Provision of knowledge as a public good Olga Memedovic UNIDO, Research and Statistics Branch 4 th Annual GARNET Conference 11-13 November 2009, Rome

Provision of knowledge as a public good

Olga MemedovicUNIDO, Research and Statistics Branch

4th Annual GARNET Conference 11-13 November 2009, Rome

UNITED NATIONSINDUSTRIAL DEVELOPMENTORGANIZATION

From the Session on EU, development policies, and governance:

“Countries come together to solve various problems with various characteristics”Garnet Conference focus areas: Food securityFuel securityKnowledge accumulation and diffusionEnvironmental sustainabilityFinancial crisis Governance (national and supranational)

The undersupply of these ‘goods’ may affect global economic development, piece and prosperity. Some form of collective action (planned action by two or more agents) becomes necessary to correct this undersupply through coordination, cooperation and coercion.

Can the traditional public economics help?


Public economics

What are Public Goods?

They are instances of market failure (others are externalities, asymmetric information, barriers to entry)

Arrow (1971: 137), “when the market can’t manage to establish an optimum situation, society will, at least to some extent, become aware of the shortages, and other social institutions, outside the market, will emerge to try to fix them.”


1. Public goods main characteristics

Goods that are non-excludable in their supply ⇒ not easy to prevent others, who did not bear the costs of supplying them, to have access to their consumption

consequences are free riding: potential users may hide their preferences for the good and wait till they are supplied and then consume the good for free

Goods that offer non-rival benefits: ⇒ consumption by one agent does not diminish the availability of the goods for others ⇒ zero marginal costs of use ⇒ exclusion is inefficient ⇒ should be provided for free (Samuelson, 1954)

non-excludability and non-rivalry ⇨ the logic of individual interests in the free market results in their undersupply ⇨ resources are not efficiently used and prospects for economic development are affected

But not all public goods meet fully these two criteria, so there are classes of public goods


The characteristics and typology of public goodsBenefits Rival Partially rival Non-rival

Excludable Pure private goods Food Cars, fuel

Club goods Intelsat International Space

Station Canals, waterways

Weather-monitoring stations

Non-excludable

Common goods Free access pasture Open pathways Hunting grounds

Air corridors

Impure public goods Ocean fisheries Controlling pests

Pure public goods Pollution-control Disease-eradication

programs Strategic weapons Sound financial

practices Basic research

Partially excludable

Impure public goods Information

dissemination Extension services

Source: Adapted from Sandler 2002: 86; Kaul, Grunberg and Stern 1999: 5.


Public Goods and ExternalitiesPublic goods are closely related to other market failures: PGs can produce externalities and can result from externalities (economic activities that produce various spillover effects by the initial generator)

Public badsPublic bads result from negative externalities. Examples are environmental degradation, monopolistic behavior, knowledge asymmetries, persistent poverty, financial instability, dissemination of undesirable materials (child pornography); lack of institutions (intermediate public goods) to secure adequate provision of public goods.

Public goods and externalities are instances that call for a coordinated social response and collective action to provide these goods at socially optimal level


1. PG Characteristics Non-excludability and non-rivalry The need for intermediate PG: intermediate goods are sometimes needed to provide final public goods.

2. PG ConsequencesThe spillover effect-The benefits spread beyond the administratively defined borders and can become international in scope: hence regional PGs, global public goods (GPGs)-The benefits can be inter-generational: future generations can benefit from the innovation and knowledge generated today.

Even if supplied for free they can not always be consumed without costs ⇨ core and complementary activities are needed for the provision of international public goods

2. Provision of public goods:2.a What aspects should be considered?


At the country level, the response is through the institutional framework, with the nation state at the center. The purpose of the response is to internalize externalities, by rewarding positive and penalizing negative, through subsidies, contributions and taxes

At the supranational level, the response is often through international agreements (bilateral , regional and multilateral), or voluntary coordination and cooperation. Some examples. . .

2.b What level of response?


Institutional innovation for PG provision Supra national EU level

Instruments

Formal coordinationEU/ ECB

System of Enforcement by Sanction: Stability & Growth Pact

Voluntary coordination Lisbon strategy

Guiding Rules: Luxemburg and Cardiff Process


Consequences from global interdependences and economic integration:Production of final goods do not depend only on national productive factorsR&D is becoming also globalized

Increasing international division of labor becomes self reinforcing process driving the structural changes and economic integration forward , leading to compressed development

⇒ Managing PG provision calls for appropriate supra-national regional and global institutions and policies.


Increasing intermediate goods trade both in imports…

Values in US$ constant prices.The categories are those of the Broad Economic Categories (BEC), a UN standard classification. Data has been extracted in SITC Rev1 from UN Comtrade and translated into BEC using a UNSD correspondence table.Source: Memedovic, Changing characteristics of manufacturing, forthcoming 2009

Imports (Constant price)

0

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

2,500,000,000,000

3,000,000,000,000

3,500,000,000,000

4,000,000,000,000

4,500,000,000,000

Capital goods

Consumption goods

Intermediate goods


…and in exports

Exports (Constant price)

0

500,000,000,000

1,000,000,000,000

1,500,000,000,000

2,000,000,000,000

2,500,000,000,000

3,000,000,000,000

3,500,000,000,000

4,000,000,000,000

Capital goods

Consumption goods

Intermediate goods

Notes:Values in US$ constant prices.The categories are those of the Broad Economic Categories (BEC), a UN standard classification. Data has been extracted in SITC Rev1 from UN Comtrade and translated into BEC using a UNSD correspondence table. Source: Memedovic, Changing characteristics of manufacturing, forthcoming 2009


2.c What principles to follow in the IPG provision?

1. The subsidiarity principle = the decision-making jurisdiction level and the spillover range of the public good should be at the same level. Thus,

A national PGs should be provided by a national government A supra-national regional PGs by a supra national regional organization Global PGs should be provided by an international organizations ( in the

absence of global government).

The subsidiarity principle may be counterproductive when there is: Economies of scale in PG production or distribution ⇨ unit costs

decrease as more public goods are provided Economies of scope, unit costs decrease as more diverse public

goods are provided In these cases the institutional response should have a wider

jurisdictional coverage⇨ to explore the advantages from increasing returns from scale and scope


Technologies of PG supply

How individual contribution may determine overall PG supply? Aggregation classification scheme gives perspective on incentives for PG provision:Simple summation = simple addition of individual contribution sets the aggregate level of supply ( CO2 levels)

Best shot = the aggregate level of supply is determined by the largest single contributor (some problems solved largely by countries with highest technological capabilities )

Better shot = the largest contributor has the greatest impact on supply

Weakest link = the smallest contribution sets the aggregate level Weaker link = the smallest contribution has the greatest impact on

provision (the stability of financial market : the more instability the more its destabilizing effect)

Weighted sum goods = the aggregate level of supply determined by the the weighted sum of individual contribution


3. Knowledge as a public goodKnowledge is often considered a public good (Stiglitz 1999) ⇨ Economic and social development depends on the capacity to generate, adopt and adapt knowledge and technology ⇨ provision of developmentally related knowledge is the key to productivity convergence and for reducing poverty ⇨ mechanism of the provision of public goods should therefore be central to any poverty reduction strategy

Knowledge has potential to provide non-excludable benefits to a large number of users and benefits received by one user do not reduce the benefits received by others ⇨ Market fails to provide socially desirable optimum and hence collective action by public and private agents is needed

But some knowledge can be partially non-rival in consumption and excludability can be established : Those who invested in new knowledge expect rewards and prefer to isolate free riders Knowledge can be kept secret and investment will go to the fields that are difficult to imitate. Iinvestment in new knowledge can also be risky because of the lack of information on the usefulness of new knowledge


3.a Knowledge accumulation in this age of globalization

The knowledge accumulation increasingly result from various forms of production and innovation networks (at regional, national and international) and co-evolutionary exchanges in these business formations.These organizational forms then become intermediate public goods as they facilitate provision of knowledge public goods

Firms and the citizens of any state can benefit from knowledge that has been generated elsewhere (often financed by other countries’ taxpayers contributions) .The key questions are then :⇨ Is there still a connection between what taxpayers pay for knowledge public good and what they receive in return?-⇨ In what type of knowledge to invest and what instrument to use? (the question for national science technology policy)


4. Knowledge as a public good: normative aspectsPublic provision :Publicly-funded and performed basic research Government procurement (contracts with the business sector to develop the specific knowledge it needs) Government rewards individuals and organizations that have produced socially relevant knowledgeGovernment establish lows and regulations (intellectual property rights-IPR) and system of their enforcementGovernment promotes cooperation among national academic communities through: funding joint research programmers, international conferences, international academic associations, student exchanges, information exchange

Private provision: firm level funded R&DIdeas, inventions and innovation have become powerful drivers of competitiveness ⇨ a fierce competition to enhance technical knowledge that can be applied and commercialized ⇨ high desire to use legal institutional framework (IPRs) to protect this knowledge, to market it and to trade (technology market is growing)


Private provision: the role and characteristics of IPRsTo exclude free riding, to make knowledge property and to create a market incentives for investing in it (dynamic advantage of IPRs) with a trade off of not having a free access to knowledge temporarily (static disadvantage) Focus mainly on knowledge developed by profit-seeking agents and to knowledge directly related to technological applications and commercialisation

They are temporary measure (at least, for patents and copyrights)

Public policies try to balance the private and the public interest: If a strong public interest , compulsory licensing or expropriation can be used and enforcement of IPRs is with a certain relaxation, with the assumption that less than perfect protection would increase welfare and reduce monopoly power

Industry sensitivity to IPRs ⇨ The more economic rents are associated with non-material production and R&D intensity the more pressure for introducing international harmonization of IPRs (Countries with high share of knowledge-intensive industrial activities have stricter rules for IPRs).


5. Developing country concerns and IPR regime

Developing countries tend to rely on international diffusion and transfer of knowledge so introducing strong IPR regime may imply high costs not necessarily associated with advantages:Even if knowledge and technology are for free not all developing countries will be able to benefit from them: those who wish to benefit have to invest time, effort and resources in their absorptive capacity (to acquire, adopt, adapt and further innovate)The amount of knowledge that can be used without costs is very limited (e.g. knowledge embedded in products)Provision of knowledge and its diffusion are uncertain and risky activities with successes and failures: there are entry barriers for imitators and for innovators Asian tigers (Japan, ROK, Taiwan Province) neglected IPR s but encouraged knowledge diffusion and incremental and adaptive innovation and become major innovators

Government dilemma in developing countries in this global economic setting is then:-In what type of knowledge to invest in?-What system of incentives to follow?


Why have then so many developing countries voluntarily signed TRIPS?

The hope that OECD economies would open up their markets in return

To attract FDI

To increase the effectiveness of technology transfer ( e.g. by increasing the number of patents and licenses in developing countries )

But, developing countries underestimated the difficulty of enforcing TRIPS in their own countries

No conclusive evidence that TRIPS Agreement has favored developing countries. The literature points out that TRIPS will need to be toned down to allow developing countries to acquire the knowledge they lack (Falvey and Foster 2005).


Benefiting from the distributed knowledge base in this age of globalization The business sector is becoming a more important player in

the generation and provision of knowledge public goods

Share of business-funded R&D has increased, while publicly funded R&D has remained stagnant or even declined over the last 20 years

The TNC innovations generated in other countries through global innovation networks (GINs) in some industries have been rising over the last 30 years


Drivers for dispersions of R&D across the network of global and regional inter-firm and intra-firm innovation networks:

Higher complexity and multidisciplinary nature of scientific research requires new sources of knowledge and sharing the risks of failure through mobilizing global talent pool and innovative capabilities; this can generate more value added and can reduce risk of failure

Open innovation model is better suited to the knowledge-based economy, where many technologies are used to create a product and to satisfy consumer needs, and where co-evolution, cooperation and co-adjustments through networking are required

To benefit from the favorable business environment conditions (policy incentives, intellectual property rights and the provision of a knowledge infrastructure) in other countries

Need to shift from “technology-push” to “consumer-pull” innovation model

To avoid over-research, over-prototyping as more focus is on customer needs

To respond better and faster to specific market needs (the product life cycle is shortened, products should have local appeal, or should be based on local raw materials

The question is then how IPR can be managed in the emerging framework of vertical

fragmentation in the supply of knowledge public goods? (Knowledge can be patented by various companies sometimes with

conflicting interest? )


With the functional and geographical fragmentation of R&D and their reintegration through GINs, national and sub-national systems of innovation will gradually integrate.

Key challenges:

For acquiring technological competences interaction between local and global knowledge networks are also needed, and this is best achieved at the regional/cluster level.

How to deal with asymmetric knowledge capabilities and with imbalances between knowledge exploration (accumulation) and exploitation (commercialization) at various levels?

EU challenge:

Is Europe becoming an exploration platform for the USA?

Developing country challenge: Developing countries can rely on leveraging knowledge through GINs, but this need to be the result of purposive activity of society (need for capacity building in government)


Global concerns:

Currently, most research activities are planned and implemented at the national level without international coordinationbut . . . the rising interdependences, the difficulty of acquiring and retaining the results of knowledge within national borders and the emergence of global challenges such as health, security, financial stability and environment . . .

call for global collective actions that promotes coordination among national efforts through bilateral or multilateral socio-economic agreements or voluntary coordination and cooperation initiatives


6. Lessons from past experiences can guide collective actions Centralization of R&D and innovation in a few world centers is not recommendable in the present global settingA system of incentives that rewards intermediate and final PG provision might help to increase knowledge flowsConcentrating on the supply side (knowledge accumulation without taking the absorptive capacity of recipient agents (individuals, firms and even nations) into account could lead to a waste of resources) Regional innovation system can be a powerful instrument for commercialization of new knowledge International cooperation between research centers in developed and developing countries is neededInternational organizations can serve as hubs of research excellence in specialized areas and can be considered as public goodsInternational organizations can play the role of network facilitators; they can help to set priorities, taking into account broad human needs


7. Role of intergovernmental institutions and organizations in the provision of knowledge PGs They can set common standards allowing all countries to benefit from best-practice knowledge and from lower transaction costs e.g. transport and information and communication technologies can operate internationally only if there are agreed standards

They are also devoted to establishing, disseminating and upgrading standards therefore they play an important role in knowledge diffusion (standards have many of the attributes of pure public goods)

They can be honest broker for the exchange of knowledge from developed to developing countries and among the two groupings (e.g. south-south cooperation) through their research and global forum activities

They can promote, fund and implement joint research programmes and associated infrastructure: the EU has established several international centers in areas where the costs and risks of scientific investigation are high and where the benefits are likely to be collective ; the European Organization for Nuclear Research – CERN; UNIDO International Centre for Technology

They also have an institutional mandate to facilitate the diffusion of knowledge through capacity building ( technical cooperation activities)


Framework conditions

Industrial strategies, policies and programmes

RIS: Local industries

SMEs and clusters

GVCGlobal

Domain

National

Domain

Business Environment

National public goods

Role of multilateralism & regionalism

International public goods

Role of public and private sector


From traditional economics (markets) to open access communities of knowledge: Can we learn from the nature?

Source: Digital Business Ecosystem Conference, Brussels, 7 November 2007

Thank you for your attention

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Documents

Provision of knowledge as a public good Olga Memedovic UNIDO, Research and Statistics Branch 4 th Annual GARNET Conference 11-13 November 2009, Rome