The Innovation Imperative – Main Messages

Outline

1. Why innovation matters2. Investing in innovation3. Research and innovation policies4. Entrepreneurship and experimentation5. Benefiting from digitalisation6. Skills and innovation7. Governance and implementation8. Some conclusions

1. Innovation is one of the main drivers of economic growth, …

Innovation is a key driver of growth, through:1. Technology embodied in

fixed capital, e.g. ICT2. Investment in

knowledge-based capital (later slides)

3. Productivity growth due to innovation (MFP)

4. Its impact on creative destruction and business dynamism (later slides)

Innovation’s role will have to grow in future, e.g. due to ageing populations.

Figure 1. Contributions to GDP growthTotal economy, annual percentage point

contribution, 1995-2013

Source: OECD Productivity Database, January 2015, and OECD (2015a), OECD Compendium of Productivity Indicators, 2015, http://www.oecd.org/std/productivity-stats/oecd-compendium-of-productivity-indicators-22252126.htm .

Source: OECD calculations based on data extracted from the EPO Worldwide Patent Statistical Database (PATSTAT, October 2011) using algorithms developed at the OECD and the EPO. See OECD (2012) Energy and Climate Policy and Innovation: Bending the Technological Trajectory, OECD Publishing. (www.oecd.org/environment/innovation)

Note: The figure shows patenting trends in selected environmental technologies compared to all sectors. Patent counts refer to the number of "claimed priorities", by the first filing date worldwide, shown as 3-year moving averages and indexed on year 2000.

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… a driver of green and sustainable growth, …

Trends in selected “environmental” technologies

Source: Based on OECD, 2014a, All on Board: Making Inclusive Growth Happen, OECD, Paris, http://dx.doi.org/10.1787/9789264218512-en 5

… and makes direct and indirect contributions to wellbeing (e.g. health, education and incomes)

Innovation in the OECD Framework for Inclusive Growth

Outcomes and their distribution:

Living standards: Income HealthJobsHousing

Other dimensions of Well-being: EducationSafetyEnv. quality of lifeWork-life balance...

Welfare functiondepending on outcomes

Production function or process,

creative destruction

Policies

EconomicFinancialCompetition

LabourSocialHealth policies

Education InnovationEnvironment.TradeInvestmentpolicies

Returns on physical , knowledge and human capital, supply of jobs …

Other drivers (institutions; norms; exogenous factors)

Demand for products and services, opportunities and well-being

Policies affecting the production process, e.g. economic, innovation or environmental.

Policies directly affecting well-being, e.g. education , innovation, health, social, and tax policies.

Business investment in knowledge-based capital (KBC) and in tangible assets in the United States (% GDP, 1972-2011)

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2. A growing share of business investment is related to innovation …

4%

6%

8%

10%

12%

14%

16%

18%

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Inve

stm

ent (

% o

f adj

uste

d GD

P)

Investment in KBC

Investment in tangibles

Source: Unpublished update of Corrado, C.A. and C.R. Hulten (2010), “How do you Measure a ‘Technological Revolution?”, American Economic Review: Papers & Proceedings 100 (May 2010): 99–104.

Business investment in fixed and knowledge-based capital(as % of business sector gross value added, 2013)

Source: OECD calculations based on INTAN-Invest data, www.intan-invest.net and OECD, Structural Analysis (STAN) Database, http://oe.cd/stan, June 2015. 7

… and knowledge-based capital now accounts for over half of all business investment.

0

5

10

15

20

25

30

35%

Non-residential GFCF including machinery and equipment KBC assets in National Accounts including software and R&D

Other KBC assets including organisational capital and training

Good framework policies are associated with investment in innovation

Source: Andrews and Criscuolo (2013), http://www.oecd-ilibrary.org/economics/knowledge-based-capital-innovation-and-resource-allocation_5k46bj546kzs-en

Investment in innovation: key messages

• Business investment in innovation is more than technology and R&D – complementarities between R&D and other assets, and policies affecting those, e.g. data, design, management, organisational capital, are key.

• As new KBC assets grow in importance, so do the framework conditions affecting them – policies for IPR and data need updating for 21st century innovation.

• Investment in innovation requires sound framework policies, enabling resources to flow to productive, innovation-intensive activities.

• Public investment is complementary to private investment in some areas, e.g. R&D, education and broadband networks.

3. Governments use different approaches to support business innovation, …

Direct funding of business R&D and R&D tax incentives, as a percentage of GDP, 2013

Source: OECD, R&D Tax Incentive Indicators, www.oecd.org/sti/rd-tax-stats.htm and Main Science and Technology Indicators, June, 2015, www.oecd.org/sti/msti.htm

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

% Direct government funding of BERD Indirect government support through R&D tax incentives Data on tax incentive support not available

.. and give different priorities to investment in public research, …Public R&D expenditure by type of research system

HERD and GOVERD, as a percentage of GDP, 2013, and total HERD and GOVERD in 2007

Source: OECD, Main Science and Technology Indicators, June 2015, www.oecd.org/sti/msti

0.0

0.2

0.4

0.6

0.8

1.0

1.2%

HERD GOVERD Total HERD and GOVERD, 2007

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… where it is not always obvious what to fund

Innovation and research: key messages

• OECD countries have increasingly emphasized R&D tax incentives in their support for business innovation, but these are not well suited to young firms and can amplify cross-border tax planning strategies of multinational firms

• Well-designed direct support, e.g. competitive grants, support for Fraunhofer Institutes, accelerators, etc., are better suited to strengthening innovation capabilities.

• Need for long-term and stable investment in public research, notably basic and mission-oriented research – avoid risk of short term focus and fragmentation

• Important to balance breakthrough and incremental innovation, explore new ways of making more informed strategic choices.

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4. Business dynamism matters - young firms create new opportunities …

Contributions of young firms to employment, job creation and job destruction, 2001-2011

Source: Criscuolo, Gal and Menon (2014), www.oecd.org/sti/dynemp.htm

… but scaling of young innovative firms is a challenge in many countries …

Average size of start-ups and old firms, in persons employed, services sector

Source: Updated from Criscuolo, Gal and Menon (2014), www.oecd.org/sti/dynemp.htm

0

10

20

30

40

50

60

70

80

Employ

ees

Start-ups (0-2) Old (>10)

… as resources in some countries don’t flow to the most innovative firms

Change in capital stock associated with a 10% change in patent stock (2003-2010)

Source: Andrews, Criscuolo, and Menon (2014), http://www.oecd-ilibrary.org/economics/do-resources-flow-to-patenting-firms_5jz2lpmk0gs6-en.

Strengthening entrepreneurship and fostering business dynamism: main messages

• Enable experimentation and firm growth: Reduce barriers to entry (e.g. red tape), growth (e.g. size-specific regulations), and exit/failure of firms (e.g. penalising bankruptcy legislation, overly strict employment protection legislation).

• Stop favouring incumbents - keep the unborn in mind: Many policies favour incumbents (e.g. R&D tax credits, some environmental regulations, incumbent subsidies that delay exit).

• Strengthen the eco-system for young innovative firms, e.g. through enhanced access to (risk) capital, network development, mentoring of entrepreneurs, skills development, etc.

• Reduce trade barriers, so firms can scale more easily across borders.

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5. The spread of digital technology is now almost universal, both in society…

Internet users by age, 16-24 and 65-74 year-olds, 2014(as a percentage of population in each age group)

Source: OECD, Digital Economy Outlook 2015, http://dx.doi.org/10.1787/888933224896

0

20

40

60

80

100

% Total users 16-24 year-olds 65-74 year-olds

… and in business

Broadband connectivity, by size of firm, 2010 and 2014(Percentage of enterprises in each employment size class)

Source: OECD, Digital Economy Outlook 2015, http://dx.doi.org/10.1787/888933224829

50

60

70

80

90

100%

All enterprises, 2014 10-49 50-249 250+ All enterprises, 2010

• Foster an appropriate business environment, by:– Fostering investments in broadband & the Internet of

Things– Removing unnecessary regulatory barriers– Addressing market concentration & barriers to

competition.– Preserving the open Internet and the free flow of data

• Enhance trust in the digital economy, by:– Addressing privacy and security concerns– Improving consumer protection

• Ensure that the benefits are widely shared, by:– Strengthening skills for the digital economy– Facilitating adjustment– Fostering inclusion 20

Benefiting from the digital economy: main messages

6. Skills are a major challenge for the innovation-intensive economy …

Less than 40% of adults have the skills to succeed in a technology-rich environment

(Percentage of 16-65 year-olds scoring at proficiency levels 2 and 3)

Source: OECD Survey of Adult Skills, October 2013, http://skills.oecd.org/OECD_Skills_Outlook_2013.pdf .

• Develop the skills necessary for a technology-rich environment. Beyond subject-specific expertise, this includes creativity, critical thinking, entrepreneurship and communication.

• Create an environment that enables individuals to choose and acquire appropriate skills and supports the optimal use of these skills at work, based on the OECD’s 2013 Skills Strategy.

• Address skills mismatches, that present a barrier to the growth of innovative firms.

• Remove gender biases and fostering the participation of women in science and innovation.

• Facilitate the development of linkages and networks among researchers and innovators across countries. Ensure that migration regimes for the highly skilled are efficient, transparent and simple, enabling movement on a short-term basis. 22

Skills for innovation: main messages

7. Governance and implementation: main messages

• Governance: Developing a national strategy requires early and adequate involvement of key stakeholders. Moreover, policies makers need to ensure that the full set of government policies that affect innovation are well aligned.

• Building trust and managing risks: Build trust in government action and ensure the support of stakeholders for policy actions. Develop a policy and regulatory environment that manages the risks associated with innovation.

• Implementation and evaluation: A commitment to monitoring and evaluation of policies, and on learning from experience and adjusting policies over time, can help ensure that government action is efficient and reaches its objectives at the least possible cost. Better measurement of innovation outcomes and impacts is essential.

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8. A comprehensive agenda for policies for innovation – more than innovation policy

1. Improved policy frameworks for investment in innovation

2. Effective research and innovation policies, modelled on good practice

3. Policies that enable entrepreneurship and foster business dynamism – allow new firms to fail or scale and encourage unproductive firms to exit

4. A strong digital innovation agenda5. A broad and inclusive skills strategy6. Focus on governance, evaluation and policy learning

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Contacts and further information

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Follow us 0n Twitter: @OECDinnovation

Website: oe.cd/innovation

Newsletter: www.oecd.org/sti/news.htm

Contact: Dirk.Pilat@oecd.org