Building an Innovative City: The Macro Perspective


by Angel Gurría, OECD Secretary-General
delivered at the 18th International Business Leaders Advisory Council (IBLAC) Annual Meeting
Promotion of an Innovative Environment - Shanghai's Future
5 November 2006
Shanghai, China

It is a great pleasure to be in Shanghai for the 14th meeting of the International Business Leaders Advisory Council. I want to thank Mayor Han Zheng and John Bond for their kind invitation.

I am also pleased to be here because of the close ties the OECD has with  China. We have had extensive co-operation since 1995. We are actively supporting China's efforts to establish the institutions, the regulations, and the best practices to operate successfully as a modern, market-based economy, increasingly integrated into the global economic system.
The topic for this year's IBLAC discussion - building Shanghai as an innovative city - is most timely. Innovation has proven to be the key ingredient for economic growth and development at the national level. But there is also growing awareness that successful countries need successful cities or city-regions.

Cities are the engines of national economies and crucial nodes of innovation and competitiveness. Cities are where innovation takes place. In fact, cities are where we will fail or succeed in achieving what I see as the three dimensions of successful globalisation - prosperity, equity, and sustainability.

There is another reason to focus on cities. Today, roughly half the world's people live in cites. That's over 3 billion people. By 2030, there will be about 5 billion people living in cities, and much of this growth will occur in developing countries. So it is imperative that we know how to successfully manage this growth. We have to get it right.

Ensuring the right conditions for innovation

Of course cities do not operate in isolation. Innovation depends upon both good macroeconomic policies at the national level, as well as the right mix of governance structures to ensure good coordination of policies. A solid, stable and predictable macroeconomic framework will encourage firms to invest and take risks. Thus, taxation, regulation, market access, competition, sound public finances and low and stable inflation - these all shape the environment for innovation. Transparency and good public management matter as well.

Promoting an environment of innovation

But macro conditions are not the whole story. They are necessary but not sufficient. Promoting innovation involves deliberate well-targeted policies. Governments have a critical role to play in supporting research and development, investing in education or ensuring that a well-developed financial sector is in place. The protection of intellectual property rights is another indispensable factor in fostering innovation.

To succeed however, governments need to work with the private sector. Any effective Science and Technology policy must emphasise collaborative research and the role of the public sector in encouraging private sector research.

Responding to this evolution in public policy, the OECD has developed what we call the national innovation system approach to identify and disseminate best practices. We are currently applying this approach, in cooperation with the Chinese Ministry of Science and Technology, in assessing China's innovation system and policies. China is following the example of successful OECD countries in trying to foster the innovative capacity of its enterprise sector. As in Finland, Sweden or the US, about two-thirds of R&D spending in China is financed and executed by enterprises. 

As part of our work with China, we are looking at the regional dimensions of innovation, including a review of Shanghai and of two less advanced regions: Sichuan in the west of China and Liaonning in the north east. This is appropriate since innovation really happens at the local level. There is clear evidence that proximity helps innovation. It happens in cities and city-regions, where talented people in universities and research institutes, in businesses large and small, come together to generate new ideas, leading to new products, services and processes.

We all know that the easy circulation of knowledge and skilled people account for the success of Silicon Valley. Many of the other high-tech success stories have also taken place in cities and city-regions where the interaction between entrepreneurs and researchers was especially strong. These include San Francisco, San Diego and Boston.

One interesting example is provided by Helsinki, which developed a leading position in the global mobile phone market. The city's success is attributed in large part to close collaboration among the region's main universities and key enterprises, a process encouraged by public policies. The success of Nokia and other Finnish companies has helped to transform a natural resource-based economy into one of the most innovative and dynamic economies in the world. Finland now has the highest number of researchers and patents per capita in the OECD.

The location of large companies alongside competitors, dynamic smaller companies and research institutions represents a tangible advantage when innovating and competing in global markets. This has been confirmed to us in recent work with regions specialised in biotech and pharmaceuticals. In Montreal and Stockholm, for example, the international competitiveness of their companies was strongly helped by the proximity of specialised research.

This is why governments are seeking ways to replicate the success factors that have encouraged the emergence of clusters of innovative firms in the "knowledge economy".

This is leading policymakers to pay more attention to the "regional" systems of innovation that facilitate the flow and sharing of knowledge and technology. Shanghai may turn out to be a good example.

Promising policies include cluster initiatives that link actors in the same industry or same value chain and provide specialised services that are useful to a group of firms -- such as supporting exports, promoting collaborative research programmes or working to expand the supply of skilled and talented people. We have seen good examples of this in several cities, such as the OCRI organisation that supports Ottawa's ICT industry.

What is encouraging about these policies from an OECD perspective is that they promise better targeting of public funds and, no less important, a shift away from firm-specific subsidies that can distort markets and hinder competition.

A strategy for cities: providing an innovative environment

At the OECD, we have devoted important resources to examining the role of cities in fostering innovation. In fact, I bring you the first copies, fresh off the press, of an important new report on the subject, "Competitive Cities in the Global Economy". 

One of the things we have learned at the OECD from our work with cities is that engaging the community in developing a strategic vision for the city or city-region enhances its competitiveness.

Shanghai is a good example of what we mean by a strategic  vision. It has set out a forward looking agenda in its 11th five-year plan for 2006-2011 that embraces economic, social and environmental goals. Shanghai wants to maintain its 9 per cent growth rate through 2010, significantly raise the role of the service sector in the economy, and increase spending on research and development to 2,8 per cent of the city's  GDP.

It wants to make sure that by 2010: the new workforce has an average of at least 14.5 years of education, Internet penetration is 68 per cent; energy consumption per unit of GDP production is cut by 20 per cent; spending on environmental projects stays at 3 per cent of the city's GDP; 80 per cent of urban sewage is treated; 85 per cent of the year is rated as having good air; and the average life expectancy of citizens rises above 80 years.

These are ambitious targets and each faces formidable hurdles. The OECD will be a ready partner for China, Shanghai and other Chinese cities to find ways to overcome such hurdles and achieve their goals.

We have also learned the importance of what we call relational assets or local collective goods for the success of cities. These include transportation and other public infrastructure. But they also include building links between universities and science-based industries and strengthening relationships between firms and suppliers, including small businesses. It is not just science. The entire range of creative capabilities in the arts, education and the broad range of service industries must be tapped. A vibrant city is one that has a high rate of new business creation.

How cities manage their space and improve liveability also matters, the more so as they can serve as a tool to attract and retain talented people. Good schools, safe streets, a high-quality cultural life and abundant green spaces, including public parks, all matter. Mixed-use planning is important, so that residential, commercial, retail and institutional activities, such as schools and hospitals, are all within easy distance of one another. Cities must ensure public transportation, as Shanghai is doing, and adopt other measures such as road-pricing or congestion charges to discourage automotive use where it isn't needed.

The OECD report on Competitive Cities also found that dealing with issues of social equity is critical. Cities can become sharply divided between rich and poor, or lose their middle class. It is important to address social exclusion, or face the risk of a widening gap between the bottom and the top that can lead to increased crime, drug use and other threats. Access to affordable housing, by the way, appears invariably as an important element of social cohesion.

Finally, cities face significant environmental challenges - clean air, clean water, waste management, toxic wastes, clean energy. Most of the environmental challenges our planet faces are found in our cities. Cities that neglect their environmental challenges will lose talented people and businesses.

This is well recognised by the leadership of Shanghai. The city has already astounded the world in recent years with the speed of its growth and the advanced infrastructure and technologies it has developed. But it is going to require major new investments, much more stringent regulations and stronger enforcement to achieve a cleaner environment. 

Shanghai has another reason to make significant progress over the next few years. It will host the 2010 International Expo, which will bring large numbers of people from around the world who will have a chance to witness what kind of a city Shanghai has become. The theme of the 2010 Expo is "Better Cities, Better Life", a sentiment we certainly share at the OECD. In fact, I am pleased to say that the OECD will be participating in Expo 2010.

Concluding remarks

Looking beyond the city itself, it is clear that Shanghai's innovative capacity has important implications for China as a whole. Innovation capacity is becoming a key driver of growth in China's most advanced regions. 

At the same time, it can also be a source of disparities between regions. The concentration of R&D, education, business support structures and other elements of an innovation system in core regions can, over time, impede convergence in regional performance. 

It is thus important that efforts are made to strengthen the links between Shanghai and other, less advanced regions, allowing the latter to catch-up faster.

As Shanghai moves up the technology and value-added ladder, joint ventures between Shanghai firms and those in other regions can contribute a lot to building capacity in such other regions and preventing regional disparities from having negative economic, social and political implications.

Mr. Mayor, Ladies and Gentlemen: cities are becoming increasingly relevant in the pursuit of innovation and competitiveness. Shanghai is a clear example. It has achieved great progress, but still faces formidable challenges. The OECD is ready to help you overcome such challenges.

Thank you.


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