Last week, the OECD held its 2010 Ministerial meeting and policy forum. The focus of the meetings was on economic recovery and sustained growth. One of the highlights was the release of OECD’s Innovation Strategy — a three year multi-disciplinary effort.
The Key Findings report outlines why it matters:
Innovation has been and must continue to be a major driver of rising living standards. Preliminary estimates for several OECD countries show that firms now invest as much in intangible assets related to innovation (R&D, software, skills, organisational know-how and branding) as they invest in traditional capital such as machinery, equipment and buildings. Such investment accounted for up to 1 percentage point – or around one-quarter – of labour productivity growth in Austria, Finland, Sweden, the United Kingdom and the United States between 1995 and 2006 (Figure 1). Moreover, much multifactor productivity (MFP) growth – that is, the joint productivity of capital and labour – is linked to innovation and improvements in efficiency. Collectively, estimates suggest that investment in intangible assets and MFP growth accounted for between two-thirds and three-quarters of labour productivity growth in OECD countries such as Austria, Finland, Sweden, the United Kingdom and the United States between 1995 and 2006. Innovation was the main driver of growth. Differences in MFP also account for much of the gap between advanced and emerging countries, an indication that innovation is also a key source of future growth for emerging economies.
The OECD reports outline a broad view of innovation. As they point out, “While R&D remains vitally important, many highly innovative firms do not engage in R&D at all . . . Increasingly, firms in services and manufacturing create value through a wide range of complementary technological and non-technological changes and innovations.” Likewise collaboration (including open innovation and user-driven innovation) has become an important part of the innovation process.
The result is that innovation is both a global and local phenomena. “While firms can access factors of production across the globe, local knowledge and capabilities, including proximity to research and education institutions, continue to matter for innovation.”
Thus, the report concludes:
Such changes in the innovation process present a challenge to existing national policy frameworks. The focus on strengthening public research and on providing incentives for firms to invest in research and development is important, but it is not enough. A more strategic approach to fostering innovation is needed, one which considers the full spectrum of policies to create, diffuse and apply knowledge
In response, the report highlights the following policy principles for innovation:
1. Empowering people to innovate
• Education and training systems should equip people with the foundations to learn and develop the broad range of skills needed for innovation in all of its forms, and with the flexibility to upgrade skills and adapt to changing market conditions. To foster an innovative workplace, ensure that employment policies facilitate efficient organisational change.
• Enable consumers to be active participants in the innovation process.
• Foster an entrepreneurial culture by instilling the skills and attitudes needed for creative enterprise.
2. Unleashing innovations
• Ensure that framework conditions are sound and supportive of competition, conducive to innovation and are mutually reinforcing.
• Mobilise private funding for innovation, by fostering well-functioning financial markets and easing access to finance for new firms, in particular for early stages of innovation. Encourage the diffusion of best practices in the reporting of intangible investments and develop market-friendly approaches to support innovation.
• Foster open markets, a competitive and dynamic business sector and a culture of healthy risktaking and creative activity. Foster innovation in small and medium-sized firms, in particular new and young ones.
3. Creating and applying knowledge
• Provide sufficient investment in an effective public research system and improve the governance of research institutions. Ensure coherence between multi-level sources of funding for R&D.
• Ensure that a modern and reliable knowledge infrastructure that supports innovation is in place, accompanied by the regulatory frameworks which support open access to networks and competition in the market. Create a suitable policy and regulatory environment that allows for the responsible development of technologies and their convergence.
• Facilitate efficient knowledge flows and foster the development of networks and markets which enable the creation, circulation and diffusion of knowledge, along with an effective system of intellectual property rights.
• Foster innovation in the public sector at all levels of government to enhance the delivery of public services, improve efficiency, coverage and equity, and create positive externalities in the rest of the economy.
4. Applying innovation to address global and social challenges
• Improve international scientific and technological co-operation and technology transfer, including through the development of international mechanisms to finance innovation and share costs.
• Provide a predictable policy regime which provides flexibility and incentives to address global challenges through innovation in developed and developing countries, and encourages invention and the adoption of cost-effective technologies.
• To spur innovation as a tool for development, strengthen the foundations for innovation in low-income countries, including affordable access to modern technologies. Foster entrepreneurship throughout the economy, and enable entrepreneurs to experiment, invest and expand creative economic activities, particularly around agriculture.
5. Improving the governance and measurement of policies for innovation
• Ensure policy coherence by treating innovation as a central component of government policy, with strong leadership at the highest political levels. Enable regional and local actors to foster innovation, while ensuring co-ordination across regions and with national efforts. Foster evidence-based decision making and policy accountability by recognising measurement as central to the innovation agenda.
Many of these recommendations are things we have heard before. Not everyone will agree with each point. But having a full discussion of them in the full context of innovation policy is very useful. A couple of the specifics are ideas near and dear to my heart including:
Well-functioning venture capital markets and the securitisation of innovation-related assets (e.g. intellectual property) are key sources of finance for many innovative start-ups and need to be developed further.
Ensuring that information on intellectual assets (e.g. R&D, patents, software, databases, organisational capital) is consistent and comparable over time and across companies would help investors to better assess future earnings and the risks associated with different investment opportunities. This can help make financial markets more efficient and improve firms’ ability to secure funding at lower cost. Governments can assist in efforts to promote identification and dissemination of best practices in reporting. Given the wide range of intellectual assets held by firms in different industries, and the comparatively early stage of development of reporting frameworks, the approach to improved disclosure should remain principles-based.
Of course, I would have liked to see the recommendations go beyond disclosure to activities the government could assist in better management of intangible assets as well, such as the Scottish Intellectual Asset Centre and my proposal to expand the Manufacturing Extension Partnerships (see also earlier posting). But that is a topic for future work.
The OECD reports ends with a road map for “the way forward”:
In this broader approach to innovation, it is particularly important to balance policies aimed at the creation of new knowledge and innovations with those aimed at fostering its uptake and diffusion in the economy. Policy actions also need to reflect the changing nature of innovation. This implies an emphasis on the following areas:
• A more strategic focus on the role of policies for innovation in delivering stronger, cleaner and fairer growth.
• Broadening policies to foster innovation beyond science and technology in recognition of the fact that innovation involves a wide range of investments in intangible assets and actors.
• Education and training policies adapted to the needs of society today
to empower people throughout society to be creative, engage in innovation and benefit from its outcomes.
• Greater policy attention to the creation and growth of new firms and their role in creating breakthrough innovations and new jobs.
• Improved mechanisms to foster the diffusion and application of knowledge through well-functioning networks and markets.
• New approaches and governance mechanisms for international cooperation in science and technology to help address global challenges and share costs and risks.
• Frameworks for measuring the broader, more networked concept of innovation and its impacts to guide policy making.
More than anything else, this outline of a broad strategic view is a major contribution to the policy debate. The Economist summary of the meetings is especially telling:
Windy talk about innovation is mind-numbingly abundant. Unusually, however, the grandees taking part in a conference in Paris this week organised by the OECD received some pointed advice. The rich-country think-tank has unveiled a thoughtful new report on how governments can do better at spurring and measuring innovation.
The grandees were also unusually attentive. Many governments are facing not only slow economic growth but also big deficits and heavy debts. At the same time, problems such as global warming and rising prices for natural resources demand their attention. Innovation, the OECD argues, offers a way out.
Let us hope that they took the larger message – of needing a broad innovation strategy — to heart. Otherwise, piecemeal actions won’t get us to where we need to be.
The full report – The OECD Innovation Strategy: Getting a Head Start on Tomorrow – is available for purchase online; the Executive Summary can be downloaded for free. A companion report – Measuring Innovation: A New Perspective is also available for purchase online.
Below is a video of Andrew Wykoff, Head of OCED’s Directorate for Science, Technology and Industry, describing the importance of innovation.
Other video clips from the policy forum are available online.