THE CONTEXT OF INNOVATION

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THE CONTEXT OF INNOVATION THE ROLE OF THE
STATE
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INTRODUCTION
The management of the innovation process is an extremely demanding discipline for converting However, the capability of organizations in initiating and sustaining innovation is to great extent determined by the widely local/national context within which they operate. This is essential as innovation within requires a favorable context outside i.e. to look out of the companys window at the business environment (economic and social conditions play a major role)
Output
Commercial Exploitation
Invention

Product
New discovery
Innovation
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INTRODUCTION
QUESTION Is there any scientific and technological gap between industrialized nations (West) and late-industrializers (e.g. Japan)? If yes, which If no, how did they manage to close it.
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INTRODUCTION
ANSWER
Late-industrializers have managed to close the
gap with strategies which focus mainly on
industrialization. In these countries economic
growth was achieved through
imitation by diffusion of technology development of new technology(creativity) efforts to develop their own capacities(transformation). This transformation requires continual efforts by entrepreneurs and business and a collaborative framework promoted by the state.
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INTRODUCTION
QUESTION Would it be easy for the latecomers to reach maturity in todays economy? How? ANSWER To be able to create high-value-added knowledge-based products/services, would appear to be a gigantic task for the latecomer-nation(s). The state must play a significant role in its regulatory and redistribution functions through strategic intervention into infrastructure development and technological capacity formulation human capacity formation
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INTRODUCTION
QUESTION For Schumpeter the idea of being entrepreneurial was not simply buying something cheap and selling it for a quick profit. It was bound up with new products and new methods of production by implication it was long-term rather than short term in nature. Is our understanding of entrepreneurship different now?
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INTRODUCTION
ANSWER No, it is exactly the same. Entrepreneur is consider one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on them.

• Characteristics
• success or failure rests on his/her shoulders
• he/she has to pay the bill personally
• he/she owns the building and/or equipment
• if the business fails, the personal wealth of the
  owner can be normally used to cover the
  businesss debt, which may lead to a compete
  wiped out

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NATIONAL INNOVATION SYSTEM NIS
A national innovation system NIS is broadly defined as the structures and institutions by which a countrys innovation activities are encouraged and facilitated, both directly and indirectly or The network of public and private institutions within an economy that fund and perform RD, translate the results of RD into commercial innovations and effect the diffusion of new technologies.
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KEY ASPECTS OF A NIS
The key aspect of a NIS, according to Archibugi Michie are Education and training Science and technology capabilities Science and technology strengths and weakness Industrial structure Interactions within the innovation system
Technology, Globalization and Economic
Performance, 1997
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KEY ASPECTS OF A NIS
Education and Training
In general, governments are responsible for formal provision of education High rates of participation to education is a key to national economic growth Qualitative issues such as high-quality graduates in the new technologies - IT and biotechnology are important and governments are keenly aware of the need to have them.
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KEY ASPECTS OF A NIS
Education and Training
Percentage of same age group with a
university-level degree
Source OECD (2000) in Financial Times, 26.10.2000
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KEY ASPECTS OF A NIS
Education and Training
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KEY ASPECTS OF A NIS
Education and Training
QUESTION What the figures show? ANSWER That Germany should concern that it is producing too few graduates too slowly. In fact the average German graduate is 28 years old and only 16 in the same age group graduate from universities.
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KEY ASPECTS OF A NIS
Education and Training
QUESTION Then how can the country make-up for skills shortage in the short term? ANSWER They can offer, like the US and UK, work permits to foreign (IT) specialists.
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KEY ASPECTS OF A NIS
Education and training Science and technology capabilities Science and technology strengths and weakness Industrial structure Interactions within the innovation system
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KEY ASPECTS OF A NIS
Science and Technology Capabilities
Countries differ in the resources devoted to RD, in both public funding and business expenditure. The richest countries devote 3 of their GDP to RD the others much less while the developing countries hardly figure.
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KEY ASPECTS OF A NIS
Science and Technology Capabilities
Business-funded RD as a of GDP, 1981-99(not in
scale)
Source OECD (2000) in OECD Observer, September
2000
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KEY ASPECTS OF A NIS
Science and Technology Capabilities
Government-funded RD as a of GDP, 1981-99 (not
in scale)
Source OECD (2000) in OECD Observer, September
2000
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KEY ASPECTS OF A NIS
Science and Technology Capabilities
Government funding of RD declined in the 1990s,
while business investment in RD increased.
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KEY ASPECTS OF A NIS
Science and Technology Capabilities
QUESTION Where government spent is often linked? To which industry? ANSWER To defense objectives. For example, US government defense spending declined in the 1990s after the cold war
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KEY ASPECTS OF A NIS
Education and training Science and technology capabilities Science and technology strengths and weakness Industrial structure Interactions within the innovation system
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KEY ASPECTS OF A NIS
Science and Technology Strengths and Weakness
Countries differ in their areas of specialization and the intensity of RD activities. Japan is a good example, with its intense investment in RD in the fast-growing consumer electronics industry in the 1970s-80s Indias growth in software development is a more recent example of building competitive advantage
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KEY ASPECTS OF A NIS
Education and training Science and technology capabilities Science and technology strengths and weakness Industrial structure Interactions within the innovation system
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KEY ASPECTS OF A NIS
Industrial Structure
Large-scale investment in RD are carried out by countrys large firms, as only they are able to undertake the long-term RD programmes and the accompanying risks. Research has shown that the share of large firms is on average about 49. Of course large spending in RD does not necessarily ensure successful innovation
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KEY ASPECTS OF A NIS
Industrial Structure
Large-scale investment in RD are carried out by countrys large firms, as only they are able to undertake the long-term RD programmes and the accompanying risks. Research has shown that the share of large firms is on average about 49. Of course large spending in RD does not necessarily ensure successful innovation QUESTION What is your opinion about small firms. Do they play a role?
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KEY ASPECTS OF A NIS
Industrial Structure
ANSWER Yes indeed. Small firms can also play a role, as has been the case in high-tech areas. The small start-up is flexible and less bureaucratic than the established firms they may also be rich source in ideas. A good example is Microsoft. In US, venture capital for start-up companies has been more developed than in either Europe or Japan. In fact, the rapid growth of biotechnology start-ups in US in the 1980s owned much to funding by venture capital.
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KEY ASPECTS OF A NIS
Education and training Science and technology capabilities Science and technology strengths and weakness Industrial structure Interactions within the innovation system
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KEY ASPECTS OF A NIS
Interactions within the Innovation System
Interactions contribute to innovation activities within a country and to their diffusion. They can be either a formal coordination or in-formal networking.
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KEY ASPECTS OF A NIS
Interactions within the Innovation System
Government guidance differs substantially from country to country. See the examples of Japan vs. ex-Soviet Union. The co-ordination role of the Japans Ministry of International Trade and Industry is often cited for its crucial role in the countrys economic development Strong state guidance in the ex-Soviet Union, by contrast, was much less successful and the separate research institutes for each industry sector had only weak links with each other. Ex-Soviet Union had concentrate on military and space projects where it spent about 3 of its GNP. This together with the rigid command economy, left little scope for civilian innovation links to develop A more (recent) trend globally is the growing interaction between academic researchers and firms.
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KEY ASPECTS OF A NIS
Conclusions 1/3
There is no one model of innovation system that can be said to be superior in generating and diffusing technological innovation Innovation is linked to economic growth Countries show a good deal of diversity in their NISs Simple quantitative comparisons of R D expenditure tell only a partial story
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KEY ASPECTS OF A NIS
Conclusions 2/3
Social, cultural and historical differences have an influence on the ways in which learning, scientific curiosity and entrepreneurial flair are allowed to flourish in national environment. Government initiatives are more influential in some countries than in others. Huge investment in industrial RD in Germany and Japan in the post war period was crucial in their efforts to catch up economically.
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KEY ASPECTS OF A NIS
Conclusions 3/3
The ability to assimilate and imitate innovations from elsewhere as the basis of further local innovative developments has been a particular feature of Asian tigers. While the process of technology transfers can be the basis for innovation for all nations, technical change has proceeded unevenly among countries as the adaptation of technology and use in local environment is still dependent on diverse national systems.
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THE ROLE OF THE STATE
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PORTERS DIAMOND

• Why does CH excel in the production
• and export of precision instruments
• and pharmaceuticals?
• Why does Japan do so well in the auto
• industry?
• Why do Germany and US do so well in
• the chemical industry?

Porter claims that there are four attitudes of a
nation that shape the environment in which local
firms compete, see figure
FACTOR CONDITIONS skilled labor, necessary infrastructure DEMAND CONDITIONS the nature of home demand for the industrys product or service RELATED SUPPORTING INDUSTRIES the presence or absence in a nation of suppliers related industries FIRM STRATEGY, STRUCTURE RIVALRY how firms are created, organized and managed and the nature of domestic rivalry.
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THE ROLE OF THE STATE IN INNOVATION

• In parallel to Porters industry framework, the
  model tries to highlight the possible role the
  state can play in relation to innovation

• It underlines a firms relationship with
• Customers, i.e buyers
• Factor conditions, i.e. labor, capital, raw
  materials
• Related and supporting industries, i.e.
  technology providers, and
• Other institutions that help facilitate strategic
  orientation and
  innovative capabilities

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THE ROLE OF THE STATE IN INNOVATION
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THE ROLE OF THE STATE IN INNOVATION
The state can impact As a financier of RD and major purchaser, e.g. in 1995, US spent 71.4 bio for RD (defense, health, space, energy, environment, agriculture, general science) funding industrial research labs, universities, non-profit labs and federally funded research RD centers. There also are indirect ways of financing RD, such as tax exemptions, subsidies, loan guarantee, export credits and form of protection, e.g. Boeing paid no taxes between 1970 and 1984, and also received a tax refund amounting to 285 mio.
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THE ROLE OF THE STATE IN INNOVATION
The state can impact As a major purchaser, the state can also reduce uncertainty and create favorable cash flows for firms by its willingness to pay higher (monopolistic) prices for early models.
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THE ROLE OF THE STATE IN INNOVATION
The state can impact Through education and other societal actions, e.g. in the formation of highly qualified workforce Interdependence between state and society may create a favorable national culture which welcomes scientific development, and remote the potential for conflict between economic interests and social forces, cultural traditions and new trends
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THE ROLE OF THE STATE IN INNOVATION
The state can impact Through regulation of competition. A very critical area for the reproduction/expansion of the capitalist system, as the state can promote the system by preventing monopolies that can result in under-innovation and by protecting the society against possible abuse by companies. see case study - Microsoft takes antitrust case to Supreme Court
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THE ROLE OF THE STATE IN INNOVATION
QUESTION Microsoft practices
You are a member of an international ethics
commission assembled by the World Trade
Organization WTO that has been asked to assess
the global tactics of Microsoft in recent years.
A primary issue is whether Microsoft took unfair
advantage of its powerful position in the
computer industry by using strong-arm tactics
on software customers throughout the world, and
by crushing weaker rivals. Regardless of whether
or not Microsoft is guilt of anticompetitive acts
in a legal sense, do you believe Microsoft has
conducted itself in a ethical manner in its
business dealing? Has it abused its power in the
industry, or is Microsoft simply a tough
competitor? Do you think the WTO should develop a
policy to control such competitive tactics of
global powerhouse like Microsoft?
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THE ROLE OF THE STATE IN INNOVATION - COUNTRIES

• JAPAN
• It provides extensive support and subsides to
  promote industrial innovation
• A good example of state role is TRINITRON
  television (a dominant electronics technology
  that dominated home electronics for more than 20
  years) which brought together
• universities
• state organizations such as the Ministry of
  International Trade and Industry
• sector organizations
• business enterprises
• The Japanese model has been acknowledge by many
  for a long time but it has also received severe
  criticism by Porter et al., as a result of the
  recent economic slowdown. However, the weakness
  mainly attributed to
• the lack of concern for strategy in Japanese
  companies which have been stuck in between two
  competitive strategies of cost and quality, and
• low profitability

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THE ROLE OF THE STATE IN INNOVATION

• USA
• It spends trillion dollars in universities and
  governmental labs
• It performs half of the words basic research
• US tries to create positive effects in the
  economy by letting the market achieve the most
  efficient allocation of resources with minimal
  possible intervention it follows the so-called
  Chicago School paradigm for promoting
  competitiveness and innovation, which created a
  belief in the free market to maximize innovation
  and productivity.

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THE ROLE OF THE STATE IN INNOVATION
There is another framework to show the way in
which some states achieved a major transformation
of the economy and society the concept of
develomental- predatory-states
GENERAL Two extremes
a?pa?t???
PREDATORY STATES which captures most of the
funds in the economy and relocate them in the
form of rents to a small group of population
(thus impending the growth potential in the
state)
DEVELOPMENTAL STATES which, in some states, is
used to achieve a major transformation of the
economy and society
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THE ROLE OF THE STATE IN INNOVATION
QUESTION Name the countries to which the
Predatory States development is a major
characteristic? ANSWER To Asian tigers, like
Korea, Taiwan, Singapore and Hong Kong as well as
to Turkey
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THE ROLE OF THE STATE IN INNOVATION

• QUESTION
• Why is it NOT surprising that many consumer
  products such as in-car satellite navigation
  guidance, mobile telephones and computers have
  their origins in defense research?
• ANSWER
• (Remember) in the question Where government
  spent is often linked?, the answer was To
  defense objectives

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THE ROLE OF THE STATE IN INNOVATION
QUESTION How can the state encourage entrpreneurs and business to invest in longer time-horizons?
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THE ROLE OF THE STATE IN INNOVATION
ANSWER Though indirect ways of financing RD, such as tax exemptions, subsidies, loan guarantee, export credits and form of protection, e.g. remember Boeing, which paid no taxes between 1970 and 1984, and also received a tax refund amounting to 285 mio By reducing uncertainty and create favorable cash flows for firms by its willingness to pay higher (monopolistic) prices for early models Through education and other societal actions, e.g. in the formation of highly qualified workforce
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THE ROLE OF THE STATE IN INNOVATION
ANSWER Through regulation of competition. A very critical area for the reproduction/expansion of the capitalist system, as the state can promote the system by preventing monopolies that can result in under-innovation and by protecting the society against possible Through partnership, e.g. TRINITRON TV in Japan Through more direct interventional, e.g. by giving incentives as direct support subsidies, location provision, etc.
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INNOVATION IN CAPITALISM
Historical Overview-Kondratief waves of growth and their main features
Prosperity
Recovery
Economic activity
Recession
Depression
?
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INNOVATION IN CAPITALISM
Historical Overview- Geography of Innovation
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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• In these Kondratief waves, the capitalist economy
  grew on the basis of major innovations in
  product, process and organization with
  accompanying shifts in the social arena.
• Each wave comes to an end due to its major
  short-comings and the successive fundamentally
  restructures and improves those weakness
• The decline of the previous wave gives birth to
  the next one which offer features able to give
  solutions to the weakness of the earlier phase
• Each major phase of innovation produced a star
  industry or industry branch, which seemed to
  affect the way the economy was organized.
• Product, process and organization created by
  technological development became universal and
  cheaply available to a vast population, which, in
  turn, created the economic shift.
• The leap forward provided by a star
  industry(ies) resulted in a major transformation
  of the economy and economic relations given
  that other factors such as demand, finance,
  industrial and social conditions were favorable.

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INNOVATION IN CAPITALISM
Waves and growth in capitalism
Organizational characteristics
Individual entrepreneur
Small firms
Monopolies Oligopolies cartels
Centralized Multi- nationals
Network types
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INNOVATION IN CAPITALISM
Waves and growth in capitalism
Organizational characteristics
Individual entrepreneur
Small firms
Monopolies Oligopolies cartels
Centralized Multi- nationals
Network types
WHAT ARE THE NETWORK TYPES-ORGANIZATION?
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INNOVATION IN CAPITALISM
Waves and growth in capitalism
Organizational characteristics
Individual entrepreneur
Small firms
Monopolies Oligopolies cartels
Centralized Multi- nationals
Network types

• They are flexible organizations, small and large
  firms
• Trust based networks with close cooperation in
  technology, QC, training and production planning
  (i.e. JIT)

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INNOVATION IN CAPITALISM
Waves and growth in capitalism
K4 Fordism
K5 ICT
K1 Early mechanization
K2 Steam power and railway
K3 Electrical and heavy engineering
K0 Initially
Organizational characteristics
Individual entrepreneur
Small firms
Monopolies Oligopolies cartels
Centralized Multi- nationals
Network types
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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• Limitations of K0 Limitations of no
  mechanization
• Advantages of K1 (Early mechanization) Solutions
  offered through mechanization and factory
  organization towards productivity and
  profitability

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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• Limitations of K1 (Early mechanization)
• Limitations of water power, scale of production
• Advantages of K2 (Steam engines railway)
  Solutions offered through steam engines and
  transport systems towards productivity and
  profitability

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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• Limitations of K2 (Steam engines railway)
• Limitations of iron as an engineering material
  (strength, durability, precision, etc) overcome
  by steel and alloys
• Limitations of steam engines overcome by
  electrical machinery, power tools.
• Advantages of K3 (Electrical heavy
  engineering)
• Solutions to layout improvements, standardization
  and capital savings

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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• Limitations of K3 (Electrical heavy
  engineering) Limitations of batch control
• Advantages of K4 (Fordism)
• Solutions offered by mass production, full
  standardization, replaceable of components,
  universal availability and cheapening of mass
  consumption goods

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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• Limitations of K4 (Fordism) Limitations of
  inflexible dedicated assembly lines and process
  plants
• Advantages of K5 (Information communication)
  Solutions by flexible manufacturing systems,
  networking and economies of scope, electronic
  control systems and networking provide for
  necessitated flexibility

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INNOVATION IN CAPITALISM
Waves and growth in capitalism

• QUESTION
• Networks constitute a key organizational
  attribute to the current wave of economic growth.
  Does this mean it is not possible for a firm to
  be innovative on its own?

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INNOVATION IN CAPITALISM
Comparison between Latin American Asian Tigers
Similarities Differences

• Initially, all were exporters of raw materials
  and importers of higher-technology products
• Both, they transformed from simple technology
  sectors towards higher-value-added and heavy
  industries (which, by the way, was the key to
  their success)
• This was achieved with the complementary use of
• Import-substituting industrialization (ISI), and
• Export-oriented economic policies (EOI)

• The Asian tigers after the initial phase of ISI,
  they opened up to international competition
  through an EOI regime in contrast to Latin
  American countries (and Turkey)

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INNOVATION IN CAPITALISM
QUESTION Innovation cannot be separated from its local, national and global contexts political and social processes main economic trends (mainly). Why is it connected so much with economic trends?
ANSWER Because of you do not have a good ROI, why to be innovative in the first place, why to invest in people, scientists, facilities, etc.
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THE ROLE OF THE STATE IN INNOVATION
These will determine to a great extent the firms opportunities together of course with its inner strengths, i.e. its strategy-making capabilities and structural features.
QUESTION Why this kind of development worked with
the Asian tigers and not with Turkey?