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Innovation and Technology Absorption
for Growth
Forum Closing Remarks
Fernando Montes-Negret, World Bank
Sector Director
Private and Financial Sector Development Department
Europe and Central Asia Region, The World Bank
Knowledge Economy Forum V, Prague, March 2006
Innovation and Absorption
“Under capitalism, innovative activity - which in other
types of economy is fortuitous and optional - becomes
mandatory, a life and death matter for the firm.”
*W.Baumol, The Free-Market Innovation Machine
‘The ability of a firm to recognize the value of new,
external information, assimilate it, and apply it to
commercial ends is critical to its innovative capabilities.
We label this capability a firm’s absorptive capacity and
suggest that it is largely a function of firm’s level of prior
related knowledge.”
*Cohen and Levinthal, 1990, Absorptive Capacity: A new perspective on Learning and
Innovation.
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Closing Remarks: Outline
Global Pressures on the ECA Region
Major Supply Shock: China and India; EU Accession & commodity
prices shock (energy)
Role of Government in Fostering Innovation: Enabling
Environment and Proactive Interventions
Coordination Failures and Economic Incentives Regime
Cooperation, Competition & Intellectual Property Rights
Intervention in Innovation Markets
Technology Transfer and Absorption
Human Capital Development
Reforming HEIs and R&D Institutes, Reversing Brain Drain
Setting up the necessary Information Infrastructure
Lessons Learned
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Global Pressures Faced by ECA Region
Increasing globalization and new global
players:
Competing effectively in an enlarged EU market
Mobile FDI bypasses restrictive national policies
Increasing labor mobility, but with relatively high
unemployment and slow growth (w/exceptions)
China and India: new global players climbing rapidly the
value chain, raising both new challenges and
opportunities. Is ECA prepared?
Limited Choices: Source of (not so) cheap
labor? Or Source of (Market & Inside-Oriented)
Innovations?  Developing Dynamic Comparative
Advantages, more flexible organizations & Niches
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Diagnostics
Growth is largely driven by technological change and
innovation (TFP) and not by factor accumulation. But
successful innovation does not guarantee faster growth.
Competitive pressures main source of innovation.
Most revolutionary innovations come from upstarts &
incremental innovations from large, established cos.
Social returns of R&D exceed private returns => Under
investment in innovation => Need for smart government
intervention.
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Policy Instruments
Proactive and market friendly public policies
Government intervention to foster innovation:
R&D: A binding constraint to growth? Maybe.
R&D necessary but not sufficient condition.
Successful cases available (e.g. Fundacion Chile)
Also risks of wasting public scarce resources.
Design of incentive-compatible financial
instruments.
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Under competitive pressure the
new Wealth of Nations depends
on …
…their ability to learn
…their ability to deliver (reforms)
…their ability to adapt
(to new challenges)
…their ability to attract
(capital, knowledge, human ressources)
…their ability to sell
(on domestic and foreign markets)
© kgretschmann
Other Factors Affecting Innovation
Dealing with local and global spillovers
Size matters!
Importance of General Purpose Technologies
as engines for growth  Developing
Absorptive Capacity
Protection of IPRs  Importance of
technology trading and technology transfers
IPRs  Granting temporary market power in
exchange for ex-ante investments  Watch
competition policy
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Risks
Inability to satisfy rising expectations, while wasting scarce public
funds  Brain drain
Danger of creating dual economies (high & low productivity sectors,
youth unemployment, worsening personal & regional income
distribution)
Inability to adapt fast enough to change  Institutional rigidities, rigid
labor markets & unresponsive HEIs
Large transition costs & dislocations  Political and institutional
constraints to implement policies
Difficulty in compensating losers
Demographic factors  Rapid aging of population
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India: Driving Forces for Change
Historical coincidences (path-dependent)
Structural and systemic factors:
Human resources
Institutional networks (clusters)
Diaspora (non-resident Indians) and market linkages
Government support (or non-interference)
Towards a Knowledge Economy
Spreading the base
From services to manufacturing & new ventures in high-tech areas
Establishing Competitiveness
In several sectors have gone through one cycle of industrial reform and
restructuring, Automotive, auto components, & Pharma
Measures of Competitiveness
Innovation is now the challenge
Patenting activity
New product launches
Patwardhan
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India: Key Policy Issues
Government as a customer (Procurement)
Making public-private partnership work
Leveraging and using publicly funded RDIs
Effective national innovation system requires
coherent synergy amongst different elements
Focus on interface structures, mechanisms
and organizations (coordination and
sequencing)
Patwardhan
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Lessons from India’s IT Sector
Excellence in industrial age was not prerequisite for success in
knowledge age – Leapfrogging an option
Success in one part of knowledge economy drove development and
success in other parts
Creating right environment for a new industry was easier than
dismantling / rebuilding for existing industries – overcoming vested
interests
Government’s supportive measures enabled growth (but otherwise
the government stayed out of the picture)
First-generation entrepreneurs, often not from traditional business
background
Importance of role models
This is perhaps a lasting benefit of the dot-com boom & bust
Patwardhan
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China: A Strategic Approach to Reform…
Reform strategy
Gradual reform with flexibilities;
Experiments, feedback, and expansion;
Creating incentive regime for R&D organizations to serve
economic development: from public institutions to businesses;
Competition mechanisms and declining budget for RDIs;
Learning from abroad.
Changing roles
Initial focus on diffusion and application
As China developed, knowledge generation becomes
increasingly important.
Xue
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China: A Strategic Approach to Reform…
Initial international competitive reform pressures:
For Chinese industrial sectors to upgrade;
The emergency of knowledge economy;
Reforming of the national innovation system (consolidation of
research institutes from 120 to 80)
Reform and decentralization of HEI management
dramatic increase in university enrollment (from 6.4 million in 1998 to
12.1 in 2001).
WTO accession
Current internal pressures (environment, regional
disparities, urban-rural) stimulate further reform
Xue
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China: A Strategic Approach to Reform
Practical, rather than ideological or orthodoxy;
Debates 1978, 1992, current debates
Political stability and policy consistency;
Policy changes in magnitude but not in major directions;
Gradual reform with determination:
e.g. changing the status of public research institutes
Creating a learning cycle: opening up and reform:
Opening up => new ideas and new forces to push for reform
=> more reform create more rooms for opening up;
Never under estimate the positive externality generated by
opening up.
Xue
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Economic Incentives Regime
Innovation is a complex activity that needs sophisticated
institutional settings and incentives for various actors (IPR,
financing, international trade and FDI, market structure).
An important element of the national innovation system is
competition policy and the interplay between competition
and innovation.
Schumpeter argued monopolists are the most vigorous
innovators, new research (Baumol) argues that competition
(or its threat) might be a stronger incentive for innovative
activity. Incumbent firms likely to be routine innovators,
new market entrants as revolutionary innovators.
Willig, Gretschmann 16
© Intellectual Property Rights
Markets for knowledge are subject to failure: IPR as a
Market-based solution…
...caution ! Risk of holding back technological progress.
The objectives of an IPR regime are stimulation of
investment in innovation; knowledge diffusion and creation;
and the creation of markets for knowledge.
Relationship between patent rights and per capita GNP
seems to imply that as countries grow richer, the need for
protecting IPR also grows.
IPR regimes need to be embedded into policy systems for
innovation, competition and development, and not as stand
alone policies.
©Maskus, Finger, Dezhina
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Intellectual Property Rights ®
PATENT*
Figure 1: Relationship Between Patent Rights
and Per-capita GNP (pre-TRIPS)
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Maskus, Finger, Dezhina
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The Role of the Government in Supporting
Innovation and Technology Absorption
Market failures in the creation of knowledge (information
asymmetries, partial appropriability) result in less than socially
optimal investment in innovation.
Innovation as a continuum, with creation of new products at
the technology frontier and absorption of existing technologies
further down the line – both need investments in R&D (public
and private).
Principles for government intervention in innovation markets:
Neutrality of Intervention (incentives)
Attention to the Institutional Environment
Additionality of funds.
Trajtenberg, Goldberg
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The Role of the Government in Supporting
Innovation and Technology Absorption
Financial instruments:
Matching grants, mini-grants, venture capital;
Tax incentives, procurement preferences;
Non-financial instruments:
Incubators, business support services, technology
parks, etc.
Government interventions should take
institutional setting into account and address
problem areas.
Trajtenberg, Goldberg 20
The Role of the Government in Supporting
Innovation and Technology Absorption
Relationship betw een GDP per capita and KEI
LN GDP per capita 2004 (constant 2000 US$)
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FIN
ISR
GRC
PRT
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CZE
POL
HUN
HRV
LTU
SVK LVA
TUR
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KAZ
BGR
BLR
ARM
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BIH
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ESP SVN
UKR
UZB
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MDA
KGZ
TJK
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Know ledge Econom y Index (KEI)
Trajtenberg, Goldberg 21
EU: Avoiding Coordination Failure
(Lisbon 2)
Interdependence
(No independent
decision making)
Spill over effects
(across borders)
R&D
Complementarities
Product market
reforms( EC)
Labor market
reforms (Nat)
Coordination
(structural reform)
Learning (from each other)
• Cross-country comparisons
• Benchmarking
Gretschmann
Technology Transfer through FDI
Research shows that economies generally benefit
from FDI, regardless of determinants. Stability,
competition, infrastructure are critical to attract FDI
but investment and incentive policies do not work.
*MGI
FDI benefits arise from increased competition,
product and process imitation, new management
approaches and backward and forward linkages. But
adoption of new technologies, processes, etc. is not
free of cost. Countries have to invest in their
absorptive capacity to benefit.
Remes, Klusacek, Broseta, Cordua
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Technology Transfer through FDI…
FDI Inflows have increased exponentially since the early 90s.
300
250
Inflows,
US$ billion
200
150
100
50
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Remes, Klusacek, Broseta, Cordua
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Technology Absorption
Innovation is critical for firms of all sizes and technology
intensity.
SMEs struggle to internalize R&D – outsourcing an option.
Local government support
Learning & adapting technologies proven abroad
Public endowment, private incentives, clear exit strategy
Fundacion Chile
Adequate upgrading of skills and tax benefits
Honeywell, Skoda, Technology Centre AS CR
Importance of Learning from mistakes and developing home
grown solutions to promote innovation, technology
absorption and encourage start-ups
TTGV Turkey
Remes, Klusacek, Broseta, Cordua
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Higher Education Reform…
“Mass higher education is forcing universities to become
more diverse, more global and much more competitive.
A more market-oriented system of higher education can
do much better than state-dominated model.” *The Economist
HEIs cannot - and will not - reform alone… competition
and more comprehensive reform required. Universities
will need to be more flexible, change oriented and
responsive to needs of individuals and economic
interests (good example is MMU in Malaysia, discussed in
the Forum, with its technopreneurship program)
Tuition fees politically difficult, but means to increase
access and quality of tertiary education.
Magrath, Crawley, Kolar, Tam, Paces
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Higher Education for Innovation
Examples of necessary flexibility:
Acts modeled on Bayh-Dole being adopted to
facilitate commercialization of university research
conducted in partnership with private sector and TTO
(Technology Transfer Office).
Science Foundation Ireland key component in this
strategy
Located in enterprise ministry, not education ministry
Foster academic-industry collaboration
Target industries; biotechnology and ICT
Competitive funding decisions, emphasize quality,
international reviewers. Flexible funding tools
Magrath, Crawley, Kolar, Tam, Paces27
R&D for Innovation
Universities are taking on a new role, as entrepreneurs
and direct contributors to economic development
(engaging in in partnerships with industry, establishing
spin-off companies and patenting research results).
Incentives structures within universities must also be
changed to ensure that they contribute to their new role
as entrepreneurs and direct contributors to economic
development.
The Way Forward…
Enabling Environment/IP
Performance Based Funding
Entrepreneurship & Researcher Training
Technology Transfer Offices
Public Private Partnerships
Holm-Nielsen, Lindqvist, Janecek, Campbell
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From Brain Drain to Brain Gain
Migration: a complex social and economic phenomenon.
Migration of the highly educated:
a significant loss to countries, but could result in potential gains
Deterrence of migration not an option. Rethinking options.
Recent research has shown that migration of highly skilled people can
also have positive effects:
Incentives to get educated
Benefiting from diaspora
Returning of migrants with new skills
Remittances
Options: Attract Skilled Migrants / Finance Education Abroad
Fresh Talent Scotland, ImigraCzech vs. Bolashak Kazakhstan
Caglar, McDonald, Andrasova, Roman
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Lessons learned
Most growth is created by innovation and technology
change rather than factor accumulation. This has
implications both for employment creation and
standards of living.
The world is moving fast (China, India), with our
without the participation of ECA countries. To benefit
from globalization and economic flows, ECA countries
have to become more competitive and innovative.
There is a rationale for government support for
private sector R&D efforts, but also a danger that
resources will be wasted. Therefore support
instruments have to be carefully designed.
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Lessons learned
Governments should also work on designing a conducive
national innovation system, where the right economic
incentives and a friendly business environment play a
major role – within those, competitive pressures should
take priority given new research results on the interplay
between competition, innovation and growth.
The analysis of China and India’s experience with
technological upgrading is important to understand what
worked and what didn’t in these countries and what
could be replicated in ECA countries.
Another key aspect of the national innovation system is
education – specifically higher education. There is a clear
trend towards new or reformed models of higher
education, making universities more flexible and
responsive to societal needs as well as increasing the
links with the private sector.
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Lessons learned
Universities are being asked to play a new role as an
active economic actor (technology transfer, patenting,
partnership with industries, spin-off companies, etc.).
This will clearly need new structures and incentive
schemes.
A major source of technological upgrading has been
the absorption of foreign technologies (FDI, trade,
etc.). Absorption of foreign technologies is not free of
cost and certain policies may be detrimental to
economic flows and technology absorption (e.g. local
content requirement).
Countries are following different paths to increase
technology absorption (Chile, Romania, Czech
Republic, Spain), but they all are very specific
attempts at increasing the absorptive capacity of the
economy.
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Lessons learned
Another hot topic is the issue of brain drain/ brain gain. It
looks like there is very little countries can do to prevent
people from moving. Win-win strategies would be to
actively try to offer more opportunities at home and to
increase links with the diaspora.
Intellectual property rights is one instrument countries
can use to encourage knowledge creation and innovation.
Current support instruments seem to be appropriate to
incentivate innovation in ECA countries, although some
tailoring to local characteristics would be necessary.
Caution ! Too stringent IPR regimes can hamper
competition.
While protecting inventors is important, well functioning
technology markets are key for technology diffusion.
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