INDUSTRIAL POLICY AND INNOVATION:RETHINKING INNOVATION POLICY IN AN INCREASINGLY
INTERDEPENDENT GLOBAL ECONOMY
Carl J. Dahlman
Georgetown University
Presentation at International Seminar:Industrial Policy for the 21rst Century
May 10-11, 2012
Rio de JaneiroBrazil
Structure of the Presentation1. Argument in a Nutshell2. Definition of Industrial Policy3. Rationale and Focus for Industrial Policy4. Critiques5. Sectoral vs. Functional Approaches6. New Global Context7. From Industrial Policy to Innovation Policy8. The National Innovation System9. The Global Innovation System10. Innovation Policies for the New Context
Data Annex
1. Argument in a Nutshell• There is a renewed interest in industrial policy because
the global context has changed.• The focus has changed from traditional protection of
industrial sectors to innovation policy• This is complicated because innovation system is now
global• Objective is now how to maximize benefits from this new
system• Easier for follower or catch up policies than for frontier so
countries should fully exploit catch-up• But countries should also develop research capability for
frontier work, but take advantage of global networks
2. Definition of Industrial Policy• There are many definitions• Core of the definitions is attempt by government to
intervene through various ways to promote a specific industry or sector or to change the structure of production in a way that is expected to offer better growth prospects for the country
• Originally applied quite narrowly to industrial sectors• Now more generally applied to any economic sector,
including services and even agriculture (such as to promote high value agricultural products)
• Also is generally applied in the context of favoring domestic versus foreign industries
3. Rationale and Focus of Industrial Policy
• Rationale:• Market Failures
• Externalities• Lumpiness (scale)• Capital market failure
• Coordination Failures
• Focus• Developing specific industrial sectors such as:
• Steel• Shipbuilding• Automobile• Semi-conductors
4. Critiques• Government Failure
• Government not likely to be able to second guess market• But easier for government to do when it was in catch-up mode with
more advanced countries• Much more difficult to do when at frontier
• Government Capture• By very groups it was trying to promote• General problem of corruption
• Generally argued that industrial policies has failed in most countries because of lack of capability to plan and especially to implement, but also because of capture and corruption
• However, some countries seem to have implemented industrial policy successful• Japan partially under MITI in 60’s-80’s• Korea, Taiwan, Singapore, to some extent Malaysia• China
5. Sectoral vs. Functional Approaches
• Targeting of specific industries and providing them assistance through• Tariff and non-tariff barriers to imports• Financial incentives such as subsidized loans• Fiscal incentive such as tax holidays, duty free access to inputs• Grants including low cost or free land• Procurement preferences• Equity or even full ownership as state owned enterprises• Coordination of investments for specific industries
• Functional or horizontal intervention• Strengthening financial system and facilitating access to credit• Strengthening education and training• Subsidizing R&D• Improving physical infrastructure, energy, and information and
communication technologies
6. New Global Context• More interdependent world
• Share of imports and exports in World GDP increased from 40 % in 1990 to 63% in 2007
• Reduction in transport and communication costs• Greater globalization of knowledge
• Major structural break as result of 2008/2009 economic crisis• Developed economies hardest hit, slow recovery• Emerging and developing countries less affected, growing faster
• Greater competition from new entrants• China• Other Asian countries
• Changing economic power• Decline of U.S. and Europe• Rise of BRICs
• Awareness there is something new under the sun: global CO2 emissions constraint
IMF Global Growth 2000-2012(quarterly change from prior year)
Source:9/2011 WEO, p.7.
Major Shifts in Economic Size: Share of World GDP in PPP 1980-2017 (IMF data and Projections)
EUU.S
China
Japan
Germany India
Russia
FranceBrazil
Source: IMF DataMapper 4/39/2012
China’s Exports Surpassed US in 2006 and Germany in 2009
©cjd
Share of Total Global Merchandise Exports 1980-2009
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
% o
f G
lob
al
tota
l
China
India
Germany
Japan
France
Italy
United Kingdom
United States
7. From Industrial Policy to Innovation Policy• Governments have realized that
• Countries are more dependent on international markets and globalization
• Some countries have been effective at using industrial policy.• But there are also more global rules now which do not allow some
of the traditional industrial policy instruments• Industry (and manufacturing) are shrinking share of GDP, services
are a rising share
• The have also realized that competitiveness depends more on technological change and innovation than just on basic factor conditions
• Therefore there is now more focus on innovation policy rather than just industrial policy
Free Market/Innovation/Industrial Policy
Structure of Output by Income and Region 2000 vs. 2010
WDI 2012 p. 221
Broad Definition of Innovation• Innovation is a concrete application of knowledge as opposed to
invention which is the first conception of something new. Innovation can be a new product, a new process, a new service, or new way of organizing production and distribution of goods and services.
• Four main types of innovation can be distinguished.• Frontier innovation in the first application of the innovation in the world.
Radical innovation refers to a major change in the technology. Incremental innovation refers to small changes that improve the innovation. Often incremental changes can be cumulative and can greatly improve the performance of the product or service over time. Most innovation is incremental.
• Catch-up innovation in the first application in a specific country of an innovation that already exists elsewhere in the world. This is particularly relevant for developing countries because by definition they are behind the world frontier. In addition much knowledge already exists beyond their frontiers and it is generally easier, less risky, and less costly to acquire it from elsewhere than to develop it independently again.
• Recombinant innovation is an innovation that does not imply new knowledge, but is based on combining existing knowledge in different ways.
• Inclusive innovation is innovation that focusses on goods and services for the poor: it can be high tech or low tech, new or recombinant.
8. The National System of Innovation• Narrow Innovation System
• Universities• Researchers• Universities R&D labs• Public R&D labs• Firms and firm R&D labs• Regional Innovation Systems (RIS)• Science Parks and Industrial Clusters• Networks among the above and between them and foreign correlates• Angel, venture capital and early stage finance for technology start-ups• Technology infrastructure (MSTQ, norms and standards)• Government policies aimed explicitly at the narrow innovation system (R&D funding and subsidies, IPR, etc.)
• Broader Context of Innovation System (Enabling Environment)• Market size, sophistication, and growth• Economic and firm structure• Trade policy and domestic competition• People & labor force, and their level of education & skills• The education and skills development systems• Entrepreneurship and risk taking culture, and quality of life• Financial system including banking and equity markets• Investment climate-macro conditions , ease of operating a business• Infrastructure including especially ICT infrastructure• Quality of life • Government policy that affects factor and market conditions, economic and firm structure, infrastructure, and
how all these interact in the enabling environment
9. The Global Innovation System
copyright cjd
The World of R&D 2011
Ten Largest Tertiary Student Populations 2009 (Thousands)
Country Number of Students Percentage of World
China 29,296 17.4
US 19,103 11.3
India 14,862 8.8
Russia 9,446 5.6
Brazil 6,115 3.6
Indonesia 4,859 2.9
Japan 3,874 2.3
Iran 3,350 2.0
South Korea 3,219 1.9
Ukraine 2,799 1.7
World total 168,582 100.0
Source: UNESCO Global Education Digest 2011, pp. 180-189
Science and Engineering Journal Articles by Region/Country 1995-2010
Source:U.S. SEI 2012
Main Stages and Agents of Innovation Cycle• There are many intermediary steps between research and
innovation. • These are not always linear and sequential because often
the idea for an innovation may come from consumers, or from the experience acquired in production and delivery of goods and services.
• Also, innovation can occur without any formal R&D such as many innovations which consist of new ways or organizing production or distribution of products and services
• There are also many agents involved in the innovation cycle: governments, private firms (including finance and venture capita, universities, NGOs, individual)
Main Agents and Stages of Innovation CycleInnovation cycle/Main Agents
Research Development Engineering & Scale-Up
Production and Commercial-ization
Dissemination and Use
Government Government Research InstitutesGovernment funding of university and private sector research (mostly basic)
Government Research InstitutesGovernment funding of private sector development
Government Research InstitutesSome government funding of scale up by private sector
Some support of private firms mostly in military area, but mostly through SOEs
Work of own ministries through use of new technologies plus explicit dissemination efforts by ministries
SOEs Important performers of own research, and some funding by universities and others
Development work for own technologies
Scale up of own technologies
May be important producers of goods and services, especially in developing countries
Through own growth, licensing and strategic alliances
Private Firms Main performers and funders of all research in world
Main agents in development
Main agents in scaling up
Main agents in production
Through own growth, licensing or other strategic alliances
Individuals Inventors Very little development work by individual inventors
Very little scale-up by individual inventors
Through licensing of technology to productive enterprises or own start-ups
Ultimate users of innovations
Grassroots innovators
Non-formal if any Non-formal if any Very rarely Usually limited to own use
Very little dissemination
Universities Important performers of R&D, particularly basic research
Some development work
Little scale up University Spin – offsLicensing of technologies to productive sectors
Key agents in dissemination of knowledge: teaching, papers, conferences, consulting
NGOs Funding Research (mostly by Foundations)
Not very common, though some do produce
Dissemination of appropriate technologies, through advocacy, demonstrating projects, finance
Key Functional Inputs into Innovation CycleInnovation. value chain
Main Type of Factor Inputs
Research Development Engineering & Scale-Up
Production & Commercial-ization
Dissemination & Use
Key Knowledge and Information
Scientific and Technical knowledge
Scientific and technical knowledge
Mostly engineering knowledge
Knowledge of how to start or expand a businessInformation on market
Knowledge of how to run a businessInformation on market
Key Human Capital
Research Scientists and Engineers
Research Scientists and Engineers
Engineers Entrepreneurs and Managers
Managers
KeyFinancing
Main financing for research own resources of firms, universities, or individuals, supplemented by government grants or angel capital
Angel capital and some early stage finance mostly by government
Some venture capital once there is proof of concept
Venture capital for start-upsBank finance or equity markets for already established firms
Normal finance through operation of financial sector
Transnational Companies are the Key Global Innovation Agent
• They account for more than 60% of all R&D in world• Less of basic research• Most of the development and commercialization
• They account for 2/3rds of world trade• Half is intra firm trade between affiliates• Other half is with third parties
• They account for more than 27% of global value added• Underestimate because does not include backward and forward linkages• They control global supply and distribution chains• They are scouring globe seeking talent and markets, and competing based on
innovation, scale and speed.
• Therefore they are key agent that needs to be taken into account in developing effective knowledge strategies• They have become global corporations, losing allegiance to home countries
in pursuit of profits• Countries need to find productive way to engage with them to leverage their
technological capabilities• TNCs also need to be enlisted in efforts to provide innovations relevant for
the poor, as well as to address global public goods, particularly global warming
Role of Government in Innovation Cycle
• Setting up an enabling innovation environment• Policies• Institutions• Infrastructure
• Overcoming market failure• Non rivalrous, non excludable• Lack of risk finance• Information asymmetry• Coordination problems
• But watch out for government failure• Inefficiency• Capture• Corruption
9. Innovation Policies for New Context
• Key is how to tap into and benefit from the global innovation system
• To do this need:• Dynamic entrepreneurial firms• Good general education plus high level human capital• Research capability (research universities, government labs, firm
research labs)• A supportive enabling environment• In short, a strong national innovation system
• But need to avoid focusing too narrowly on upstream R&D and neglecting the downstream parts of engineering and scale up, production and commercialization, and dissemination.
• There is also need and potential in developing and applying green technologies
Key Points for Developing Countries -1
• Need to be very good at tapping global knowledge through all its forms• Trade, technology, licensing, FDI, participation in global value
chains• Foreign education and training, participation in trade fairs• Global research networks, accessing technical publications and
data bases• Copying and reverse engineering
• Need to build up domestic capability• This requires not just education in general but entrepreneurship
and business management, as well as science and engineering• Also requires institutions and mechanisms to provide re-skilling and
up-skilling to keep up with new technology and business needs
Key Points for Developing Countries -2• Catch-up strategies are easier than pushing back the global frontier
so must exploit these opportunities• However developing countries also have to develop capability to do
some frontier work• Need to get in on potentially new and exciting technologies that may be key to
new technological revolutions• Should explore some areas of nanotechnology and biotechnology by joining
global research networks in these areas• How much to invest and in what areas depends on countries capabilities and
ambitions• Need to put explicit effort in getting from research to actual use and
diffusion• Knowledge is sticky so there is need to build up technology clusters
because of agglomeration economies and the importance of tacit knowledge transfers through personal contacts
• However, these clusters need to be networked internationally as well as nationally
Framework of Insead’s Global Innovation Index
Insead’s Global Innovation Rankings
ITIF Global Innovation Policy Index Rankings 2012
Brazil SWOT Analysis StrengthsNatural resourcesYoung demographicSizeGovernment stabilityLarge energy resources with new pre-sal discoveriesSocial cohesionBenign climateGood neighborhood Good political leadership on macro since CardozoPositive actor in global governance
WeaknessesEducationStill high inequalityLegacy of protectionist policiesResurgence of heavy handed industrial policyBloated and expensive governmentLots of red tape and regulationCorruptionPoor infrastructureLow R&D especially by private sectorOvervalued currencyWeakness in competing with Chinese manufactures
OpportunitiesInvest petroleum windfalls wisely (education, R&D,
infrastructure, social safety nets)More investment in poverty reduction and social
infrastructureDevelop technology for deep oil extractionDevelop green technologiesPromote regional integration and south-south tradeBe more proactive in international diplomacy
ThreatsRisk of Dutch diseaseRisk of breakdown of social cohesion if cannot
provide full employmentRisk of spread of drug economyRisk of distortion in infrastructure investment to
games, not best economic useEnvironmental risk with unsustainable agriculture,
deforestation, and global warmingChina slowdown or crash will hurt Brazil's
commodity exports
Changing Relative Shares of Merchandise Exports Brazil vs. China 2000 vs. 2010
Brazil China2000 2010 2000 2010
Total Merchandise Exports(US billions)
Percentage Breakdown ( SITC)
55.3 201.9 249.2 1,578.2
0+1 Food, beverages& tobacco. 18.3 23.8 4.9 2.72+4 Materials and vegetable & animal oils 16.6 26.9 1.8 0.8
3 Mineral fuels 0.9 9.8 3.2 1.75 Chemicals and related products 6.3 6.1 4.8 5.56 Manufactured goods classified by materials 20.3 11.6 17.4 15.8
7 Machinery and transport equipment 28.0 16.6 33.1 49.5
8 Miscellaneous manufactures 6.1 2.4 34.3 23.99 Not elsewhere classified 2.7 2.6 0 0.1
Implications for Brazil• Brazil is still a small player in the global innovation system• Brazil needs to increase its innovation potential• Two components
• Tapping into global knowledge networks• Strengthening domestic innovation potential
• Improve the investment climate• Invest natural resource windfalls in
• education, especially tertiary education and research universities, and STEM
• R&D• infrastructure
• Avoid appreciation of exchange rate• Strengthen diversification of economy• Leverage the attractiveness of its domestic market• Leverage its global position as green economy
THANK YOU!Carl J. Dahlman
Email: [email protected]
Total R&D and Percentages by MNCs & other Firms vs. Government and Others
Total $982 Percentage 100.0
Top 1000 MNCs 492.0 50.1
Next 1000 MNCs 36.3 3.7
Smaller MNCs and othercompanies
85.7 8.7
Government, non-profits, other
369.2 37.6
[Memo: top 20 MNCs] [$128.5] [13.1]
Soured: Jaruzelski and Dehoff (2008)
Tertiary Students Studying Outside of Home Country 2009
Source: UNESCO Global Education Digest 2011, pp. 190-209
Number of Students As Percentage of Domestic Enrolments
As Percentage ofWorld Total
Brazil 26,309 0.4 0.8
China 510,314 1.7 15.1
India 195,107 1.0 5.8
World Total 3,369,242
Academic Ranking of Universities 2011
Academic Ranking of Universities 2011
Exports of High Technology Products by Region/Country 1995-2010 (U.S billions)
Exports of Commercial Knowledge Intensive Services By Region/Country 1995-2010 U.S. Billions
Public Stimulus Funding for Clean Energy and Technologies by Selected Region/Country 2008 2009 (U.S. Billions)
Financial New Investment in Clean Energy and Technologies 2004-2009 (U.S. Billion)
Source:U.S. SEI 2012
