KEY POLICY CHALLENGES IN FOSTERING INNOVATION

International Conference “Industry and Innovation 2014”Sofia, 30-31 October 2014

SALVATORE ZECCHINIChairman OECD Working Party on SME and

Entrepreneurship

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• Can a boost to R&D and Innovation (RDI) prop up currently stagnating economies ?

• Multifactor Productivity (MFP) differences can explain part of differences in per-capita income

• RDI is a major component of Multifactor Productivity

• MFP has provided a sizeable contribution to economic growth

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From innovation policies to growth: A model link

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MFP drives per-capita GDP differences (Source: OECD, Johansson et al. 2012)

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MFP as a main contributor to economic growth(Source: OECD, Johansson et al. 2012)

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Gvt expenditure in RDI rose even during the last major economic crisis

(Source: EU Lessons…2013)

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But in countries most affected by crisis RDI funding first had an anti-cyclical effect, then declined

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Bulgaria’s funding to RDI followed the same pattern(Source: EU Innovation Scoreboard 2014)

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Bulgaria’s performance in innovation is not so unfavourable

(Source: EU Innovation Scoreboard 2014)

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Focus: Main challenges for government support policies in RDI

• Is there a need to support RDI, particularly at a time of fiscal stringency?

• Who should be the target for support?• How should support be structured?• What are the most appropriate means to

support?• How to ensure efficient and effective

implementation?

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• Innovation is a process involving many actors, forms and institutions in a non-linear sense.

• Product of continuous interaction of many actors

• It is affected by economic, social and regulatory environment

• Prone to systemic failures• Need to intervene on the many components

of national innovation system• The two main weak links are SMEs and finance

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Bulgaria’s innovation indicators(Source: EU Innovation Union Scoreboard 2014)

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Barriers to innovation

• SMEs difficult access to outside finance,• lack of competition in the market place, • unfavorable investment climate, • the social culture,• some regulatory constraints,• the weak linkages between large and small

companies, • the dearth of cooperation between universities

and entrepreneurs, particularly the start-ups.

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Where to intervene? On the main shortcomings of the national innovation system

(Data source: EU Innobarometer 2014)

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Factors hampering innovation(% innovating firms with 10 to 49 employees, 2010 – Source: OECD)

Belgium

Bulgari

a

Czech

Republ

ic

Estonia

Finland

France

Hungar

y

Icelan

dIre

land

Italy

Latvia

Lithua

nia

Luxem

bourg

Norway

Poland

Portuga

l

Slovak

Republi

c

Sloven

iaSpa

in

Sweden

Turkey

0

5

10

15

20

25

30

35

40

45

difficulty in finding cooperation partners for innovation lack of qualified personnel markets dominated by established enterprises uncertain demand for innovative goods or services lack of funds within the enterprise or group

lack of finance from sources outside the enterprise innovation costs too high

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Factors hampering innovation(% innovating firms with 50 to 249 employees, 2010 – Source: OECD)

Belgium

Bulgari

a

Czech

Republ

ic

Estonia

Finland

France

Hungar

y

Icelan

dIre

land

Italy

Latvia

Lithua

nia

Luxem

bourg

Norway

Poland

Portuga

l

Slovak

Republi

c

Sloven

iaSpa

in

Sweden

Turkey

0

5

10

15

20

25

30

35

40

45

difficulty in finding cooperation partners for innovation lack of qualified personnel markets dominated by established enterprises uncertain demand for innovative goods or services lack of funds within the enterprise or group

lack of finance from sources outside the enterprise innovation costs too high

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Factors hampering innovation(% innovating firms with more than 250 employees, 2010 – Source: OECD)

Belgium

Bulgari

a

Czech

Republ

ic

Estonia

Finland

France

Hungar

y

Icelan

dIre

land

Italy

Latvia

Lithua

nia

Luxem

bourg

Norway

Poland

Portuga

l

Slovak

Republi

c

Sloven

iaSpa

in

Sweden

Turkey

0

5

10

15

20

25

30

35

difficulty in finding cooperation partners for innovation lack of qualified personnel markets dominated by established enterprises uncertain demand for innovative goods or services lack of funds within the enterprise or group

lack of finance from sources outside the enterprise innovation costs too high

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Still, 2/3 of surveyed firms innovated in the last 3 years (Data source: EU Innobarometer 2014)

SMEs invest in R&D and innovate less than large firms

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SMEs introducing product and process innovation in 2008 and 2010

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Surprising: few innovative firms received any funding support

(Data source: EU Innobarometer 2014)

SMEs generally received much less government aid than large firms

Tax incentives benefit more multinational corporations than start-ups and SMEs

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Equally surprising: the majority of supported firms did not consider public support important!

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What policy approach, to overcome system failures, government failures, SMEs hardship, financial market failures, incomplete

markets for funding RDI?

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Policy approaches are rather homogeneous across countries, with limited differences in their focus in spite of wide disparities in

innovation performance

• Conclusion: there is no policy model valid for all the countries.

• The choice has to be based on the country’s characteristics and its validity tested on the ground in terms of innovation performance

• Barriers to innovation: SME financing problem, low competition, poor investment climate, social culture, low technology transfer, weak linkages between firms and universities, few collaborative projects

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Government needs to develop a long term vision and a strategy with clear goals

Issues: • Policy governance• Top-down approach vs. bottom-up• The latter is more successful• Create an innovation constituency within

private business sector• Choice of policy instrument mix• Poor implementation and bureaucracy

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Essential support

• Develop high skills, training, mentoring of firms, incubators, accelerators

• Improve firms’ absorption capacity and business environment

• Promote Production and Diffusion of innovation• New standard settings and regulations• Debt and equity funding of start-ups, innovative firms• Policy coherence and effective policy implementation• Public procurement• Fine tuning of tax incentives (incremental investment)

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Invest in an innovation culture within the society at large, not just the entrepreneurs

Main policy message resulting from more than a decade of experience:

Create an enabling environment conducive to research, development & innovation

andGenerate a culture that promotes innovation.

Firms themselves should have an important role in shaping government policy and monitoring its

implementation.