How to promote Innovation in your Organization

how to promote innovation in the workplace and how to promote innovation culture in the company
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Innovation Policy A Guide for Developing Countries Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure AuthorizedOverview Innovation Policy: A Guide for Developing Countries he presentation of innovation policy in this volume offers a detailed con- Tceptual framework for understanding and learning about technology innovation policies and programs and their implementation in different countries. Inspired by the experience of both developed and developing coun- tries, the book focuses on the latter’s needs and issues. The publication’s main audience is the policy-making community. It includes not only those who are directly involved with technology, industry, science, and education but also those in charge of finance and economics, and indeed the top government leadership, which plays a crucial role in successful innovation policies. This overview follows the organization of the volume, which is divided into parts and chapters. Before a summary of the individual chapters, however, the 1 main messages that emerge from the volume as a whole are briefly presented. The approach to innovation policy proposed in this volume revolves around the basic questions: Why? What? How? Why? The Innovation Imperative Technological innovation has always been at the heart of economic and social development. And as such, it is therefore essential to the further evolution of the developing world. Today, additional reasons make renewed attention to This overview was prepared by Jean-Eric Aubert, with contributions from Carl Dahlman, Patrick Dubarle, Yevgeny Kuznetzov, Jean-François Rischard, and Justine White. 12 Innovation Policy: A Guide for Developing Countries technology even more compelling. First, the world is in the midst of a serious economic crisis, and technology can be a means of relaunching or recreating economic activities worldwide. Second, major environmental challenges require wide-ranging changes in patterns of production and consumption. And third, the global technical system is undergoing a profound transformation based on information technologies and new technologies such as biotechnology and nan- otechnology that are changing our world and our societies. Innovation should be understood as the dissemination of something new in a given context, not as something new in absolute terms. While economi- cally advanced countries naturally work at the technology frontier, developing countries have considerable opportunities for tapping into global knowledge and technology for dissemination in their domestic context. This ability will be decisive for initiating new activities, notably in service industries, for improving agriculture and industrial productivity, and for increasing overall welfare in areas like health and nutrition. Innovation depends significantly on overall conditions in the economy, governance, education, and infrastructure. Such framework conditions are particularly problematic in developing countries, but experience shows not only that proactive innovation policies are possible and effective but also that they help create an environment for broader reforms. What? The Government as a Gardener Innovation can be approached from an organic and evolutionary perspective. An efficient innovation policy addresses the overall innovation climate, which goes far beyond traditional science and technology policy, and involves many government departments. At the same time, government action can usefully focus on a few generic func- tions comparable to nurturing plants to help them grow. It can facilitate the artic- ulation and implementation of innovative initiatives, since innovators need basic technical, financial, and other support (watering the plant). The government can reduce obstacles to innovation in competition and in regulatory and legal frame- works (removing the weeds and pests). Government-sponsored research and development (R&D) structures can respond to the needs and demands of sur- rounding communities (fertilizing the soil). And finally the educational system can help form a receptive and creative population (preparing the ground). For each of these functions, economically advanced as well as less advanced countries offer good practices that can be adapted to local contexts. The firm backing of top leadership, such as the head of state or prime min- ister, is essential to the success of an innovation policy. It gives credibility to a national vision and facilitates the adoption of key measures for removing bureaucratic hurdles. It is also important to have efficient mechanisms that facilitate cross-departmental cooperation. By its very nature, innovation policyOverview 3 concerns parts of government that usually work independently. Agile and fle xible agencies for implementing innovation policy measures may be neces- sary especially for supporting specific industries, technologies, or communities. The institutional challenges to innovation policy should not be underesti- mated, as it intervenes in institutional settings that are already “crowded” with organizations that are supposed to fulfill—or claim to fulfill—its objectives and functions. Careful policy reviews and assessments, conducted with the help of the international community, can facilitate needed adaptations. How? A Pragmatic Agenda Since in most countries, particularly in the difficult institutional context of developing countries, implementing innovation policy is a challenging task, a long-term strategy should be inspired by a philosophy of “radical gradualism.” That term refers to a sequence of finely tuned small, specific reforms and suc- cessful outcomes that paves the way for broader, institutional changes. Depending on countries’ technological competence and the quality of the business environment, governments will need to choose their goals. After focusing on prime movers and creating innovation endowments (well-defined technology centers, science parks, or export zones), they need to build critical masses of innovative and entrepreneurial initiatives by promoting industrial clusters, actively attracting foreign direct investment (FDI), and possibly even creating new cities. The multiplication of entry points in the economic system will facilitate broader reforms. In all cases, local communities and governments must be mobilized. This effort requires adequate incentives such as matching funds and administrative frameworks that include the delegation of power. To materialize and advance this strategic process of change, policy initiatives targeted to specific industries, sites, or communities are best conceived through a collective vision and implemented in a holistic manner. They can thus fulfill the different “gardening” functions evoked above. Industries benefit from the necessary technological infrastructures, skill provision schemes, export net- works, trade and intermediary professional structures, funding mechanisms, and the like. Technology sites, such as export zones or science parks, should combine the needed services and be well integrated in urban settings and well connected to the transportation infrastructure, including international air- ports. Local communities, even the poorest, have unique knowledge and entrepreneurial potential that can be exploited with appropriate support from surrounding actors such as research and education establishments, the busi- ness sector, and nongovernmental organizations. Acting in concert, with effi- cient local and global networks, is essential. Innovation is fundamentally the task of the private sector and entrepre- neurs. But history has shown that in moments of major transformations and crises, the role of governments has always been crucial. They alone can assume4 Innovation Policy: A Guide for Developing Countries the launching of large-scale programs that help renew infrastructure while facilitating nationwide learning processes for innovative initiatives. Only they can legitimately impose and fund the adaptation of the educational, research, and other knowledge sources that are required to cope with deep and rapid technical change. This publication provides governments with ideas and tools to facilitate their tasks. A host of examples of policy actions from throughout the world are presented as a source of inspiration. What Is Innovation? In this volume, innovation means technologies or practices that are new to a given society. They are not necessarily new in absolute terms. These technologies or practices are being diffused in that economy or society. This point is impor- tant: what is not disseminated and used is not an innovation. Dissemination is very significant and requires particular attention in low- and medium-income countries. Box O.1 provides examples of innovations in developing and emerging economies, ranging from the dissemination of new methods of eye care to the production of information technology (IT) components. Innovation, which is often about finding new solutions to existing problems, should ultimately benefit many people, including the poorest. For understanding innovation, distinguishing high technology from low technology is not very useful, particularly in low- and medium-income 2 countries. High technology may not generate jobs and wealth, while low- technology developments and the exploitation of indigenous knowledge can lead to significant economic growth and improve welfare. The use of high technology in all sorts of products, processes, and services can be more important than producing it. Innovation is distinct from research and in fact need not result from it. Innovations come from the entrepreneurs who make them happen and ultimately depend on a society’s receptiveness. Innovation, therefore, is fundamentally a social process. The focus in this volume is on technologi- cal innovation, which is often accompanied by organizational and institu- tional innovation at both the micro- and the macrolevels. The volume is a set of complementary chapters that form a structured whole. It offers a fairly exhaustive perspective on what innovation policy consists of and how it might serve concerned policy-making communities, from govern- ments at the highest levels to managers of relevant organizations such as training institutions, R&D centers, or technological services. Based on a better understanding of innovation, we now summarize the book contents, chapter by chapter. The volume is organized in three main parts that present the innovation policy concept, its functions, and the condi- tions of its implementation.Overview 5 Box O.1 A Few Examples of Innovations in Developing and Emerging Economies � India’s Aravind Eye Hospital deals with blindness in general and the elimination of needless blindness in particular in rural India. It reaches those most in need—the traditionally unreachable—through 20–25 weekly screening camps in villages. It also makes use of Internet kiosks in remote locations, where the information is sent electronically to a clinic for diagnosis. The Aravind eye-care system treats 1.4 million patients a year and, since its inception, has performed over 2 million operations and handled over 16 million outpatients. � To regain prominence as a leading center of learning, the Bibliotheca Alexandrina, in Alexandria, Arab Republic of Egypt, is playing a central role in the design, plan- ning, and launch of a world digital library, in partnership with the U.S. Library of Congress and many other libraries around the world. This initiative, which includes digitizing its expertise, will make significant primary materials from cultures around the globe available on the Internet to people everywhere. These materi- als are to be accessible free of charge and in multilingual format. � The Malaria Research and Training Center in Bamako, Mali, is internationally rec- ognized for its contributions to research on malaria and the improvement of public health standards. Its researchers participate in both international (National Institutes of Health, Institut Pasteur) and local networks. It works with traditional doctors to create a source of immediate care in the Bandiagara region and has helped reduce the mortality rates of young children significantly. � Intel’s construction of a US300 million semiconductor assembly plant in Costa Rica came as a surprise to many. Twelve years after the decision to invest was made, the initial investment had created many benefits, some of them unexpected. Intel’s two plants employ 2,900, but the industry in Costa Rica now employs 12,000. The local support businesses for Intel alone reflects a base of 460 suppliers. The investment decision was the catalyst for a realignment of Costa Rica’s competitive platform as an investment location, which led to newly secured FDI in other targeted sectors. � Tiny Estonia, a small Baltic state close to Finland, with a population of only 1.4 million, is leading an Internet revolution: its parliament has declared Internet access a basic human right. Estonia’s well-educated, wired workforce and its lib- eral economic policies, low taxes, and low wages have helped make it an attrac- tive business destination, especially for Sweden and Finland. It is also nurturing domestic innovation through key partnerships with Nordic neighbors. These include the development of devices such as dochome, a hand-held electronic health kit that monitors blood pressure, stress, and weight and sends an alert to both patient and doctor in case of any sudden changes. Source: Justine White. Policy Concept Part one addresses the general approach to policy concepts, with a focus on two fundamental questions: (1) Why promote innovation? and (2) How can innova- tion be promoted? These chapters offer a historical perspective on innovation in6 Innovation Policy: A Guide for Developing Countries economic and social development and show how government can promote innovative activity. Chapter 1: Why Promote Innovation? The Key to Economic, Social, and Environmental Progress Innovation has always played a decisive role in the economic and social devel- opment of countries: it is the main source of economic growth, it helps improve productivity, it is the foundation of competitiveness, and it improves welfare. Figure O.1 presents an example of the effect of innovation on the economies of two countries and shows that two-thirds of the differences in the growth performance of Ghana and the Republic of Korea over four decades are attributable to technology-related improvements. In today’s “poly-crisis” context, innovation is imperative. Innovation capa- bilities are seriously challenged both in the developed and in the developing worlds. Economically advanced countries need a more solid foundation than growth driven by financial speculation, as well as a truly innovative evolution of their economies and societies. Developing countries need ways to achieve broadly inclusive growth and innovation to benefit their many poor and not simply a narrow elite. More generally, adaptation to climate change, adjust- ment to limits of natural resources, and protection of biodiversity require fun- damentally new patterns of production and consumption worldwide. Finally, a more general reason to pay renewed attention to innovation is the current transformation of the world technological system in the wake of ear- lier transformations: the agricultural revolution in the Middle Ages and the Industrial Revolution in more recent centuries (see figure O.2). The four poles Figure O.1 How Innovation Contributes to Growth: A Comparison of Ghana and the Republic of Korea, 1960–2005 14,000 Korea 12,000 10,000 difference in 8,000 output due to TFP growth or knowledge 6,000 accumulation in Korea 4,000 difference in output due to growth 2,000 in labor and capital in Korea Ghana 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: World Bank 2007. Note: TFP = total factor productivity. real GDP per capita (2000 US)Overview 7 Figure O.2 Major Technical Systems from the Middle Ages through the Present Middle Ages Industrial Revolution present optronics, computers and communication time scale Taylorism polymers, electricity, steel, materials energy combustion nanotechnology supraconductivity cement microbiology human-biosphere relations biotechnology, ecological equilibrium Source: Adapted from Gaudin 2009. around which technological systems are structured—energy, matter, life, and time—are affected by these upheavals. In the long term, all production systems are affected by such changes. They result in a cognitive revolution, which has today taken the form of a knowl- edge economy or knowledge society. The present situation is characterized by very rapid scientific and technical developments, and advances in science are making it possible to engineer new life forms and materials. The pervasive use of new technologies in all industries and activities requires new skills and new types of knowledge. Higher levels of education and greater flexibility in poli- cies and institutions are necessary to take advantage of the innovation poten- tial of such advances and to build the foundations of the so-called knowledge economy (World Bank 2007). Chapter 2: How to Promote Innovation—Policy Principles Governments have traditionally played an important role in promoting tech- nology, sometimes by directly supporting the development of technologies (in space, defense, and the like) or more indirectly by creating a climate favorable to innovation through various incentives or laws. Every society has to find the ways and means to innovate that correspond to its needs and capabilities. Its innovation climate is largely determined by its overall macroeconomic, busi- ness, and governance conditions. Despite the nature of these conditions in low- and medium-income countries, well-designed and well-implemented innovation policies are very relevant. Moreover, they can be an efficient policy tool for triggering change and improvement in the country’s overall frame- work conditions (this question is discussed in detail in chapter 8). Figure O.3 depicts the diverse factors that influence developing countries’ innovation capabilities. These countries can make considerable economic and social progress by tapping into globally available knowledge and technologies and adapting them to local contexts. Sources of foreign knowledge and tech- nologies include trade activities such as imports of equipment and goods, multinational corporations, and skilled diasporas. converging8 Innovation Policy: A Guide for Developing Countries Figure O.3 Determinants of Technology Upgrading in Developing Countries: Domestic Absorptive Capacity Both Conditions and Attracts External Flows technological frontier foreign diaspora trade direct and other investment networks governance and the business climate policies to - create competencies basic technological literacy - build infrastructure - foster an innovation- finance of innovative firms friendly business climate pro-active policies dynamic spillover returns to effects effects scale magnify technology transfer domestic technological achievement Source: World Bank 2008a. Innovation processes germinate and develop within what are called “innovation systems.” These are made up of private and public organiza- tions and actors that connect in various ways and bring together the tech- nical, commercial, and financial competencies and inputs required for innovation. It is on such systems that government innovation policies are focusing. Avoiding misconceptions about the source and process of technological innovation, often wrongly perceived as deriving mechanistically from research and science, is important. Fundamentally, innovations are carried out by entrepreneurs who exploit existing knowledge and technology to propose new products or practices and disseminate them. The sources of their ideas are more likely to be users, suppliers, and customers than scientific research. Therefore, the role of governments is to facilitate this process by � supporting innovators through appropriate incentives and mechanisms, � removing obstacles to innovative initiatives, � establishing responsive research structures, and � forming a creative and receptive population through appropriate educa- tional systems. One may compare the tasks of governments to those of a gardener who should (a) water the plants, (b) remove the weeds and pests, (c) fertilize the technological technological transmission absorption absorptive capacity channelsOverview 9 soil, and (d) more broadly, prepare the ground so that plants can grow (see figure O.4). These four generic functions are detailed in part two. Moreover, the government can intervene in areas of particular importance. In industrialized countries, for example, large-scale programs have targeted defense, space, and health, among others. This volume focuses on the promo- tion of competitive activities in agriculture, industry, or services; the develop- ment of innovative sites (industrial zones, technology parks, new cities); and the stimulation of innovation in, or for, poor communities. Issues and expe- riences relating to specific applications are discussed in part three. It is clear from the above that innovation policy is broader than, and differ- ent from, science and technology policy, with which it tends to be merged. It also takes place as part of an overall trend toward knowledge-based economic strategies (see figure O.5). Innovation policy requires action in many different policy areas—education, trade, investment, finance, and decentralization, among others—and it is the right combination of interventions in these diverse domains that creates a fruitful innovation climate. This approach to innovation policy reflects the evolving understanding of innovation policies in countries of the Organisation for Economic Co-operation and Development (OECD) over several decades (see box O.2). It explicitly recognizes the role of proactive and comprehensive government policies in establishing the overall framework and in fostering interaction among the actors, including different parts of government. This fundamentally horizontal and interdepartmental innovation policy calls for a “whole-of-government” approach. It depends on the establishment of efficient government machinery able to ensure the needed coordination. Although its mechanisms must be adapted to existing institutional frameworks and to cultural backgrounds, models that are placing a powerful coordinating Figure O.4 Gardening Innovation watering (finance, support to innovators) removing weeds (competition, deregulation) nurturing soil (research, information) preparing the ground (education) Source: Author.10 Innovation Policy: A Guide for Developing Countries Figure O.5 Innovation Policy in a Broad Perspective science and technology policy innovation strategy knowledge-based economy strategy Source: Jean-François Rischard (personal communication). Box O.2 Innovation Policies in OECD Countries—50 Years of Experience Innovation policy has come into its own with some difficulty, as it was crushed between two ideologies with very active lobbies. The scientific ideology promoted the idea that technology derives naturally from science so that governments need do no more than build a good science base. The market ideology considered that inno- vation occurs naturally in a good business climate and that governments should concentrate on this aspect. They need only maintain an open, competitive environ- ment and, in addition, fund public goods such as basic research, which the private sector is unable to finance. Although these two views acted in coalition to promote their interests, govern- ments felt the need to take specific measures to promote innovation. Their efforts took advantage of World War II initiatives and governments’ strong involvement in the development of defense technologies. Government efforts in the 1960s and 1970s were largely inspired by a linear model of innovation and the idea that science and research needed to be pushed toward technological and industrial applications; many policy initiatives therefore aimed at supporting enterprises in their R&D efforts or at improving university- industry collaboration. Concomitant large-scale space and defense programs facilitated the development of breakthrough technologies that were later used in civilian applications. Recognition of the importance of interactions in innovation processes led to the concept of innovation systems, which was introduced in the literature in the late 1980s. This concept has been particularly fertile and has been variously understood. Most often, it defines the sets of interacting actors and institutions that provide the knowl- edge and financial resources required for the successful development of innovations.Overview 11 Box O.2 continued Therefore, the first generation of innovation policy was replaced by a second generation in which innovation policy became more complex and aimed at facilitat- ing interactions between the various actors and institutions involved in innovation processes: universities, research laboratories, banks for venture capital, and govern- ment agencies in charge of various sectors. The boundaries of an innovation system legitimately include the “framework con- ditions” that encompass elements as apparently distant from the innovation process as the educational system or the macroeconomic environment. The OECD, for instance, explicitly includes framework conditions in its reviews of innovation systems. Thus, a third generation of innovation policy has appeared. It is inspired by a “whole-of- government” approach, in which all departments are potentially concerned. Source: Author. Figure O.6 Model for a Strong Innovation Policy research education trade innovation policy other industry finance Source: Author. body at the center of government allow innovation policy to have a pervasive influence (see figure O.6). As innovation takes place primarily in local milieus with a concentration of knowledge, talents, and entrepreneurs; innovation policy is an important con- cern of sub-national governments that set up appropriate bodies (discussed in chapters 3 and 8). Policy Functions Part two addresses the four “gardening” policy functions described earlier. It discusses how government can provide basic support to innovative activity (chapter 3), reduce obstacles to innovation (chapter 4), sponsor appropriate R&D (chapter 5), and foster a receptive and creative population (chapter 6). This part also considers the important functions of policy evaluation and monitoring (chapter 7). 12 Innovation Policy: A Guide for Developing Countries Chapter 3: Supporting Innovators Supporting innovators effectively requires putting the necessary technical, commercial, and other services as close as possible to them. Such services should therefore be organized locally through the efficient mobilization of concerned authorities and with the active participation of concerned “clients.” Services of strategic relevance for innovation policy include basic industrial services like promotion, marketing, and internationalization; technology extension services; metrology, standards, testing, and quality control; innova- tion in organization and management; and information and communication (see box O.3 for details of such services). Supporting innovators also requires adequate financial support. Innovation expenses increase as projects develop and near commercialization. As such projects advance, government support should be increasingly based on the potential for commercialization and provided on a reimbursable basis. Government measures in this policy area are many and varied. The diffi- culty in low- and medium-income countries is an overall lack of transparency Box O.3 Business Services for Innovators The following services potentially have strategic relevance for innovation policy: Basic industrial services (promotion, marketing, and internationalization). Examples include assistance for direct investment abroad; assistance for inward investors; legal and financial assistance; financial services such as accounting and tax assistance; market information or other economic data; organization of and participation in trade fairs and other promotional events; partner search; and assistance for tenders of the European Union, World Bank, and other international organizations. Technology extension services. Examples include assistance for patenting and licensing, for grant applications, for in-house R&D activities, and for subcontracting to research institutes; competitive intelligence (technological benchmarking, tech- nology maps, information on emerging technologies); innovation diagnosis; review of current or proposed manufacturing methods and processes; participation in and organization of technology exhibitions; and technology brokerage. Metrology, standards, testing, and quality control. Examples include calibration of equipment; quality certification; domestic standard; compliance with the International Organization for Standardization; technical assistance; demonstration centers and test factories; energy audits; materials engineering. Innovation in organization and management. Examples include assistance for enterprise creation; interim management; logistical assistance; organizational con- sultancy, quality and training; productivity assistance; and incubation services. Information and communication. Examples include advanced services for data and image transmission; assistance on communication strategies, telecom network connections and for the implementation of electronic data interchange systems; and database search. Source: Patrick Dubarle.Overview 13 and insufficient ability to evaluate projects. OECD countries often provide the business sector with fiscal incentives such as tax rebates to stimulate R&D and innovation-related efforts. Such incentives, which work best for medium- and large-scale industry, are generally not adapted to the situation of low- and medium-income countries, which lack sufficient accounting capabilities and have a large informal sector of small firms with no R&D expenses (for a more detailed discussion, see chapter 5). A key issue is support for the incubation stages of innovation. While the financing of the initial stage, invention, is the responsibility of the public sec- tor and the financing of the late stage is clearly the responsibility of the private sector, difficulties arise in the intermediary stages: prototype testing, product development, market research, and the like. For these middle stages, public- private networks or groups that can bring innovation projects to fruition by gradually mobilizing private money and management competencies, market- ing opportunities, and other essential elements are critical. Chapter 4: Improving the Regulatory Framework for Innovation Removing obstacles to innovation means fighting anticompetitive and monop- olistic practices, suppressing bureaucratic hurdles, and adapting the regulatory framework to support the search for and diffusion of novelty. It is a task that by nature should mobilize many areas of government—taxes, customs, procure- ment, and standards, for example—and requires vigilant action. This task is particularly necessary, but difficult, in developing country contexts. The World Bank investment climate assessments and Doing Business surveys can help identify such obstacles. It is important to pay attention to those obsta- cles that are especially relevant to promoting innovation and entrepreneurship. Such obstacles can vary widely from transfer of pension rights for academics who become entrepreneurs to customs rules affecting technology imports or inappropriate safety regulations. Equally important is the establishment of durable institutional mechanisms that are able to improve the regulatory and legal framework in this regard. The maintenance of competitive pressure on firms (especially on state-owned firms in transition economies) and of all forms of incentives to innovate is also an essential element of innovation policy. The design and implementation of effective procurement policies is a major instrument for promoting innovation. The experience of OECD coun- tries offers a few valuable principles: define performance standards rather than set technical requirements; maintain fair competition in tendering pro- cedures; and offer small and medium firms a share of contracts (perhaps 10 per- cent). Such principles could be usefully applied by low- and medium-income countries, particularly for infrastructure projects, which are generally financed largely by multilateral or bilateral partners. In international commerce, fair-trade rules should be strictly applied. Developed economies should abolish the practice of taxing processed products14 Innovation Policy: A Guide for Developing Countries (with added value) more than raw materials imported from developing countries, as it undermines the efforts of developing countries to climb up value chains. Current international intellectual property rights regimes also need to be reconsidered. Regulations on access to technologies should be less stringent for developing countries, which cannot maintain costly protection systems or afford high licensing fees. Open-source regimes are also better adapted to the evolution and use of new technologies in software, genetic engineering, and related fields. Chapter 5: Strengthening the Research and Development Base in Developing Countries Developing countries should focus their research efforts on what has already been accomplished and take good advantage of it. OECD countries, particu- larly the largest, account for the bulk of R&D effort worldwide, although Brazil, China, India, and Russia are also becoming significant investors in R&D. In developing countries, public and university laboratories are often ivory towers, cut off from local needs and poorly funded and staffed. Establishing a responsive research infrastructure depends principally on creating adequate competencies and laboratories with adequate funding mechanisms. These should ensure an appropriate proportion of stable financing with other fund- ing from contracts with industry, communities, or the government. When research activities are partly dependent on external resources linked to explicit demands, the research structures are more attentive and more responsive to economic and social demands. Research structures should be linked to global centers of excellence and should work with local communities to satisfy basic economic or social needs. Public research laboratories play a fundamental role in developing countries and should be equipped to respond efficiently to the need for technical research, technical assistance, certification, and quality control—functions that the business sector, which has low R&D capabilities in developing countries, is unable to perform. It is not advisable to privatize (former public) research structures to perform such tasks. For its part, the university sector should pur- sue high-quality research, and the results should be assessed through interna- tional peer reviews. Incentives in OECD countries that facilitate collaboration by the univer- sity or public research structure with the business community, such as joint R&D projects partly funded by government agencies, could usefully be adapted to low- and medium-income countries if their transparency is ensured. Transferring intellectual property rights to universities or public laboratories that perform government-funded R&D (as in the United States under the Bayh-Dole Act) can be an effective incentive for engaging in inno- vation efforts, but such practices can also undermine long-term research efforts of collective interest and of a public good nature. The issue becomesOverview 15 more complex when multinational corporations are involved, as they often are in developing countries. Promotion of R&D in the business sector is important for stimulating adaptive research as well as for helping firms face global competition success- fully, a growing concern for a number of emerging and developing economies. Table O.1 summarizes the incentives and mechanisms at the disposal of governments, with their respective advantages and disadvantages. Chapter 6: Fostering Innovation through Education and Training No recipe can “make” innovators through education. Everything that facili- tates the combination of the complementary competencies needed for inno- vation, such as engineering, design, and business, however, can help, especially in postsecondary education. Moreover, in addition to “hard” skills, people Table O.1 Direct Support for Business Sector Research and Development Instrument Advantages Disadvantages or shortcomings Tax incentives � Provides functional intervention, � Has unclear fiscal costs in advance, for R&D not picking winners may be high � Offers less distortion, more � Is difficult to ensure additionality automatic � Is not very relevant for start-up firms � Generally requires less bureau- that do not yet have taxable revenue cracy to implement, although streams advisable to have monitoring � Is a blunt instrument, cannot target and spot checks specific companies, although it can target specific sectors Grants for R&D � Allows specific targeting on � Requires large bureaucracy projects case-by-case basis to administer � Can control amount of subsidy � May not select the best project granted � Is also difficult to ensure additionality � Can be given in tranches against defined goals � Can be structured as matching grants, which may help improve quality and efficiency Accelerated � Reduces the capital costs � Does not provide incentive for depreciation of R&D projects noncapital costs such as personnel for R&D and material inputs equipment Duty exemption � Reduces cost of world-class � Results in loss of tariff revenue on imported inputs if country otherwise � Is distortionary to the extent that inputs into has high import duties it favors R&D over other activities R&D Venture capital � Helps overcome financial market � Requires detailed knowledge to facilitate failure in making capital available of sectors to evaluate technical commercializa- to start-ups with no collateral and commercial prospects tion of research or track record � Is often not successful because of results limited deal flow and shortage of techno-entrepreneurs � Also requires developed stock market so that investors can sell off shares and reinvest in new projects Source: Carl Dahlman.16 Innovation Policy: A Guide for Developing Countries need “soft” skills such as problem solving, communication, and teamwork and a good work ethic. These skills are important for innovation, as well as more generally in the economy, as innovators need to interact with both the busi- ness sector and the community. The rapid expansion of knowledge-based industries has increased demand for more highly skilled labor. Because most new jobs will go to “knowledge workers,” nurses in hospitals, farmers in automated stables, and workers in computerized factories will need to be able to manipulate symbols, read instru- ments, and interpret measures and data. Today’s workers and innovators therefore need a broad set of platform skills based on a good general education beyond primary schooling. This requirement implies interventions in primary and secondary education. Vocational training also plays a vital role in preparing workers for the labor market but has often received too little attention from policy makers. A coun- try’s youth must acquire—in addition to basic skills such as writing, counting, and the like—“functional literacy,” a good “technological culture,” and an abil- ity to “think outside the box.” The timely acquisition of basic literacy conditions the effectiveness of sub- sequent lifelong learning, which individuals will need to function effectively in a knowledge economy. Lifelong learning requires a new pedagogical model, which may include customized learning, learning by doing, and teamwork. On-the-job training assumes an important role in the lifelong learning sys- tem: it builds on the acquired soft and hard platform skills, adds specific skills necessary for the job, and helps upgrade skills continually. Especially for low- income countries, education policy should include skills development in the informal sector, which can represent 30 percent or more of nonfarm employ- ment in a number of developing economies. An appropriate focus is improv- ing traditional apprenticeship training, as it is responsible for more skills development than all other types of training combined in developing coun- tries, particularly in the least developed. The biggest challenge to educational reform is a deeply rooted model of schooling. That model, characterized by traditional teacher-dominated class- rooms and strong emphasis on rote learning, determines practices both inside and outside the education community. A second challenge is to make educa- tional strategies part of a broader innovation agenda, an effort resisted by vested interests such as existing institutions and teacher organizations. The challenges for most developing countries are more complex than for devel- oped countries, as they must deal simultaneously with problems of provision and quality under serious financial and institutional constraints. In investing in a well-educated workforce, low- and medium-income coun- tries necessarily face the risk of a large-scale brain drain. Experience shows, however, that appropriate mechanisms can facilitate a “brain circulation” process by which talented migrants reconnect with their country of origin asOverview 17 efficient drivers of innovation in various forms: as creators of enterprises, openers of new markets, sources of venture capital, or facilitators of institu- tional reforms. Chapter 7: Policy Evaluation—Assessing Innovation Systems and Programs Like any government policy, innovation policy needs to be properly moni- tored and evaluated at two levels: the monitoring of innovation systems and the assessment of innovation programs and policies. To monitor countries’ innovation capabilities at the macro level, a number of international bodies, including the World Economic Forum with its competitiveness indexes and the World Bank with its Knowledge Assessment Methodology, have developed benchmarking based on regularly updated databases. Benchmarking helps countries position themselves with respect to their competitors and observe their progress over time. These macro-benchmarking approaches, however, have to be comple- mented by more detailed indicators that monitor and assess innovation systems, specifically, firms’ resources and performance in research and innovation and their diffusion of specific technologies. These indicators should be systemati- cally documented through the use of regular surveys, possibly limited to well- defined samples, but rigorously conducted. Measuring the impact of policy programs as well as their relevance is indis- pensable. Industrialized countries have significant experience with measuring the impact of schemes such as tax incentives for business R&D or public R&D support on innovation efforts and performance. Quantitative methods, based on field experiments, are also being implemented specifically for use in the developing world. They help countries decide whether to scale up programs that prove effective. Overall, the most appropriate methods for evaluating innovation policy are the peer review processes that were initially developed in economically advanced countries, notably by the OECD, and that are gradually and success- fully being disseminated in low- and middle-income countries. Such national reviews can serve as a tool for shaping policy initiatives and triggering policy reforms (as discussed in chapter 8). Policy Implementation Putting in place an innovation policy is a daunting challenge, as economically advanced countries have learned in the past decades, especially because estab- lished agencies and departments supposed to carry out innovation policy functions have crowded the field. Implementing innovation policy is even more daunting in developing countries where the institutional context is more difficult, resources are necessarily limited, and managers able to carry out these programs and policy measures are lacking. 18 Innovation Policy: A Guide for Developing Countries A long-term strategic approach, based on a clear long-term vision, for gradually implementing the necessary changes is therefore useful. This step- wise approach focuses on interventions in specific industries, sites, or com- munities. These chapters in part three first describe elements of the strategic framework (chapter 8) and then examine the promotion of competitive industries (chapter 9), the building of innovative sites (chapter 10), and the support of innovation in, and for, poor communities (chapter 11). Chapter 8: Policy Implementation—The Art and Craft of Innovation Policy Making The rationale for innovation policies is that they aim to boost technological change, which is considered the basic factor of economic growth, social devel- opment, and environmental adaptation. Countries differ considerably in their assets and capabilities, however, and developing countries are seriously affected by governance problems, lack of resources, insufficient infrastructure, and other constraints. It is therefore crucially important to provide orientations for making innovation policy work in different policy contexts, including the most difficult ones. This effort involves two complementary issues: the design of effi- cient and pragmatic policy agendas and the formation of institutional virtuous circles within an “evolutionary” perspective. When designing pragmatic agendas for local contexts, policy makers should focus broadly on the sectors, sites, and groups of people with the greatest chances of successful development in view of their competencies, comparative advantages, and networking. Specific strategies will depend on the scientific and technological level of the country and the situation of its institutions and governance climate (see table O.2). In addition, it is important to distinguish between “prime movers’ agendas,” which entail starting from scratch with pio- neer innovators, and “critical mass agendas,” which largely entail attracting newcomers to a going concern. The objective in all cases is to favor a success- ful “self-discovery process” through appropriate combinations of public and private actors that take the best advantage of the situation, whatever its con- straints and opportunities. Clearly, government priorities and policy actions will differ considerably according to the country’s technological competence and the nature of its business environment. For countries well equipped with R&D competencies and infrastructure and with a good business climate, it makes sense to pursue advanced research broadly along the frontier of technology, while facilitating— through encouragement of venture capital, technology brokering services, and training platforms—the development of innovation clusters in industries with international competitors. For their part, low-income countries with limited knowledge endowments and a poor business and governance environment can focus their efforts on exploiting those endowments. They can tap into and adapt global knowledge and technology for their needs and support budding entrepreneurs throughOverview 19 Table O.2 Country Contexts and Strategic Focal Points Tolerable and improving Weak institutions Technology Strong institutional institutional and investment capabilities framework environment climate High (frontier Innovation leaders’ Critical mass agenda: Prime movers’ agenda: technology agenda: development increase of value leveraging pockets creation) of proprietary added of natural of dynamism technology through resources wealth and promotion of innova- technology commer- tion clusters cialization Medium Critical mass agenda: Critical mass agenda: Prime movers’ agenda: (adaptation of development of development of leveraging pockets technologies innovation clusters and innovation clusters of dynamism available high value-added and high value-added worldwide) supply chains supply chains Low (adoption Creation of knowledge Exports as springboard Creation of basic of technologies) endowments through agenda: development institutional higher education and of nontraditional infrastructure attraction of foreign exports as entry through a diversity technology and points for institutional of entry points expertise and technology assets Source: Yevgeny Kuznetzov. well-focused measures (technical assistance, mobilization of intermediaries, building of export networks, and the like). These activities do not preclude undertaking some frontier research, but because their R&D capability is limited, they must focus carefully on needs that cannot be addressed by existing knowl- edge. In other words, the issue for developing countries is to strike the right balance between using or attracting existing technology and knowledge, adapt- ing them to local contexts, and pursuing focused research, including on frontier technology when appropriate. This balance will of necessity be country specific. Various instruments are available for creating conducive institutional frameworks through virtuous circles, engaging actors in the self-discovery process, and building problem-oriented networks. Examples include well- designed matching funds, foresight exercises, federal contest funds, and other means that are not very costly but that do involve collective mobilization of motivations and the knowledge of targeted communities. A well-defined strategy should then be articulated to move gradually from micro- to macroreforms (see figure O.7). Change often begins with effective microreforms, which then serve as models or sources of motivation for building a critical mass of initiatives through a combination of top- down and bottom-up actions. As the intermediate level between micro- reforms and structured national policy reform, the meso level is critical for scaling up these reforms because it creates the base for major reforms. Mass media should be actively mobilized throughout the process to generate pub- lic support.

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