«Regional Innovation Systems as Public Goods UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION Regional Innovation Systems as Public Goods By Phil ...»
Systems as Public Goods
INDUSTRIAL DEVELOPMENT ORGANIZATION
Regional Innovation Systems
as Public Goods
Director, Centre for Advanced Studies,
Cardiff University, Wales, United Kingdom
In cooperation with
UNIDO, Strategic Research and Economics Branch
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
Vienna, 2006 This publication was prepared by the UNIDO Strategic Research and Economics Branch drawing on a background paper for the UNIDO Research Project “Public Goods for Economic Development”, by Phil Cooke, Director, Centre for Advanced Studies, Cardiff University, Wales, United Kingdom, in cooperation with Olga Memedovic, UNIDO staff member from the Strategic Research and Economics Branch.
UNIDO intern Robert Lambertus van Lavieren provided assistance during various stages of preparing this publication.
Penelope Plowden and Georgina Wilde were the principal English language editors of the publication. Penny Butler was the copy-editor.
Comments and suggestions on the issues raised in this paper may be addressed to:
Olga Memedovic Strategic Research and Economics Branch UNIDO P.O. Box 300 1400 Vienna Austria Tel: (+43-1) 26026-4676 Fax: (+43-1) 26026-6864 E-mail: email@example.com This paper has not been formally edited. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations Industrial Development Organization concerning the legal status of any country, territory, city or area, or of its authorities, or concerning the delimitation of its frontiers or boundaries. The opinions, figures and estimates set forth are the responsibility of the author and should not necessarily be considered as reflecting the views or carrying endorsement of UNIDO. The designations “developed” and “developing” economies are intended for statistical convenience and do not necessarily express a judgment about the stage reached by a particular country or area in the development process. Mention of firm names or commercial products does not imply endorsement by UNIDO. Material in this paper may be freely quoted but acknowledgement is requested with a copy of the publication containing the quotation or reprint.
Abstract The paper focuses on the concepts of ideas and knowledge, which are generally considered as public goods. Ideas and knowledge have always been important to production and growth but nowadays their contribution is central to what many refer to as the knowledge economy, where increasing amounts of production are positioned. The sectors in which disruptive and radical innovation frequently occurs are high-technology manufacturing plus knowledge-intensive business services; the former being mainly aerospace, telecommunications, computing and biotechnology, the latter being mainly research, software, media and financial services.
The paper examines the role of support institutions in knowledge production and innovation, focusing on a regional level. These institutions are shown to be crucial in assisting firms to meet knowledge, skills, financial and other needs that markets fail to provide. The building of global-local relations network management skills by successful firms is shown to be particularly important in this process. The paper investigates and gives examples of the ways in which technological and other standard services in support of regional innovation may be provided. It makes policy recommendations based upon good practice shown by the cases discussed. Finally, the paper considers which role is most appropriately discharged by which governance level, from regional to national and global, including international and supranational agencies such as UNIDO.
Public goods, in comparison with private goods, are those whose consumption by one person does not preclude consumption of the same good by another person. Such consumption does not result in depletion of the goods or disutility for previous consumers.
As Best (2001:5) puts it: “The value of a cooking recipe to the original user does not diminish with its diffusion to new users.” The concept of public goods is also important to new growth theory. This is because new growth theory has productivity increases as endogenous to production. While neoclassical growth models assumed diminishing returns to scale, new growth theory assumes increasing returns to scale associated with new knowledge or technology. New growth models tend to explain where knowledgedriven productivity growth comes from. Productivity may be “made” in production processes by, for example, internal (endogenous) innovation or skills upgrading. Or it may be “bought” as, for instance, in the form of knowledge such as R&D purchased from a university. The same supplier of research may simultaneously also produce, external to the firm, other upgraded human capital. This may have more scientific, technological, managerial or creative content and value than its preceding cohorts. Knowledge may also be “imported” as a public good, otherwise known as “localized knowledge spillovers”.1 These ideas about the importance of innovation and talent to productivity are central to new growth theory. They are also central to the “Washington consensus”, after Capra (2002) and Kay (2003). This posits that innovation positively affects productivity, which in turn creates growth and ultimately competitiveness.2 This central dogma underpins the economic policies of virtually all governments and multilateral agencies.
An unproven thesis One instance of the apparent failure of the central dogma to hold true is provided by the “Swedish paradox” (Edquist and McKelvey, 1997). High rates of innovation and For developing countries, transfer of such spillovers is secured most effectively by enabling visiting scholars to conduct internships in proximity to such knowledge, either in academic or business settings, preferably both. This has been a common means for knowledge upgrading by developing regions and countries in the EU such as the Basque Country and Portugal (see Fontes, forthcoming).
The question arises as to the relationship between knowledge and innovation; indeed, are they the same thing?
If knowledge is thought of in terms of exploration and exploitation, with the former defined in terms of basic research with high tacitness, this type of knowledge is necessary but not sufficient for innovation. Exploitation knowledge is utilized for innovation, but it is more codified, less scientific and closely linked to conventions of entrepreneurship and risk management.
2 REGIONAL INNOVATION SYSTEMS AS PUBLIC GOODSone of the highest levels of expenditure on the key input to innovation, namely R&D, are associated with relative economic decline in Sweden. The same can be said for Japan and Germany. Conversely, countries like Denmark or Italy that do not spend nearly as much on R&D have continued to grow at a healthy pace. Thus between 1991 and 2002 government funding of business R&D in these countries was, at
0.05 per cent and 0.08 per cent of GDP respectively, much lower than the OECD average (0.12 per cent). Equally, average business expenditure on R&D was modest, at
0.6 per cent of GDP for Italy and 1.2 per cent for Denmark, even in the boom period 1998-2000. Nevertheless, Italy had 40 per cent of its manufacturing firms officially defined as innovative and Denmark 52 per cent (OECD, 2004). Meanwhile Denmark’s average annual GDP growth rate for 1998-2002 was 2.0 per cent and Italy’s 1.7 per cent compared with the OECD weighted average of 2.9 per cent. Many countries growing faster, such as Mexico, Poland, Slovakia, Hungary and Greece, grew from a significantly lower base (OECD, 2005). But Italy, with its dependence on industrial districts that specialize in both medium- and high-quality design-intensive consumer products, now faces fierce competition, most recently from China, but previously from Turkey, and North African and other Asian countries. Thus far, Denmark’s design-intensive clusters seem to have avoided Italy’s problems, probably because clothing and footwear are less prominent in Denmark’s industrial mix. The central dogma seems to hold better, not for coordinated market economies, of which the above are exemplars, but for liberal market economies like the United Kingdom and the United States of America (Hall and Soskice, 2001). This is because the latter are more flexible and capable of absorbing competitiveness shocks, usually by moving production offshore or even relinquishing it and developing as service economies, especially knowledge-intensive business services (KIBS).
This paper explores the role of public goods in relation to economic growth and new growth theory, focusing on the concepts of ideas and knowledge, which are often public goods of precisely the kind mentioned above. Of course, these have always been important to production and growth but nowadays it is the contribution of these as formalized within production that is central to what many refer to as the knowledge economy, where increasing amounts of production are positioned. These sectors—the main areas in which disruptive and radical innovation frequently occurs—are hightechnology manufacturing plus KIBS, the former being mainly aerospace, telecommunications, computing and biotechnology, the latter being mainly research, software, media and financial services (Machlup, 1962; OECD, 1999).
The paper examines the role of support institutions for knowledge production and innovation, especially at a regional level. These are shown to be crucial in assisting firms to satisfy knowledge, skills, finance and other needs that markets fail to provide and the building of global-local relations network management skills by successful firms are shown to be important in this. The paper investigates and gives examples of the means by which technological and other standard services in support of regional innovation may be formulated. It makes policy recommendations based upon good practice revealed by the cases discussed. Finally, the paper considers which role is most appropriately discharged by which governance level, from regional to national and global, including international and supranational agencies such as UNIDO.
2. Innovation support institutions Assistance to firms in satisfying knowledge, skill, finance and other needs, when markets fail to provide, can play a crucial role in their success and global-local relations network management skills are considered of key importance in this. The underlying concept is that of innovation systems, particularly the variant known as regional innovation systems (RIS) (Cooke et al., 2004). It is often held that differences in economic performance between relatively more or less successful regions can be explained by looking at the mix of regional innovation policies and institutions that foster economic dynamism. In section 4 below, it is shown that for developing countries, RIS require policies for aligning institutional missions and facilitating connections between exploration and exploitation knowledge. In the cases discussed, refocusing of institutional priorities towards entrepreneurship and ensuring seed funding and incubation for small firms are among appropriate instruments, as are “softer” actions such as integrating associative and networking capabilities between exploration and exploitation activities.
Multilateral agencies have a useful consciousness-raising function but are often less accomplished in nuts-and-bolts policy instrument design.
Policies pursued by regional governments can enhance the economy, culture and identity of regions, including their institutional capacity to attract, animate and construct competitive advantage. Collective entrepreneurship, by promotion of cooperative practices among actors, may give regions distinctive trajectories in regional economic development.
Cases where economic governance gave global identities to artificial (not previously geographically or in any other way coherent) regions include those of Emilia-Romagna in Italy and Baden-Württemberg in Germany respectively.3 To become attractive for companies, specific institutions to support innovation strategies of territories can be set up.
Regions that have constructed advantage by supporting innovative enterprise can act as meaningful communities of economic interest, can define genuine flows of economic activities and can take advantage of true linkages and synergies among economic actors.
Regions need to seek competitive advantage by mobilizing all their assets, including institutional and governmental ones where these exist, or press for them where they do not. As regions become more specialized and pull the institutional support structure along, so foreign direct investment (FDI) seeks out such centres of expertise by On this, see in particular Cooke and Morgan (1998).