How to improve the national innovation systems of the catchingup economies

1
How to improve the national innovation systems of
the catching-up economies ?

• Urmas Varblane
• University of Tartu

2
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

3
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?

4
The framework of the research proposal
5
The implementation plan of the project
subtopics, working groups

• NIS partly overlaps with the three systems
  economic- education- and political system gt
• 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.

6
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.

7
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

8
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 gt 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.

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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 RD
  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.

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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)

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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,
  1995p.462-463)

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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 .

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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.

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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).

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Nauwelaers, 2003
16
Edquist, 2001
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A generic national innovation system (Arnold, E.,
Kuhlman, S, 2001, RCN in the Norwegian Research
and Innovation System. Available at
www.technopolis-group.com)
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Boundaries of innovation systems types of
systems

• Spatially, sectorally,functionallygt
• 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)

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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.

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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
• 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)
• 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).

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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 gt 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

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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.

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Activities in the system of innovationproposed
by Chaminade, Edquist, 2005

• Provision of knowledge inputs to the innovation
  process
• 1. Provision of RD - 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 RD 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

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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
predominantly the result of ideas born in
universities and transformed by companies.
Applied research turns the idea into something
practical
Industry development of new products and processes
The company brings the new product to the market
NIFU-STEP, 2005
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Activities in the system of innovationproposed
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, RD
  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.

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Activities in the system of innovationproposed
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.

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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 gt common command economy past,
  which has influenced the whole logic of building
  up their national innovation system

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Problems of the building the national innovation
system in catching-up economies

• Catching-up economies own latecomer advantages -
  extremely high dynamismgt 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.

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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

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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 (RD facilities etc.).
• Freeman (1999) added capacity to make
  institutional changes (social capability for
  institutional change - to overcome learning and
  technology divide(Arcena, Sutz,2003)

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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.

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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

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Capabilities and development - an integrated
framework (Fagerberg, Shrolec, 2007)
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National Technological Learning (Watkins, 2007)
ST learning capacity
ST learning opportunities

Knowledge generation capacity
Knowledge absorption capacity
Diaspora and Expats
Internet
Capital imports
Licensing
Education
Export Customers
RD
Inward FDI
ST co-operation
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Tree of national technological learning
Human capital accumulation
Creative-cooperative
Autonomous
Creative- isolated
Active FDI-dependent
Aid supported
Passive FDI-dependent
Slow learning
Time
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Six models of national technological learning
(Watkins, 2007)

• Traditionalist slow learning,
• Passive FDI-dependent,
• Active FDI-dependent,
• Autonomous,
• Creative-isolated,
• Creative-cooperative.

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Advantages and disadvantages of coming late

• Big gap in technology gtpotential for a rapid
  catch-upgta wide diffusion process of innovations
  needed(UNIDO 2005).
• East Asian vs.Latin America gtthe importance of
  the technology diffusion management
• market-induced imitation and organizationally-indu
  ced technology transfer.
• Matthews (1999) indicates that those are passive
• East Asia gtactive 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 RD 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.

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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

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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, 2000Milner, 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)

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How technologies spread?

• Technologies do not spread instantaneously
  diffusion is a long process
• Models disagree about the reasons behind it
• Epidemic models gtinformation (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)
• gt 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)

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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 RDgtleapfroging decades of
  technological porgress (Teece, 2000)

42
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)

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General Background of IndustrialDevelopment of
Taiwan
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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 Phone, DTV, Display,
Automobile, Ship-building, etc.
Export Commodity Profile
Semiconductor
HCI Product
79.8
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Light Industry Product
14.1
Agricultural Product
6.1
1980
1990
2003
1960
1970
1999
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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

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Korea (2) Innovation Strategy
Promote balanced National Innovation System

• Vitalization of university research
• Networking among Industry, academia, govt

Sustain infrastructure for creative innovation
From supply push To demand pull

• Mission-oriented governmental
• RD programs
• Technology targeting

• Sustained investment for
• basic science (KIAS)
• Increased protection for
• intellectual property rights
• Promotion of venture companies

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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).

48
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 RD
  institutes
• the diffusion of these capabilities as rapidly as
  possible to the private sector (e.g. through a
  sequence of targeted RD 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.

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Technology Leverage Institution (TLI)

• not be engaging in fundamental scientific
  research.
• would be concerned strictly with identifying and
  evaluating available technologies.
• provide shared RD 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.

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Overview Industrial Technology Research Institute
(ITRI)
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Sources of early mover and latecomer advantages
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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

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Generic Technological Capability Development
Strategies ofLatecomer Firms from Late
Industrializing Economies
(Poh-Kam Wong, 1999)
56
Key Technological Learning Processes for the Five
GenericTechnological Capability Development
Routes
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Dominant Generic Technological Capability
Development Routes in National Innovation System
Models of three NIE
(Poh-Kam Wong, 1999)
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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.

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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.

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Development of the national innovation system in
countries with command economy past
63
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 gtBeing 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.
  

64
Path dependency problem

• inefficiencies and ineffectiveness of NISs 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.

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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

68
Passive FDI-dependent learning

• passively relying on FDI to bring in new
  technologies,
• low ST 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.

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Active FDI-dependent learning

• relatively high ST 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.

70
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.

71
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 ST 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 RD intensive
  industries).

72
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.

73
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.

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75

• The task of innovation system in this case should
  be to move firms up the ladder described in
  Figure 1.
• It requires activities in two directions.
• Firstly, to encourage firms to improve their
  capacity to absorb technologies from abroad and
  innovate by providing access to different sources
  of technologies.
• Secondly, to improve the internal motivation of
  firms to change, which requires providing data
  for firms about their relative position comparing
  with the best practises in the world.

76
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 RD -
  understanding that non-RD 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

77
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
78
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.

79
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).

80
Policy areas of importance to services
Innovation in Services Typology, case studies
and policy implications. ECON Report, 2006, Norway
81
Tertiary graduates by field of study (2002)
Source OECD (2004), Education at a Glance.
82
Source OECD, Main Science and Technology
Indicators database.
83
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

84
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
85
The company centred model of the innovation system
Industrial system
International setting
Policy organisations
Research institutions
Suppliers
Company

• Learning
• Networking
• Innovation

Customers
Consultants
Financial institutions
Cultural environment
Regulatory framework
NIFU-STEP, 2005
86
The basis for systemic innovation policies
(NIFU-STEP, 2005)
87
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 RD
• System-based approach to innovation, emphasis on
  learning and diffusion / absorption of knowledge
• Mobility of tacit knowledge embedded in
  humansbecomes a key performance factor
• Glocalisation localised nature of (tacit)
  knowledge spillovers - importance of global
  connections

88
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

89
Policy Conclusions (I)

• Effectiveness of innovation systems depends on
  balanced combination of 3 capacities
• creation of knowledge
• diffusion of knowledge
• absorption of knowledge
• Governments 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, ...

90
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

91
A Simple Taxonomy of Science, Technology and
Innovation Policies
The Impact of RTD on Competitiveness and
Employment (IRCE), EC, 2003
92
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.

93
Export Structure by Technology Category Producing
what vs. producing how