How to improve the national innovation systems of the

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					    How to improve the national
innovation systems of the catching-up
             economies ?

           Urmas Varblane
            University of Tartu
      THE PATH DEPENDENT MODEL OF THE
    INNOVATION SYSTEM: DEVELOPMENT AND
   IMPLEMENTATION IN THE CASE OF A SMALL
                  COUNTRY

Aim - to develop the model and implementation
 mechanisms of the national innovation
 system for the small country, which accounts
 for the path dependency, considers late-
 comer advantage and ensures sustainable
 economic development
  THE PATH DEPENDENT MODEL OF THE INNOVATION
SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN THE
            CASE OF A SMALL COUNTRY

 • Which characteristic features and problems of the national
   innovation system are caused by the path dependency?
 • Which should be the structure of the national innovation
   system in order to account for path dependency?
 • Which are the major advantages and disadvantages of
   latecomers and how to utilise those advantages by the national
   innovation system?
 • How does the country size affect the formation and
   development of national innovation system?
 • Which implementation mechanisms are suitable for the path
   dependent national innovation systems of small countries?
The framework of the research proposal
      The implementation plan of the project –
            subtopics, working groups
• NIS partly overlaps with the three systems:
  economic-; education- and political system =>
Working groups:
• Innovation capabilities, its factors and development
  in the economic system
• Human- and social capital: the role of education,
  research and knowledge in the national innovation
  system
• The role of the public policy and public sector in
  the innovation system.
• Methodology: how to measure innovations and their
  effects.
            Structure of the presentation
• development of the concept of the national
  innovation system, its elements and function
• applicability of national innovation system approach
  in different groups of countries
• advantages and disadvantages of catching up
  economies as latecomer economies
• major path dependency related problems in the
  building up of the national innovation systems in
  catching up economies
• Conclusion and recommendations for using
  appropriate policy measures.
Theoretical perspective on innovation and learning:
      as socially embedded (Lundvall, 2003)
 – Innovation is a process that is:
    •   Cumulative
    •   Nonlinear
    •   Path dependent
    •   Context dependent
    •   Continuous
    •   Interactive – Firms do seldom innovate alone
 – Innovation and learning
    • You learn from what you do
    • Innovation as joint production of innovation and competence
    • Learning is a socially embedded process – social capital is
      important
Development and diffusion of the concept NIS
• Historical roots (Friedrich List,1841) - ‟national systems of
  production‟ - a wide set of national institutions including those
  engaged in education and training as well as infrastructures such
  as networks for the transport of people and commodities
• Freeman 1982 and Lundvall 1985 – National Innovation System
• innovation process should be treated in a systematic manner
  - need for systemic approach, which integrates institutions to
  create, store, and transfer the knowledge, skills and artefacts.
  (OECD,1999
• understanding innovation as a complex interactive learning
  process
• learning is important => key element in both the dynamics of
  the system and as a key agent in binding the whole system
  together.
• comparative - could not be an ideal NIS, which fits different nations with
   their specific socio-economic, political and cultural background.
                   Definitions of NIS
• Innovation System - a system for generating and diffusing
  new technologies - every country has such a system, even if it
  is weak or low in capacity.
• C. Freeman (1987, p. 1) „the network of institutions in the
  public and private sectors whose activities and interactions
  initiate,import, modify and diffuse new technologies‟.
• B.-A. Lundvall (1992, p. 12) narrow NIS „organisations and
  institutions involved in searching and exploring – such as R&D
  departments,technological institutes and universities‟.
• broader NIS includes „all parts and aspects of the economic
  structure and the institutional set-up affecting learning as well
  as searching and exploring – the production system, the
  marketing system and the system of finance present themselves
  as sub-systems in which learning takes place‟.
                   Definitions of NIS
• “The elements and relationships which interact in the
  production, diffusion and use of new, and economically
  useful, knowledge… and are either located within or
  rooted inside the borders of a nation state” (Lundvall,
  1992; p.12)
• “A set of institutions whose interactions determine the
  innovative performance of national firms” (Nelson,
  Rosenberg, 1993; p.5)
• “The national institutions, their incentive structures and
  their competencies, that determine the rate and direction
  of technological learning (or the volume and
  composition of change-generating activities) in a
  country” (Patel and Pavitt, 1994; p.12)
              Definitions of NIS

• “That set of distinct institutions which jointly
  and individually contribute to the development
  and diffusion of new technologies and which
  provides the framework within which
  governments form and implement policies to
  influence the innovation process. As such it is
  a system of interconnected institutions to
  create, store and transfer the knowledge, skills
  and artefacts which define new technologies”
  (Metcalfe, 1995;p.462-463)
                  Definitions of NIS
• C.Edquist (1997) - includes “all important economic,
  social, political, organizational, institutional and other
  factors that influence the development, diffusion and
  use of innovations”
• Galli, Teubel (1997)- “a historically grown
  subsystem of the national economy in which various
  organizations and institutions interact and influence
  each other in the carrying out of innovative activity”.
• NSI as the set of organizations, institutions, and
  linkages for the generation,diffusion, and application
  of scientific and technological knowledge operating
  in a specific country .
         Systemic approach to innovation
• According to Ingelstam (2002):
   – 1. a system consists of two kinds of constituents: there are
     firstly, some kinds of components and secondly, there are
     relations among them. The components and relations
     should form a coherent whole (which has properties
     different from the properties of the constituents);
   – 2. the system has a function – that is, it is performing or
     achieving something;
• 3. it must be possible to discriminate between the
  system and the rest of the world; that is, it must be
  possible to identify the boundaries of the system. If
  we, for example, want to make empirical studies of
  specific systems, we must, of course, know their
  extension.
        Elements in the system of innovation
• Players or actors. Organizations : firms (normally
  considered to be the most important organizations in
  Sis), universities, venture capital organizations and
  public agencies responsible for innovation policy
  etc.
• Rules of the game. Institutions are “sets of common
  habits, norms, routines, established practices, rules or
  laws that regulate the relations and interactions
  between individuals, groups and organizations,”
  (Edquist & Johnson, 1997).
    Figure 1: Indicative Issues, Actors and Activities
in a Simple Science, Technology and Innovation System



                  Social and Human        Absorptive Capacity
                       Capital             ‘Follower’ firms;
      Knowledge      Universities          Intermediate and End
        Users        S&T Training          Consumers and
                     and Education         Professional Users
                                           Market for Goods
                                            and Services
                                            Technology and
                  Research Capacity     Innovation Performance
      Knowledge    Universities; Govt     ‘Creative’ Firms
       Creators    Laboratories           Applied RTD and
                   Basic Scientific       Product /Process
                   Research               Development


                       Public                   Private
                       Sector                   Sector




             Nauwelaers, 2003
Edquist, 2001
A generic national innovation system (Arnold, E., Kuhlman, S, 2001,
RCN in the Norwegian Research and Innovation System. Available at www.technopolis-
group.com)
Boundaries of innovation systems – types of systems

• Spatially, sectorally,functionally=>
• National Innovation Systems (Freeman, 1987;
  Lundvall, 1992; Nelson, 1993);
• Regional Innovation Systems (Camagni, 1991;
  Cooke et al., 1997; Braczyk et al., 1998; Cooke,
  2001; and Asheim & Isaksen, 2002);
• Sectoral innovation systems ( Breschi & Malerba,
  1997, Malerba, 2004).
• “Technological innovation systems” (Carlsson,
  1995; Carlsson & Stankiewicz, 1991)
Roots of the systemic approach to innovation
• evolutionary theory (Nelson & Winter, 1982).
• firms are a bundle of different capabilities and
  resources (Eisenhardt & Martin, 2000; Grant, 1996;
  Spender, 1996) which they use to maximize their
  profit.
• knowledge is not only information, but also tacit
  knowledge; it can be both general and specific and it
  is always costly.
• Knowledge can be specific to the firm or to the
  industry (Smith, 2000).
• The innovation process is interactive within the
  firms and among the different actors in the innovation
  system.
         Activities in the system of innovation
                    (Chaminade, Edquist, 2005)
function of SIs is to pursue innovation processes: to
    develop and diffuse innovations.
„activities‟ in SIs are those factors that influence the
    development and diffusion of innovations. Four
    approaches
1) innovation production process, looking at the
    different activities needed to turn an idea into a new
    product or process. Edquist, (2004), Furman, Porter et al., (2002)
2) knowledge production process - how knowledge is
    created, transferred and exploited (emphasis on the
    channels and mechanisms for knowledge
    distribution). (David & Foray 1994; Johnson & Jacobsson, 2003;
     innovation systems as learning systems (Lundvall, Johnson et al., 2002).
       Activities in the system of innovation
                 (Chaminade, Edquist, 2005)

3) organizational performance - organizations as the
   starting point, identifying the activities of the
   different organizations that have an impact in the
   innovation system (Borrás,2004).
4) innovation policy as a focal point => what activities
   (and organizations) in the innovation system can be
   stimulated by public intervention (OECD and other
   international organizations)
criticism - it considers only those activities that can be directly
   affected by public intervention
               Chaminade, Edquist, 2005


• what is the division of labor between private and
   public actors in the performance of each activity.
This will provide policymakers with a new perspective on:
a) what role they can play in stimulating different
   activities in the system of innovation;
b) once the complex division of labor between public and
   private actors has been unfolded, what could be the
   appropriate instruments to do this;
c) how to identify future research needs.
       Activities in the system of innovation
          proposed by Chaminade, Edquist, 2005
I.    Provision of knowledge inputs to the innovation
      process
 1. Provision of R&D - creating new knowledge, primarily in
      engineering, medicine and the natural sciences.
  2. Competence-building (provision of education and training,
      creation of human capital, production and reproduction of
      skills, individual learning) in the labor force to be used in
      innovation and R&D activities.
II. Provision of markets – demand-side factors
  3. Formation of new product markets.
  4. Articulation of quality requirements emanating from the
      demand side with regard to new products
        The linear model of innovation is dead
                                    Basic research gives
                                    birth to an idea and
                                    relevant new
                                    knowledge
The old belief was that
industrial innovation was          Applied research turns
predominantly the result of        the idea into something
                                   practical
ideas born in universities and
transformed by companies.
                                   Industry development
                                   of new products and
                                   processes



                                   The company brings
  NIFU-STEP, 2005                  the new product to the
                                   market
               Activities in the system of innovation
                   proposed by Chaminade, Edquist, 2005
III. Provision of constituents for IS
5. Creating and changing organizations for the
   development of new fields of innovation (e.g.enhancing
   entrepreneurship to create new firms and intrapreneurship to diversify existing
   firms, creating new research organizations, policy agencies, etc.)
6. Provision (creation, change, abolition) of institutions
   (e.g. IPR laws, tax laws, environment and safety regulations, R&D investment
   routines, etc) - influencing innovating organizations and innovation
   processes by providing incentives or obstacles to innovation.
7. Networking via markets and other mechanisms, incl.
   interactive learning between organizations (potentially) involved in
   the innovation processes. Integrating new knowledge elements developed in
   different spheres of the SI and coming from outside with elements already
   available in the innovating firms.
     Activities in the system of innovation
        proposed by Chaminade, Edquist, 2005

IV. Support services for innovation firms
8. Incubating activities (e.g. providing access to
   facilities, administrative support, etc. for new
   innovating efforts).
9. Financing of innovation processes and other
   activities that can facilitate commercialization of
   knowledge and its adoption.
10. Provision of consultancy services of relevance for
   innovation processes, for example, technology
   transfer, commercial information and legal advice.
  Problems of the building the national innovation
         system in catching-up economies
• National innovation system approach - proposed
  based on the experiences of high income economies,
  (strong accumulated knowledge base, stable and well
  functioning market system, developed institutional and
  infrastructure support of innovation activities).
• Catching-up economies are different: lower income
  level, less accumulated knowledge, weaker
  institutional support etc. plus
• Path-dependency => common command economy
  past, which has influenced the whole logic of
  building up their national innovation system
    Problems of the building the national
 innovation system in catching-up economies
• Catching-up economies own latecomer
  advantages - extremely high dynamism=>
  special requirements also to the innovation
  system.
• Impossible automatically transplant the
  national innovation system concept based on
  the technology frontier countries from Western
  Europe in the catching-up economies of
  Eastern Europe.
      Advantages and disadvantages of coming late
• Gerschenkron (1962) initial ideas „patterns of
  industrialization‟(imitation, scale economies, access to the
  modern technology at lower costs; access to already established
  markets etc.)
• Perez and Soete (1988) - potential disadvantages of latecomers -
  showed that scale economies are industry-specific and
  technology-specific.
• Bell and Pavitt (1997) not sufficient for the catching-up country
  simply to install large plants with foreign technology – the
  capacity to absorb the new technology into the human capital
  stock is also critical.
• Active learning policies are needed to create “absorptive
  capacity” defined as “the ability of a firm to recognise the value
  of new, external information, assimilate it and apply it to
  commercial ends” (Cohen, Levinthal 1990, p. 128
Advantages and disadvantages of coming late
Abramovitz (1994) accepted the potential for catch-up by
   latecomers, but suggested that exploitation of the potential is
   not an automatic process. He proposed that differences in
   countries‟ abilities to exploit this potential might be explained
   with the help of two concepts: technological congruence and
   social capability.
technological congruence - degree to which the leader and the
   follower country are congruent in areas such as market size,
   factor supply, etc.
social capability - capabilities that the developing countries have
   to acquire in order to catch up, especially the improvement of
   education and business infrastructure and more generally
   technological capabilities (R&D facilities etc.).
Freeman (1999) added capacity to make institutional changes
   (social capability for institutional change - to overcome
   learning and technology divide(Arcena, Sutz,2003)
          “Social capability” (M.Abramowitz)
       (1986, pp. 387-390; 1994a, pp. 34-35; 1994b, p. 88):

not only individual skills (acquired through education) but
  “collective capabilities” - what organizations in private and
  public sector are able to do and how it is supported (or
  hampered) by broader social and cultural factors.
Social capability
• technical competence (level of education),
• experience in the organization and management of large scale
  enterprises
• financial institutions and markets capable of mobilizing capital
  on a large scale
• honesty and trust
• the stability of government and its effectiveness in defining
  (enforcing) rules and supporting economic growth.
                 Technological capability
(Chandler, 1977) “the scale and scope” paradigm
• focused on the economics of large, integrated companies and the
  social, economic and organizational capabilities needed to
  support and finance them.
Nonaka and Takeuchi (1995) - concept “the knowledge-creating
  company”
• emphasis on exploration and exploitation of technology and
  getting the organizational prerequisites for that right (Japanese
  success stories).
Cohen and Levinthal (1990) absorptive capacities - “the ability of
  a firm to recognize the value of new, external information,
  assimilate it and apply it to commercial ends”
(Kim 1997, p. 4) “technological capability” - “the ability to make
  effective use of technological knowledge in efforts to assimilate,
  use, adapt and change existing technologies.”
• Kim - three aspects of it: innovation-, production- and
  investment capability
Capabilities and development - an integrated framework
(Fagerberg, Shrolec, 2007)
   National Technological Learning (Watkins, 2007)


    S&T learning                     S&T learning
      capacity                       opportunities
                           +
Knowledge     Knowledge
generation    absorption
 capacity      capacity

                                                    Diaspora
                                                   and Expats
                          Internet
    Capital   Education              Licensing       Export
   imports                                         Customers
                           R&D
         Inward                         S&T co-
           FDI                         operation
„Tree‟ of national technological learning


  Human capital
  accumulation
                                            Creative-
                                            cooperative
                               Autonomous


                         Active                  Creative-
                         FDI-                    isolated
                         dependent

             Aid
             supported
                                     Passive
                                     FDI-
 Slow                                dependent
 learning                                           Time
Six models of national technological learning
              (Watkins, 2007)

   • Traditionalist slow learning,

   • Passive FDI-dependent,
   • Active FDI-dependent,
   • Autonomous,
   • Creative-isolated,
   • Creative-cooperative.
Advantages and disadvantages of coming late
• Big gap in technology =>potential for a rapid catch-up=>a
  wide diffusion process of innovations needed(UNIDO 2005).
• East Asian vs.Latin America =>the importance of the
  technology diffusion management
• market-induced imitation and organizationally-induced
  technology transfer.
• Matthews (1999) indicates that those are passive
• East Asia =>active model of the technology diffusion
  management, which leveraged those innovations and quickly
  turned into technological capabilities and competitive products
• Linkage – Leverage - Learning
• Instead of establishing typical R&D support institutions
  suggested by the experience of high income economies, they
  developed a whole network of institutions for technology
  diffusion and also organisational capabilities management.
  Favourable condition for the diffusion of modern
                    technology
Three major groups of factors allows faster technology
   diffusion
1) Latecomer advantage
2) Openness to foreign trade and investments
3) Foreign direct investments support diffusion of
   technologies in host countries
R.Perkins, E.Neuymayer (2005) controlled
on three technologies: continuous steel casting;
   shuttleless textileweaving looms,digital telephone
   mainlines
Results: First and second holds, third not
   Favourable condition for the diffusion of
            modern technology
Additional factors supporting faster technology diffusion
4) Geographical location of the country – diffusion is
    geographically localised” (Globermann et al, 2000;Milner,
    2003)
5) Level of education. Well educated workers are more likely
    aware about the new technologies and bale to master them
    profitable.(Caselli, Coleman, 2001)
6) Social system heterogeneity. Learning through social
    interaction.New technologies spread more slowly in socially
    mixed populations (Takada, 1991, Dekimpe et al, 1998)
                How technologies spread?
• Technologies do not spread instantaneously – diffusion is a
  long process
• Models disagree about the reasons behind it
• Epidemic models =>information (Griliches,1957). Some
  firms contact earlier with technologies
• Firms heterogeneity (Ireland, Stoneman, 1986)
  differ by organisational, environmental etc. variables
  (firms capital stock, human capital, available credit)
  => economic returns on adoptation are different (Blackman
  1999).
 CONSEQUENTLY = countries with skilled labour, high
  capital labour ratio, low interest rates are first adopters.
  They could also better absorb potential losses from the
  absorption of technology (Bell, pavitt, 1997; Todaro, 2000)
  Why and how latecomer economies could diffuse
            technology more rapidly
Key assumptions
1. Latecomers could take advantage of technological
   advantage made by first-comer
Directly - FDI, technology purchases (importing,
   licensing)
Indirectly – knowledge spillovers (imitation, reverse
   engineering, transfer of know-how by movement of
   employees etc.
They can obtain technology cheaper – not paying the
   full costs of R&D=>leapfroging decades of
   technological porgress (Teece, 2000)
   Why and how latecomer economies could
      diffuse technology more rapidly
2. Latecomers are able to diffuse new technology
   across their economic structure faster due to
   latecomer advantage
Two sources of latecomer advantage:
a) Level of capital stock. They need to install capacity
   – may choose technologies. Less inertia in
   technological change (Clark, Wrigley, 1999; Amiti
   2001)
b) Learning investments and increasing net returns
   to adoption over time (they can take advantage of
   accumulated learning of frontrunners about using the
   new technologies). (Dekimpe et al, 2000)
General Background of Industrial
    Development of Taiwan
1.2         Economic Take-Off with Outward-looking
            Development Strategy (5/5)
            KOREA - Changes in Export Commodity Profile:
               From Light Industry to Heavy Industry
                                                                           Semiconductor, Mobile
  Export                                                                   Phone, DTV, Display,
Commodity                                                                  Automobile, Ship-building,
  Profile             Wig          Textile      Automobile   Semiconductor etc.
                                                                                79.8
                                                                                  % HCI Product




   50%

                                                                                            Light
                                                                                          Industry
                                                                                  14.1    Product
                                                                                   %
                                                                                 6.1%    Agricultural
                                                                                          Product
               1960         1970                        1990           1999   2003
                                         1980
Example of building a National Innovation System:
                    Korea (1)

Original condition:
• Unbalanced industrial development
  – Strong final assembly industry, but weak capital goods and
    system integration industry
• Unbalanced National Innovation System
  – Underdevelopment of university research system
  – Dormant industry-academic cooperation
• Lack of infrastructures for creative innovation
  – Lack of investment in basic science
  – Weak protection of intellectual property rights
  – Underdevelopment of venture financing and support system
                   Korea (2): Innovation Strategy

                             Promote balanced
                         National Innovation System
                   Vitalization of university research
                   Networking among Industry, academia, govt


      From supply push                           Sustain infrastructure for
       To demand pull                               creative innovation


 Mission-oriented governmental             Sustained investment for
    R&D programs
                                           basic science (KIAS)
 Technology targeting                      Increased protection for
                                           intellectual property rights
                                            Promotion of venture companies
    Latecomer firms (Mathews, 2007, 2005, 2002)
• strategic goal - to catch up with the advanced firms and to
  move as quickly as possible from imitation to innovation.
• able to exploit their late arrival to tap into advanced
  technologies (do not replicate the entire previous technological
  trajectory)
• bypassing some of the organizational inertia that holds back
  their more established competitors.
• Linkage with the global value chains as suppliers.
• Through linkage latecomer firm could acquire from more
  advanced firms knowledge, technology, and market access
• It is this capacity to secure more from a relationship than the
  firm puts in, that we call leverage.
• linkage and leverage can be repeated over again until firm or
  group of firms enhance their capabilities and become,
  potentially, advanced players (industrial learning).
    Latecomer firms (Mathews, 2007, 2005, 2002)
• The institutional innovations involved are all concerned with
  the capture of technologies in timely fashion;
• the building of capabilities in these technologies, such as in
  government-owned R&D institutes;
• the diffusion of these capabilities as rapidly as possible to
  the private sector (e.g. through a sequence of targeted R&D
  consortia).
• Mathews calls it as the national system of economic learning
• the process involved is the management of technological
  diffusion, or technology diffusion management.
• Technology Leverage Institution (TLI) is needed (like
  Taiwanese Industrial Technology Research Institute, ITRI)
• task of the TLI is to identify technologies of interest to a
  developing country, fashion strategies for acquiring
  technologies, adopting, adapting and diffusing them to the
  firms in the country, where they can be used to build new
  businesses and industrial sectors.
       Technology Leverage Institution (TLI)
• not be engaging in fundamental scientific research.
• would be concerned strictly with identifying and
  evaluating available technologies.
• provide shared R&D services for existing and
  emerging industries in the developing country.
• Technologies already being used are subject to
  testing to see how they can be improved;
• technologies used by rivals and competitors are
  constructed and analyzed;
• potential technologies that could substitute for the
  ones in use are being evaluated.
Overview Industrial Technology Research Institute
                     (ITRI)
Sources of early mover and latecomer advantages
  Generic Technological Capability Development
  Routes of Latecomer Firms (Poh-Kam Wong, 1999)

• "Reverse Value Chain" Strategy (from OEM to
  ODM to OIM or OBM)
OEM (Original Equipment Manufacturing);Original Design Manufacturers (ODM)
(Original Idea Manufacturing OIM); (Own Brand Manufacturing (OBM)).

• “Reverse Product Life Cycle” Innovation Strategy
  ("Late-follower" to "Fastfollower")
• Process Capability Specialist Strategy
• Product Technology Pioneering Strategy
• Applications Pioneering Strategy
 Generic Technological Capability Development Strategies of
   Latecomer Firms from Late Industrializing Economies




(Poh-Kam Wong, 1999)
Key Technological Learning Processes for the Five Generic
     Technological Capability Development Routes
Dominant Generic Technological Capability Development
Routes in National Innovation System Models of three NIE




(Poh-Kam Wong, 1999)
        Innovation processes are path-dependent
•   Evolutionary characteristics - we do not know
    whether the potentially best or optimal path is being
    exploited.
•   The system never achieves equilibrium, and the
    notion of optimality is irrelevant in an innovation
    context. We cannot specify an ideal or optimal
    innovation system
•   Comparisons between an existing system and an ideal
    or optimal system are not possible, instead
    comparison with the other countries is available.
•   Instead of market failure the term systemic problems
    or systemic failures are used.
Systemic problems mentioned in the literature include
  (Smith, 2000; Woolthuis, Lankhuizen et al., 2005):
 • infrastructure     provision and investment, including the physical
    (IT, telecom, transport) and scientific infrastructure (universities, labs);
 • transition problems – the difficulties that might arise when firms and
    other actors face technological problems or changes in the prevailing
    technological paradigms that exceed their current capabilities;
 • lock-in problems, derived from the socio-technological inertia, that
    might hamper the emergence and dissemination of more efficient
    technologies;
 • hard and soft institutional problems, linked to formal rules
    (regulations, laws) or nonformal (such as social and political culture);
 • network problems, derived from linkages too weak or too strong
    (blindness to what happens outside the network) in the NIS;
 • capability problems, linked to the transition problems, referring to
    the limited capabilities of firms, specially SMEs, their capacity to adopt
    or produce new technologies over time.
Development of the national innovation system in
    countries with command economy past
Development of the NIS in the countries with
        command economy past
• Movement from the one extreme – full state
  dominated model to the extreme laissez faire of
  model (subparts strongly isolated, role of the state
  weaker than in the Western countries)
• Systemic change created huge instability in the
  economy and society =>Being successful required a
  lot of efforts and therefore attempt to be able to
  solve problems individually (on the level of single
  person, firm or academic institution) became
  dominating.
• Competition was the key notion and cooperation
  was seen as the threat to the individual success.
                Path dependency problem
• inefficiencies and ineffectiveness of NIS‟s may be partly
  related to path dependence and lock-in situations (evolutionary
  and historical economics - Niosi, 2002).
• In the case of the new EU member-state - path dependency of
  the whole system of innovation.
• The change in 1980s was systemic, majority of the
  components of the innovation system changed, but at different
  speeds as some components were easier to change than others.
  Misfit between components of NIS (Replacement of
  fixed assets vs. introducing institutions guiding economic
  transactions like trust)
• Subjective factors - policy makers do not want to face up to
  this issue. Wishful thinking and neglect of path
  dependency is very dangerous; the result is action
  plans that are inadequate, and in any case not
  implementable.
Path-dependency problems of building the national
 innovation systems in the catching-up economies

• dominating role of the linear innovation model and
  neglecting demand;
• confrontation between high and low tech industries;
• overvaluation of the role of foreign direct investments;
• lack of social capital and network failures;
• weak innovation diffusion system and low motivation to
  learn.
• underestimation of the role of public sector in the
  national innovation system;
   Passive FDI-dependent learning
• passively relying on FDI to bring in new
technologies,
• low S&T learning capacity,
• no or weak government technological
strategy,
• limited opportunities for technological
learning,
• high risk of losing in economic competition
with poorer, lower-wage countries.
    Active FDI-dependent learning
• relatively high S&T learning capacity,
• active government strategy aimed at
building national human capital and
accelerating national technological learning
from FDI,
• active targeting of the most beneficial FDI,
• much wider opportunities for technological
learning from FDI,
• lower risk of losing in economic competition
with lower-wage but lower-skill countries.
Weak innovation diffusion and low motivation to learn
• Success of the catching-up economies depends on the
  capability and willingness of actors within NIS to
  search for, adapt and utilise knowledge produced
  outside those countries.
• In this process they need specific skills – to
  understand the knowledge stock, and to be able to use
  it and adapt it to create new knowledge.
• Nonaka (1991) has argued that learning about new
  technologies requires significant levels of absorptive
  capacity as a condition of being able to diffuse
  technologies produced elsewhere.
• Knowledge needed to absorb new technologies is
  often not available in codified form. Since effective
  learning involves both tacit and formal components, a
  key task is to capture and codify – to make
  learning explicit.
    Weak innovation diffusion and low motivation to learn
• Information about the innovations and technologies is neither
  free nor widely available, particularly for small firms.
• The majority of firms in catch-up economies are small in terms
  of the scope of management
• Mechanisms to raise awareness of the available innovations,
  and the means of access to the relevant channels of
  communication, need to be organised explicitly - to help firms
  to identify which technologies they need, and thus avoid the
  pitfall of inappropriate technologies.
• (Analysis of Estonian regional S&T intermediary system
  revealed - intermediaries do offer services like technology
  watch; collecting information on relevant existing technologies
  and technological audit, but the employees of these
  intermediaries are not competent enough. Usually the employees of
  SMEs know much more about new technologies and production
  possibilities existing in their area than intermediaries. Previous is mainly
  problem in R&D intensive industries).
Weak innovation diffusion and low motivation to learn
• In latecomer economies with a command economy past, the
  technology transfer problem is really a problem of learning
  in enterprises and intermediaries. To increase the learning
  capacity of the whole society.
• Rapid catch-up requires rapid learning.
• But learning is not automatic – there must be
  motivation to enter the learning cycle. Overcoming
  path dependency in thinking.
• Where catch-up is already proceeding rapidly (e.g. Baltics) the
  lack of extra-organisational stimulus to change can become
  a serious problem.
• As long as the existing business model continues to generate
  steady, rapid growth, it is extremely difficult to persuade
  the actors in the innovation system (not only firms, but also
  policy-makers and non-market institutions) to enter into
  the learning cycle in a serious manner.
  Weak innovation diffusion and low motivation to
                      learn
• The latecomer advantages have created short-run
  success, and this in itself has tended to result in very
  low motivation to create learning capabilities.
• Firms often fail to learn because they are isolated and
  lack support for key stages in the process, partly
  because of elements of path dependency stemming
  from the old planning system.
• Practical experience suggests that learning can be supported by
  structures and procedures to facilitate the operation of the
  learning cycle, and that this, indeed, is the mark of a properly
  functioning innovation system.
    Conclusions for the improvement of the NIS in
      economies coming from systemic change
• Precondition - consider the path dependency problems:
 a) Linear innovation model should be replaced with the
   balanced interaction based approach
   Innovation should not be equalised with R&D - understanding
   that non-R&D dimensions of innovation are equally
   important for catching up economies.
 b) Discrimination of low tech industries allocating majority of
   resources into creation of high tech sector is not appropriate
   policy – instead funding of the use of high technologies in
   traditional industries and services;
c) Support the development of the system of absorption and
   diffusion of knowledge produced outside and inside of the
   catching-up economies
   Combining high technologies with traditional
            industries and services

• Traditional
  industries                                  Services



                              ICT



                          Biotehnologies


It requires motivation from both side, adequate knowledge base needed
Instruments of innovation policy also play a role
     Conclusions for the improvement of the NIS in
       economies coming from systemic change
d) On firms level:
    encourage motivation of firms to change;
    support the process of building absorptive capacities of the
    firms.
e) lack of managerial and organisational skills are very
    important barriers of innovation (even more than better access
    to modern technology) and should not be overlooked.
f) Integration of local firms into networks of foreign
    investors should be supported. Selection must be used by
    FDI policy in catching up economies
g) Technological path-dependency could be used not as a threat
    but as an opportunity. Resistance to change is weak and offers an
   opportunity to skip the whole generation of technology and introduce new
   solutions.
 The typology of services (Innovation in Services: Typology, case studies and policy implications)

• Problem solvers create value by solving specific and unique
  problems for their customers. Low standardization. Suppliers
  provide services that the clients are not able to produce themselves
  (law firms, medical doctors, engineers, architects, and researchers)
• Producers of assisting services generate customer value by taking
  over time consuming activities for firms and households that are
  easy to standardize (Security services and cleaning services)
• Producers of distributive services - value through facilitation of
  interaction between customers (e.g. selling goods and transporting
  commodities, passengers and information). A large sub-group
  operates predominantly through digital channels (telecom or
  financial services. Due to the large scale and productivity effects
  of operating in such channels split into digital and manual
  distributive service providers.
• Producers of leisure services generate values by stimulating the
  emotions, perceptions and spiritual experience of customers.
  Highly heterogeneous. (sports, arts, entertainment, restaurant
  services and media services).
           Policy areas of importance to services




Innovation in Services: Typology, case studies and policy implications.
ECON Report, 2006, Norway
Tertiary graduates by field of study (2002)
     Source: OECD (2004), Education at a Glance.
Source: OECD, Main Science and Technology Indicators database.
  From science and technology policy to innovation
            policy (NIFU-STEP, 2005)
• 1st generation: Science and technology policy
   – Focus on research and especially research in universities and
     laboratories
   – Ministries of industry/economy (industry policy) and
     research/education (science policy)
• 2nd generation: Innovation policy
   – Focus on policy measures and institutions targeting the innovative
     capabilities of firms
   – Ministries of industry/economy and research/education
• 3rd generation: holistic innovation policy
   – Focus on institutions and policy measures that directly or indirectly
     influence the innovative capabilities of firms
   – Most ministries
Now: A more complex understanding of innovation

• Innovation takes place in complex systems of
  companies, knowledge institutions, financial
  institutions and within a extensive regulatory, social
  and cultural framework.
• Innovation is based on complex learning processes
  involving a large number of persons, all with
  different educational backgrounds and experiences.
• Innovation thrives on spillovers and unexpected
  combinations of persons, existing knowledge and
  technologies.

 NIFU-STEP, 2005
The company centred model of the innovation system
International setting                      Industrial system
                            Policy
                         organisations
    Suppliers                                     Research
                                                  institutions
                          Company

                          •Learning
                          •Networking
    Customers             •Innovation             Consultants


                          Financial
  Regulatory framework   institutions    Cultural environment

  NIFU-STEP, 2005
        The basis for systemic innovation policies
                   (NIFU-STEP, 2005)
Traditional industrial         Modern innovation policies
policies
Knowledge as a “free”          Competence building as
commodity                      learning processes
Focus on research              Including a broad set of
                               innovation activities
                               (incl. development, incremental
                               improvements, design, branding,
                               marketing)
Focus on “high tech”           Including “low tech” companies
companies                      and services
Focus on R&D institutions      Company centred

Focus on knowledge diffusion   Focus on absorptive capacities
                               and networking
  A changing framework for innovation policy :
  National System of Innovation (Nauwelaers, 2003)

 Increased awareness of the role of innovation as crucial
  ingredient for economic development
 Interactive view of innovation: innovation differs from
  R&D
 System-based approach to innovation, emphasis on
  learning and diffusion / absorption of knowledge
 Mobility of tacit knowledge embedded in humans
  becomes a key performance factor
 Glocalisation : localised nature of (tacit) knowledge
  spillovers - importance of global connections
                  Policies for innovation systems
                        (Nauwelaers, 2003)

From “picking-the-winners” towards “addressing-weakest”
System performance is mainly determined by the weakest node
From “stocks” to “flows” as main focus of policy attention
Flows in the system need to be addressed in priority
From “raising resources” towards “promoting change”
Performance is affected by learning abilities of firms and others
From “best practice” towards “context-specific” solutions
Policies should be fine-tuned to specific system failures
From “standard” policy-making towards policy “learning process”
There is a need for more strategic intelligence in policy-making
               Policy Conclusions (I)

• Effectiveness of innovation systems depends on balanced
  combination of 3 capacities :
   – creation of knowledge
   – diffusion of knowledge
   – absorption of knowledge
• Government‟s role shifts from investor to facilitator -
  promotion of public/private partnerships and interface
  management
• Growing importance of framework conditions
   – entrepreneurship
   – competition rules
   – labour market conditions
   – social capital, ...
              Policy Conclusions (II)

• Danger of fragmentation of innovation policy :
  need for intra-government policy coordination
• Increasing role of regions for innovation : need for
  vertical policy coordination
• More efficiency through “Policy packages” rather
  than isolated instruments
• Need for more policy intelligence
   –   monitoring and evaluation of policies
   –   sound analyses of innovation systems
   –   « intelligent » benchmarking practices
   –   long term views
   –   inclusive policy design processes
A Simple Taxonomy of
Science, Technology and
Innovation Policies




                          The Impact of RTD
                          on Competitiveness
                          and Employment (IRCE),
                          EC, 2003
 Social capital and the small country paradox
                (slide from B.A.Lundvall)
• Small size (cf. The costs of respectively production and
  reproduction of knowledge) and low tech specialisation
  should be a serious handicap for small countries
  and especially for Denmark but small countries
  perform better than big ones in the new economy –
  why?
• In ‟the learning economy‟ speedy adjustment,
  learning and forgetting is rooted in social
  relationships. Trust, loyalty and ease of
  communication is easier to establish in culturally
  homegeneous nations with shared responsibility for
  the costs of change.
Export Structure by Technology Category
     Producing “what” vs. producing “how”
                                Finland
                      Hi Tech
                        22%
                                              Reso urce
                                               B ased
                                                38%



                M edium
                 Tech
                  30%                     Lo w Tech
                                             10%