Towards an innovation strategy

Angel Gurría

Secretary-General of the OECD

Published:  November 2007

The history of human progress is also a history of innovation, and OECD countries have been rediscovering what this means for the global economy. Consider the US. For two decades the world’s largest and most advanced economy has been driving forward the frontiers of technical progress. Yet whether in information technology, pharmaceuticals or biotechnology, the US knows it must innovate to stay in front.

So too must all OECD economies, large and small, which have been transformed thanks to the role they play in the global innovation chain.

Or consider China, whose recent space ventures are a reminder not only of China’s re-emergence as a global power, but of its history of technological advancement. China invented the humble wheelbarrow, the powerful printing press and much more. Today, it has communications firms to rival the best, and researches into nanotechnology and biotechnology.

Innovation is about improving communications, curing diseases and solving energy, food and environmental problems. But it is also about wealth creation. Today’s companies create value-added by investing in “intellectual assets”, rather than in machinery and equipment per se. That means more patent activity, more branding, more international law, and so on.

Developed countries see innovation as an ingredient to help raise them up the value chain and give them an edge in the expanding global marketplace–what Harvard business guru Michael Porter calls a “competitive advantage”. An attractive policy idea, since unlike natural comparative advantages, innovation can be cultivated and improved. This characteristic also applies to developing countries, which can harness innovation as a springboard for faster progress. The question is how to foster innovation successfully.

Innovation transforms an idea into a new, improved product, process or service. New technology is the visible expression of this, but there are intangible, organisational innovations too. Amazon harnessed information and communications technology to sell goods online, but also to improve efficiency. “Old economy” firms, from fast-food outlets and financial services to automotive producers, have also transformed their businesses.

In short, progress depends on how human skills and technology interact to improve processes and raise performance. Innovation enhances this total factor productivity.

OECD governments have got the message and are doing more to boost innovation by providing fiscal incentives for R&D–spending on R&D has risen by around 3% per year since the mid-1990s!–encouraging more business research, opening up education, building international business parks, and so on.

But why has all the government effort not always led to more growth, particularly in Europe, despite its leading-edge firms? What is missing and how can governments move their economies forward?

A strategy is needed, and that is what the OECD has been asked to develop for our member governments. This cross-cutting package will provide mutually reinforcing policies and recommendations to boost innovation performance. The OECD Innovation Strategy will point to general and country-specific practices, and where appropriate, develop guidelines.

This work will culminate in a report to ministers in 2010, but some patterns are already clear. For instance, innovative, dynamic economies as diverse as Finland and the US display a cocktail of features, ranging from fiscal incentives and expanding public research to openness to foreign R&D. They produce plenty of top graduates in science and technology, in well-funded learning institutions. They also have good business environments and stable macroeconomic conditions.

Take public basic research. True, most innovations occur in business, but many key inventions, like the world wide web, have come from public basic research. Are governments doing enough to strengthen this bedrock of innovation?

Certainly, public research should support business research and not crowd it out. As Schumpeter argued, it is the wild spirits of entrepreneurs that must be harnessed. In 2005 four-fifths of researchers in the US were in the business sector, compared with two-thirds in Japan, but just half in the EU. Food for thought.

Governments should also ask if they are really doing enough to foster collaboration between universities and businesses, and not just within their borders. Cross-border co-operation on scientific publications and inventions is rising fast, making global interaction a paradigm of the innovation age.

A tough challenge for policymakers from Berkeley to Beijing concerns intellectual property rights. In today’s market, good ideas are a valuable though vulnerable commodity and the challenge is to develop rules and licensing practices that encourage both invention and diffusion, while enhancing growth.

Google and Nokia are global faces of deeper processes that other countries can set in motion. The cocktail may have to be mixed differently to suit country priorities, but the flavour must emphasise innovation. As an underlying condition though, policymakers must ensure sound economic management; innovation will not spur much growth if product and labour markets are inflexible or if trade and investment regimes are closed. Financial markets too must respond to fast changing competition.

In the end, innovation is about the political economy of reform, with a crucial ingredient being leadership. The US, China and a few others are blazing a trail, and other countries must forge ahead too. The OECD Innovation Strategy can help plot the way forward.  

©OECD Observer No. 263, October 2007