«Regional Innovation Systems as Public Goods UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION Regional Innovation Systems as Public Goods By Phil ...»
However, there have been high failure and low graduation rates that have held growth of incubators and incubator firms back considerably, partly because of funding problems. While funding programmes may be influenced at the idea stage by MEAOs (box 6), if there is inadequate follow-up from private or public programmes they are likely to be stillborn. Even when there is a relatively generous national funding programme for building incubators and associated infrastructure, without seed-funding for incubatees such programmes are likely to be ineffective. Thus there should be appropriate multilevel governance of incubator programmes with pump-priming from MEAOs. Infrastructure on a scale beyond the resources of regions should be supplied by national programmes. Seed-funding must be established at regional, municipal and local levels through associative public-private partnership activity. Something like this appears to have happened in Brazil where there has been success, but not in Argentina.
Box 6. Inadequate multilevel management of incubation finance
The idea of developing incubators to stimulate business innovation through exploitation of science and technology fields began with the UNESCO-supported Columbus project organized through the Conference of Rectors of European Universities. Workshops were held in Florianopolis in 1991, then Rio de Janeiro in 1993 and Santa Fe de Bogotá in 1994. Two training models were available for incubator managers in 1992 and 1995. William Bolton, author of The University Handbook of Enterprise Development, and other experts advised the few Argentinian universities receptive to the idea. Argentina’s first incubator was founded at Zapala under the National University of Comahue in 1995. Its specialization was ceramics; thereafter three more were founded, including one by the National Space Agency in Cordoba. The first public policy in support of incubators was in the Province of Buenos Aires. This was the Programme for Production Technology Incubators sponsored by the Provincial Employment Institute, which was part of the Ministry for Production (later the Ministry of Employment took over and closed the programme). All 11 regional universities participated in the programme, each receiving US$50,000 for infrastructure development. A national programme under FONTAR (the National Technological Fund) using Inter-American
22 REGIONAL INNOVATION SYSTEMS AS PUBLIC GOODSDevelopment Bank funds followed in 1997. From 2001 to 2005, 33 grants of roughly US$700,000 each were funded by FONTAR and 31 incubators came into existence.
The occupancy rate of 44 per cent is low, but a surge of new incubators in very recent years explains this. There have been 282 incubatees over this period, of which only 25 (9%) have graduated. Again, incubatee youthfulness is the main reason. Services offered include physical infrastructure, housing, access to electronic communication, consultancy and entrepreneurship training, but there is a general lack of funds for such incubation. Comparison with the Brazilian experience shows that while MEAOs may be important stimulators of an innovation support idea without localized, regionalized or national funding—meaning public funding since incubators are seldom profitable in themselves—application of that idea may be severely hampered by lack of investment finance for incubatee firms.
Source: Versino and Hoeser, 2005.
Integrating financial support Support for innovation is fundamentally a public goods activity justified by a general failure of the market to come forward and anticipate a rate of return on capital investment in incubator facilities. There is virtually absolute market failure in provision of necessary finance for incubatee firms in many cases, although Brazil, for example, performed better than Argentina in this respect.
A case, in which innovation advantage was systemically constructed by linking excellent science and technology (talent) to entrepreneurship (incubation) and innovation (financing) in the absence of entrepreneurship and innovation resources, is that of Israel. Moreover, this case shows that public goods may be in advance of market thinking in provision of systemically interacting innovation support, but that public goods may transform into private goods once a profitable return on investment can be envisaged or demonstrated. The introduction of public goods may thus contribute to reducing the asymmetric information uncertainties that caused market failure in the first instance.
Intermediary agencies Exploration knowledge institutes may adapt to a systemic innovation posture at regional level in part by retraining management and researchers, in part also by engaging in the public goods strategies of sub-national institutions, and by opening and recruiting new businesses for an incubator. It has been shown that a top-down influence focused on a single instrument, building incubators, may enthuse exploration knowledge institutes without them being able to progress swiftly because of weaker systemic linkages at the regional level, specifically financial means of supporting incubatees.
Examples of the importance of well-established intermediary organizations in securing better performance from industrial districts come from the ceramics clusters of Castellon in Spain and Sassuolo in Italy (both of which have strong links to the ceramics cluster in Santa Catarina, Brazil).
POLICY RECOMMENDATIONS FROM THE SUCCESSFUL SERVICES 23Box 7. Public goods financing fuels innovative entrepreneurship in Israel The Israeli model was created with the prospect of global software innovation leadership being endangered by a lack of risk finance. An ambitious and successful incubator programme enabled many thousands of entrepreneurs to emerge from universities and, particularly, research institutes like the Weizmann Institute of Science. The niche technology is indigenous, being in the data security business, otherwise known as Internet firewalls. Israelis pioneered the technology, mainly in the Israel Defence Forces (IDFs) and Mossad, first-mover entrepreneurs being former military personnel made redundant with the scaling back of Israeli defence expenditure. From 1980 to 1990, firms specialized in anti-virus, software protection and encryption technologies (Carmel Software, Iris, BRM and Eliashim were lead firms). At this stage there was no venture capital (VC) in Israel, though the Office of the Chief Scientist’s Industrial R&D Fund and a 1984 R&D law that allowed 50 per cent grants benefited software firms. The Weizmann was key as the invention source of what became a world-standard encryption algorithm. Firms like Algorithmic Research and NDS were set up in the embryonic Tel Aviv innovation corridor. Firewall firms then emerged (1990–1996). With the arrival of the Internet in this period, demand for encryption engines mushroomed, and world-leader firms like Checkpoint, Memco and Aladdin were founded. At this time also (1991), the Israeli government set up Yozma, a public VC firm, which triggered the formation of the Israeli VC industry. By the third stage of development, Yozma had been privatized (1997), funds rose in number from 1 to 70, and US$1 billion was available for start-up and Initial Public Offering (IPO) businesses. This was the point at which ties with the United States became pronounced. IPOs listed on Nasdaq and many of the 70 VCs originated in the United States. Some non-IPO firms have been acquired by US companies.
Source: Cooke et al., 2002.
At the institutional level, the Spanish ceramic tile sector has a more fragmented associative character than the Italian. In Italy, there is a clear hegemony of the tile manufacturers” association (Assopiastrelle) and to a lesser degree the manufacturers of machinery and equipment association (ACIMAC). In contrast, the Spanish sector shows a multiplicity of agents of which the principal is the manufacturer’s association (ASCER), but also relevant are the frits and glaze manufacturers” association, the manufacturers of equipment and machinery association (ASEBEC), the ceramic technicians association (ATC) and the ceramic and building materials distributors’ association (ANDIMAC). This fragmentation limits the industry’s voice in representing this leading industrial district as a whole. For example, leadership in international exhibitions lies with the Italian rather than the Spanish ceramics fairs. There are also certain mismatches in the skills requirements for transforming local into global competitiveness in Castellon, while these seem better integrated in Sassuolo (see box 8) (GabaldónEstevan et al., 2005).
24 REGIONAL INNOVATION SYSTEMS AS PUBLIC GOODSBox 8. Training and skills mismatches cause weakness in global ceramics markets Regarding training, Castellon’s Jaume 1 University supplies high-quality ceramics chemistry graduates, but supplies of management, commercial and industrial engineering talent are scarce and deficient. The Emilia-Romagna universities only recently offered chemistry specialization, their strength being the supply of business administration and engineering talent. Research activity in ceramics is advanced in Castellon, with the university and two specialist research centres, while in Sassuolo there is only the real services centre, the Centro Ceramico di Bologna (CCB), which has been adequate for research needs thus far. Technical innovation in Castellon comes mainly from the glaze manufacturers, but in Sassuolo it comes from the mechanical and design providers. Castellon is highly dependent for research and training on the Institute of Ceramics Technology (ITC), while in Sassuolo greater training effort is spent on design, management and commercialization. The Italian set-up is far more market-oriented, understanding global tastes, while the Spanish is good at ceramics science but less capable of turning local to global competitive advantage.
Source: Gabaldón-Estevan et al., 2005.
Performance in terms of production and export share is better in Italy than Spain, although they have comparable sized industries. However, as table 3 shows, the performance of both the Italian and Spanish clusters (in each case the clusters account for the bulk of national production) is being threatened by the rise of China. Even Brazil is suffering stagnation in its global market share because of China’s competitive incursion into the global ceramics market.
In 2003 Italy had 315 ceramics firms to Spain’s 294, employment was 30,264 and 25,200 respectively, and mean firm employment was 96 in Italy and 86 in Spain.
Nevertheless, Italy remained the global leader in export performance, although it had experienced the sharpest decline because of China, the world’s largest producer.
Source: ASCER, 2003.
Better organization of intermediaries seems to be crucial to the development of Italy’s global lead from a local cluster and regional economic governance base. But now attention must once again be given to more design-intensive production, since China’s cost
POLICY RECOMMENDATIONS FROM THE SUCCESSFUL SERVICES 25advantage in production means global market losses are unlikely to be recovered at the lower-quality levels. Hence regional and local coherence, integration and associativeness among intermediaries are essential to mount swift responses to global competitiveness threats in times of market instability. It remains to be seen if Italy can reassert its global market share in this and other sectors, faced with the competitive challenge from China, and whether further public goods actions will assist.
5. Conclusions and recommendations Exogenous stimuli are sometimes needed Where evidence that innovation mechanisms are working successfully in neighbouring countries with comparable developmental trajectories is not understood or acted upon, a stimulus from exogenous sources is needed. UNESCO’s sponsorship of the incubators concept through the Association of European University Rectors is a case in point.
But it is not enough to alert and advise, where resources for achievement of aims are absent. Tighter partnership with national governments is required for implementation.
Co-funded pilot projects based on successful experimentation in comparable settings are a means to achieving this where recipient organizations show receptivity to innovative solutions. There is clearly a role for UNIDO to initiate the regional innovation system-building process, perhaps in partnership with UNESCO. This should take the form of raising consciousness through regional conferences, ensuring national stakeholders are receptive and willing to invest in innovation infrastructure (the exploration, examination and exploitation dimensions) then, at national and sub-national levels, ensuring seed-funding and other risk investment capital is available and tailored to local needs and potentials. UNIDO should follow through ideas with committed development co-funding for knowledge centres, partnerships and networks.
National and regional policy priorities At the national level formulating general policy approaches that suit changing global conditions is a fundamental responsibility. This can be achieved with vigour in the field of science and technology policy, for example, by redirecting traditional “ivory tower” research institute and university practice towards more market-facing academic entrepreneurship. Science policy ministries must interact positively with ministries of industry and employment in recognition of the strains involved in organizational transformation, otherwise wasteful duplication and relearning efforts will follow. The Brazilian experience of initial failure in management retraining later followed by a less ambitious retraining route is an example of successful adaptation.
investment redirections could perfectly well be pilot projects co-funded by MEAOs at specific experimental and institutional levels. In general, training for management, entrepreneurship and knowledge exploitation should be mainstreamed in higher education institutions specializing in innovation studies. Practical experience of nuts-and-bolts elements like incubation should be pursued with knowledge transfer through internships.