higher education. Therefore:

• The government should encourage universities to offer short (two year) courses, as are available in most other countries.

• The authorities should differentiate tuition fees, as this will provide universities with an incentive to offer courses that are more attractive to students. Furthermore, the authorities should continue their experiments allowing more private education suppliers to compete for public education funds so as to enhance the quality and diversity of courses offered.

The proportion of the population with tertiary education, another
key innovation related indicator, is also relatively weak
Population that has attained tertiary education (3), 2003, Per cent of age group

1. Data refers to 2002.
2. Unweighted average.
3. Tertiary education is defined as tertiary type A and advanced research programmes and tertiary type B education.
Source: Education at a glance (2005)

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For further information please contact the Netherlands Desk at the OECD Economics Department at webmaster@oecd.org.  The OECD Secretariat's report was prepared by David Carey, Ekkehard Ernst, Jelte Theisens and Rebecca Oyomopito under the supervision of Patrick Lenain.

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