Innovation: the path to stronger, smarter and greener growth

 

Remarks by Angel Gurría, OECD Secretary-General at a Luncheon meeting with Keidanren

Tokyo, 18 November 2009

Dear friends and colleagues, it is a pleasure to be with this distinguished group once again. At the OECD, we very much value our relations with the Japanese business community, as you help us stay connected with the economic reality on the ground, the reality that firms and business leaders face every day.

We are just starting to exit from the most severe global economic downturn in half a century. You know better than I that conditions have been difficult for businesses seeking to grow and prosper. But I believe that, collectively, we are faced with a great opportunity. It has been said that a crisis is a terrible thing to waste. Indeed, past crises have often served as a springboard for change and for stronger growth.

I believe this is also the case today. I would like to focus my remarks on the area of innovation, which is now more than ever an imperative for businesses. Innovation will be one of the keys to accelerating recovery and putting firms and countries back on a path to sustainable, smarter and greener growth.


Innovation is a key driver of growth


We know that innovation is a key driver of economic growth. In the last couple of decades, new technologies, new industries, and new business models have powered impressive gains in productivity and GDP growth. Many studies have found that R&D – the most narrow construct of innovation – has a significant effect on growth in real per capita GDP. Other studies have demonstrated the important productivity enhancing impact of information and communications technologies. But, it’s not just about investing in new technology. It is also about undertaking complementary innovation to adapt these technologies. It implies changing our working methods and business structures, and improving our skills to fully reap the benefits of the technology.

These “intangible” assets, have enormous strategic value for companies and countries. And, investment in these “intangibles” has become as important as that in traditional plant and equipment, with estimates for Japan putting this at 12% of GDP.


The crisis poses threats to innovation


No one will deny that the crisis poses a number of serious risks and challenges to innovation and therefore to long-term growth. It is affecting innovation through several channels: access to finance, growing aversion to risk, unemployment, drops in international trade, effects on global value chains, and stifling of business dynamism.

Indeed, experience demonstrates that financing innovation becomes harder in economic downturns when both cash flows and investment funds are shrinking. Moreover, negative impacts of the crisis are likely to be biased against firms which are more dependent on external financing (e.g. SMES and start-ups) and tend to affect long-term product innovation in particular, as opposed to short-term cost-cutting improvements.

Take the area of research and development (R&D), for example. R&D expenditure is one of the most widely used measures of the innovative efforts of firms and countries. The business enterprise sector remains the main source of R&D funding, accounting for around two-thirds of the total across the OECD in 2007, and over three-quarters in Japan. We have seen business expenditures on R&D steadily increase over time, with some countries like Israel, Japan, Korea and Finland making big strides as business R&D exceeds 2.5% of their respective GDPs.

As one partial measure of what is happening to R&D investment during the crisis, domestic and foreign companies quoted in US stock markets reported a reduction of close to 7% in their R&D expenditures in the first quarter of 2009.


But this cycle may be different


On the other hand, the current context offers an opportunity to strengthen the medium and long-term potential of the economy. And we are seeing strong indications that this cycle may be different. Already in the second quarter of 2009, this same measure of R&D expenditure showed a small increase over the previous quarter.

And we know from past experience that strong opportunities emerge in downturns. In the ICT sector, household names such as Google, RIM (the maker of the Blackberry), IBM or Microsoft all emerged during past slowdowns. And this time around, several innovation-driven companies showed record sales or profits in the third quarter of 2009.

Furthermore, the exceptional economic stimulus measures taken by governments around the world represent a unique opportunity for public policy to foster innovation. By providing the incentives for innovation-related investments, and accelerating activities for which barriers may have been otherwise too high, governments can help lay the foundations for a greener economy and durable growth. If this opportunity is handled effectively, countries – and firms – could be reaping the benefits for decades to come.


There have been some important changes in the way innovation takes place


To make the most of innovation, governments need to understand innovation today. Even before the crisis, the OECD had documented some important trends in the way innovation takes place. In recent years, the notion of innovation has broadened. There is growing recognition that innovation encompasses a wide range of activities, including organisational changes, marketing and design, in addition to R&D. Moreover, there is a growing recognition that services firms can be just as innovative as manufacturing companies. With 70% of GDP in OECD countries now coming from the services sector, this implies a massive potential for innovation and growth.

Just as the notion of innovation has broadened, innovation processes have become more complex and interactive. The complexity and costs of engaging in innovation have risen. Product life cycles have also shortened or are under pressure – owing to more intense and global competition and continued technological progress. This is forcing companies to innovate more quickly and develop products and services more efficiently.

Confronted with intense global competition and rising R&D costs, companies are increasingly collaborating with external partners. As this practice of “open innovation” spreads, new forms of knowledge sharing and exchange between firms, individuals and institutions are growing. Innovators now connect halfway across the planet, through global value chains, through networks and brainstorm in real time enabled by the growing ubiquity of the Internet. Networks are a new form of governance. No borders; no limits; little or no cost; constant iteration and interaction.

At the same time, a new and potentially huge driver of innovation has emerged: the demand for technologies and processes to address environmental and sustainability challenges. The search for innovative responses in these areas is likely to grow sharply in the coming years, driving new investment and further exploration of resource and energy-efficient technologies and renewable energies, new business models and cross-sectoral application of ICTs, biotechnologies, nanotechnologies, and others. Japanese firms, such as Toyota and others, are already playing a major role in this area and have great opportunities for the future.


The OECD is responding to the dual challenges of innovation and green growth


Today, as businesses and governments search for new sources of sustainable and balanced growth, the OECD is focusing its efforts on the two key areas of innovation and green growth.

The OECD Innovation Strategy, which began in 2007, will be launched next spring 2010. Effective policies to harness innovation and channel it for economic and social goals are urgently needed. Yet the policy frameworks for innovation have not kept sufficient pace with changes in the global economy and the transformation of innovation processes. The origins of the current crisis – financial sector innovations where systemic risk went largely unchecked – is only one case in point.

In the aftermath of the crisis, society – including business – is looking to governments to create policy mechanisms that encourage innovation and experimentation, but provide safety nets for failure. Policy must help channel innovation towards uses that make life better for individuals, businesses and society at large.
The OECD Innovation Strategy takes a broad, system-wide approach to innovation. It recognises the fundamental role of people – in both the public and private spheres – and framework conditions, operating within an interconnected world where markets are more sophisticated and demanding than ever before.
The Innovation Strategy will provide a set of key policy principles for an effective and cross-cutting government innovation strategy that enables businesses to innovate and flourish. It will also present key analyses and data on the latest trends in innovation processes and implications for policy. And it will provide a new set of indicators which will help position countries in the context of “broader innovation” and track developments in innovation processes.

We have very much appreciated the support and involvement of the business community in this project through the OECD BIAC, including the many Japanese representatives in this work, and we look forward to your further feedback on the Innovation Strategy in the coming months.

The OECD was also asked by Ministers at the 2009 Ministerial Council Meeting to develop a Green Growth Strategy. Green growth means promoting economic growth and development, while reducing pollution and greenhouse gas emissions, minimising waste and inefficient use of natural resources, and maintaining biodiversity. It means making investment in the environment a driver for economic growth and development. Green growth also means improving health and jobs prospects for populations and strengthening energy security through less dependence on fossil fuels. Green growth will require a shift in both public and private investments, with the limited public funds available carefully targeted and accompanied by the right policy frameworks to help leverage private financing.

In developing its Green Growth Strategy, the OECD will focus on a number of key areas, such as expanding green markets; managing the transition to a greener economy and to more green jobs; supporting the introduction of green infrastructures; and fostering green technologies and innovation. The framework provided by the OECD Innovation Strategy will be applied to making innovation work for green growth.

The development of the Green Growth Strategy will benefit from business views and contributions, and I look forward to our exchanges on this issue.


Conclusion


We all know that the crisis is far from over. We also know that a return to “business as usual” is not an option. Dynamic businesses have already adapted – and will continue to adapt – to the new reality. As we look to the future, one thing is certain, however: innovation and the drive for greener growth will be part of the landscape for years to come.
Japanese companies are very well placed to thrive in this new environment. Building on your many strengths, such as your high investment in R&D, your focus on energy efficiency and strong marketing and after-sales service – to name but a few – there is little doubt that you will be among the global leaders in innovation-driven green growth.

Thank you.

 

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