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Speech by OECD Deputy Secretary-General Pier Carlo Padoan
INCOM Workshop on Innovation and Growth Policy in the EU,
Prague, 22-23 January 2009

The Lisbon Strategy had set the goal for Europe to become by 2010 “the most competitive, knowledge-based economy in the world”. Accordingly, the Barcelona objective was for Europe to spend 3% of its GDP on R&D.

Nearly ten years after, it’s fair to say that there is still a long way to go to achieve these objectives. An incomplete policy mix and a changing environment explain this failure.

The OECD has been tasked by its member government to prepare an “innovation strategy”. I would like to share with you some initial lessons that the OECD innovation strategy can offer for a revised Lisbon strategy.

Major themes emerging from the innovation strategy, that can help the Lisbon Strategy to evolve and become relevant to the policy making process, are:

• the “openness” of innovation;
• the central role of entrepreneurship;
• the importance of creativity and culture;
• the role of innovation and innovation policy in addressing global challenges; and
• the need for new measurement tools.

I will conclude this talk by some reflections on the current economic crisis and its meaning for innovation policies.

Openness

Innovation is an interactive process: in many cases new ideas emerge from the combination of existing ideas. Globalisation and the rise of the Internet have enhanced this effect , making openness central to innovation processes:

• new modes of innovation require “openness”, that is to say the ability for firms to access and integrate others’ ideas in their own research,
• “others” can mean other firms, non-profits or universities, from the same country or from abroad.
• But is also includes new inno-actors – users, consumers, amateurs, philanthropists – which are emerging and influencing the demand for innovation.

Policies must ensure the proper conditions for knowledge to circulate in a global and connected world.

The emergence of knowledge markets as mechanisms for enabling, supporting, and facilitating the mobilization, sharing, or exchange of information and knowledge. This includes various mechanisms:

• some are purely commercial, like inter-firm co-operation or IPR exchanges like licensing or patent pooling;
• others are partially commercial, like university/industry partnerships or open source;
• others are non commercial, like Wikipedia of the diffusion of public research inventions.

Most policies currently are not suited to this new world: IPR and competition policy notably need to be reviewed and updated in light of these new challenges.

The role of non-traditional actors, including users and consumers, has become more important in driving scientific discovery and innovation. That raises new challenges for policies, including education policy and IPR.

The globalisation of science and technology has advanced rapidly: national government have to enhance their co-operation accordingly and review the relevance of national policies rooted in domestic markets and based on the premise of local benefits gained from un-captured “spillovers”.

Implications for EU policies: exploit the single market more, accelerate intergration and liberalization of service markets.

The services sector is gaining in importance both as a source of innovation, i.e. new and impoved services, and as a user of innovations. The integration and liberalisation of service markets keeps lagging behind in Europe. Accelerating these processes could potentially have a high impact on the overall level of innovative activity, and thus on long-term growth.

There is no currently a single EU patent, which would provide protection to inventors EU-wide with legal certainty at a reasonable cost. That is a necessity for the EU to become a single market for new products. Current discussions need to make progress both on the European single patent court and on the community patent. That requires that countries set aside the implicit protectionism that have plagued policies, accepting that inventions invented in other countries have equal protection as domestic inventions in their domestic market.

Entrepreneurship

Creative destruction, the renewal of firms and sectors, business dynamics are at the core of innovation and productivity growth.

Europe’s persistent deficit in R&D is to a large extent the result of its failure to promote the emergence and growth of innovative businesses in new sectors (new technologies and services).

50% of business R&D in the United States is performed by companies which are less than 25 years old -- there is nothing comparable for Europe.

Because of various impediments in the business environment, the key policy issues have not been fully addressed:

• finance is not favourable to new, small firms,
• venture capital is under-developed;
• universities are not open enough to industrial applications, hence giving rise to too little spin-offs;
• markets, notably public procurement, are not open enough to new entrants.

Implications for EU policies: accelerate integration of EU financial markets and support venture capital, support university business interactions, eliminate barriers to public procurement.

The new European Small Business Act adopted in December 2008 marks progress in that regard. It will level the playing for SMEs vis à vis large firms, regarding access to public procurement and to funding and the creation of a status of the European company, acting under a European statute.

The currently discussed creation of a central authority in Europe, at least the Euro area, for monitoring financial markets would not only facilitate the securisation of the banking sector in the current crisis, but also the Europe-wide circulation of risk capital, which is much beneficial to innovation.

Creativity and culture

Creativity is the essence of innovation and growth. Workers must be creative, adaptable and develop new knowledge and skills as long as they remain on the labour market.

An organisational culture encouraging innovation is a recognised success factor in firms and public institutions, alike.

Education systems must be updated to take into account the development of “soft skills” and the capacity to be flexible in learning and adapting to demand for new skills.

Core to an innovation strategy are:

• The development of the right skills for operating in an open system of innovation (beyond the traditional focus on science and engineering), where knowledge is drawn from a wide range of global sources, and where clusters of research and innovation activity, global collaboration and interdisciplinary research are of growing importance. In this respect Europe is a unique blend of cultures and the European integration of national education systems and the development of a true European research areas are fundamental elements of an innovation strategy for the EU.
• An innovative education system. If individuals are to be equipped with the capacity both to innovate and to adapt to innovation, it is important to better understand how education systems can become more innovative themselves in order to quickly and better respond to new knowledge and social demands.
• Firms that are able to turn their intangible assets into value. Intangible assets have a driving role in firms’growth. Such assets encompass elements beyond R&D, e.g. patents, software, human resources and new organisational structures. They have become strategic factors for value creation by firms which often spend as much on intangible as on tangible assets.

Implications for EU policies: accelerate integration of EU education, develop a European research area, open access to EU research funds to all.

Whereas culture diversity in Europe should be cherished as a source of creativity, the development of a “European innovation area”, based on a convergence of both EU education and research policies toward best practices should be actively promoted.

The Ljubjana process (started in 2008), about the coordination of national research policies should be emphasised and accelerated, as EC managed research funding only represents a small part of public funding to research in Europe, the rest being managed by national governments.

Global challenges

Innovation plays a crucial role in addressing a range of global challenges. Three prime examples of global challenges for which innovation and new technologies will necessarily be part of the solution are climate change, emerging and neglected infectious diseases and food security.

These challenges are all high priority public concerns and their solutions require global action where the same challenges of complexity, global sourcing, networking and financing apply.

However, the policy context which guides both public and private investment in innovations that can help address these challenges and maximize their economic impact is different. In particular:

• difficulties arise in terms of international coordination on research needs and priorities;
• financing levels and provision of other incentive mechanisms or reward systems for innovation are often missing;
• mechanisms to ensure technology transfer, equity and benefit sharing need to be established;
• governance frameworks need to be defined that establish and legitimate the policy context.

Implications for EU policies. Sustainable development is an area on which Europe has developed both significant capacities in scientific research and industrial technology and a broad societal consensus.

Addressing climate change can be used as a mobilising goal on which European trans-disciplinary effort of major actors in science, technology and innovation can be focussed. As a global challenge it also provides a priority area for international co-operation with the rest of the world, including technology transfer, as part of joint innovation efforts notably with developing countries.

The “lead markets” initiative of the EU rightly addresses societal and environmental challenges, like waste management, water management etc. It still needs to be fine tuned, regarding notably issues like competition, but it seems ta have a great potential.

Measurement

The grand challenge before us is to develop a second generation of innovation policies relying on a new set of indicators and an updated measurement framework for innovation.

If innovation is changing in radical ways that we do not yet fully understand, then our understanding of the drivers of innovation and sources of economic performance is incomplete and policy recommendations risk becoming less and less meaningful and perhaps harmful. Measurement that can guide analysis and policy making is core to an innovation strategy.

In particular, we can gain a clearer perspective by:

• measuring new features of innovation, new actors, their linkages, and the dynamics of the process;
• focusing more on outputs and impacts of innovation performance and leveraging on the potential of micro-data to understand why some firms’ innovate and some don’t; and
  analysing gaps in our measurement framework for innovation, experimenting tools to explore the “unmeasured” factors in innovation.

Today’s economic downturn

The current economic downturn is the first of this severity to hit OECD economies that have been transformed to knowledge-based economies. Both our current policies directed towards promoting innovation and our efforts to stimulate growth need to reflect this reality.

The OECD “strategic response” to the crisis strongly emphasizes the need to link the short term response to the longer term goals of increasing productivity while making growth more knowledge-driven and climate-friendly.

The crisis is an opportunity to raise EU trend growth and make it more knowledge driven and sustainable
Sustained innovation is a principal way out of this slowdown and the medium term must not be sacrificed on the altar of the short term.

The role of innovation:

• Innovation is key to sustaining long term growth. The likely direct impact of the current downturn will be to depress investments in innovation (innovation is pro-cyclical, declining oil costs reduce stimulus for environmental innovation, short term goals prevail on longer term ones).
• To avoid this and prepare for the recovery, long term objectives should be included in short term stimulus packages.
• In particular, increasing investment in the innovation infrastructure that extends beyond R&D to cover human capital, ICT (especially broadband networks) and entrepreneurship for sustainable development is crucial.

The role of policy experimentation:

The crisis can also be an opportunity for governments to consider new policy instruments which seem to have potential but have not yet been implemented at a substantial scale.

• For example, the public sector is an important purchaser and provider of services. Since innovation is closely linked to demand from users, government as a large scale purchaser can promote innovation by being a demanding buyer, signalling acceptance of innovations as early or lead users and creating new markets.
• While more work is needed to ensure that such mechanisms do not distort competition or deliver sub-optimal performance, such “pull” mechanisms can provide incentives for the development and commercialisation of technologies closer to the market -- an important complement to traditional innovation policies that have primarily “pushed” new technologies into the economy (e.g. through investment in research and development).

The exact picture of the post-crisis economy is far from clear, but it is obvious that it will be significantly different from the pre-crisis economy. A forward-looking Lisbon Strategy must address:

• Risk management: there is a danger that societies will become risk-adverse in the wake of crisis, which would clearly be detrimental to innovation and growth.
• Smart regulation: The crisis has shown that carefully crafted regulations are needed for markets to operate in a healthy manner and address market failures, notably informational failures.
• Policy evaluation: if government is taking a larger role in economic activity, its actions must be more carefully monitored and evaluated.
• International governance: stronger international coordination will be required in certain areas, notably in addressing global challenges.

The OECD can assist in the coordination of policies through its analytical expertise and perhaps more importantly as a forum where best practices can be shared, problems can be collectively analysed and solutions can be identified.

Related Documents

The OECD Innovation Strategy