Sunil Mani* Centre for Development Studies. In collaboration with. Mohammad Halimi Department for High Tech Industries Islamic Republic of Iran

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1 A National System of Innovation in the Making: An Analysis of the Role of Government with Respect to Promoting Domestic Innovations in the Manufacturing Sector of Iran Sunil Mani* Centre for Development Studies In collaboration with Mohammad Halimi Department for High Tech Industries Islamic Republic of Iran * Corresponding author: Centre for Development Studies, Pransantha Nagar Road, Ulloor, Trivandrum 69511, Kerala, India Tel: (91) (471) , Fax: (91) (471) , URL: 1

2 A NATIONAL SYSTEM OF INNOVATION IN THE MAKING: AN ANALYSIS OF THE ROLE OF GOVERNMENT WITH RESPECT TO PROMOTING DOMESTIC INNOVATIONS IN THE MANUFACTURING SECTOR OF IRAN # Sunil Mani Centre for Development Studies In collaboration with Mohammad Halimi Department for High Tech Industries Islamic Republic of Iran Abstract Iran's manufacturing sector has been growing very rapidly during the 199s. Consequent to the structural reforms initiated, almost entirely due to domestic compulsions, the sector is undergoing a wave of privatization and is also more open to foreign investments. The change over to a Republic and consequent changes in the educational system meant that the country has ended up with a large pool of both scientists and engineers. Capitalizing on this important human resource, the policy makers have initiated serious efforts towards crafting a national system of innovation for the country, especially since 21. This paper undertakes a detailed review of the efforts that are being made to create this system of innovation, and identifies the gaps in terms of policy instruments and institutions that are still required. The study concludes with a number of policy conclusions, the implementation of which will support the efforts that are being mounted by various agencies of the government. Keywords: innovation system, human resource development, Iran # The research underlying this study has been sponsored by the Department of High Tech Industries, Ministry of Industry and Mines, Government of Iran. I am grateful to several officials of the department and in particular to Mr. Seyed Mojtaba Hashemi, Director of the Department, and Mr. Mohammad Halimi. Mr. Halimi was a great source of support and helped me in subjecting the successive drafts to a detailed empirical scrutiny. Research assistance provided by Mr. Borna Barkhordar and comments made by an anonymous referee are thankfully acknowledged. The paper was completed while the first author was a researcher at the United Nations University-Institute for New Technologies at Maastricht in the Netherlands. We are grateful to UNU-INTECH for facilitating this study. However none of them are to be implicated for any of the errors or shortcomings that may still remain in the paper: the views expressed in the study are those of the author and do not necessarily reflect the views of the United Nations. 2


4 1. INTRODUCTION The system of innovation perspective is a convenient framework to understand the process of innovations occurring in an economy and especially within the manufacturing sector. In this framework, the economy is decomposed into various components such as the government, independent research institutes, firms and the higher education system, which supplies human capital to firms research institutes and the government. The success of an innovation system depends very much on how closely knit the relationship between the various components is. Needless to add, innovation policy instruments and institutions play a very important role in cementing the relationship between various components. An applicatio n of this framework to the situation in a specific country is very useful in identifying the systemic failures that hamper the generation of innovations. Public policy can then be applied to correct for such systemic failures. An elucidation of this framework is discussed in (Mani, 22). I will apply this framework to understand the efforts that are being made by the government to craft a system of innovation for Iran specifically focusing on the manufacturing sector. In order to place our discussion in a proper perspective. The conceptual framework underlying the study is the national systems of innovation framework (NSI) introduced into the literature by (Freeman, 1987) and subsequently extended and reinterpreted by (Lundvall, 1992) and (Nelson, 1993). Two different approaches to the study of the NSI are discernible (Table 1). <INSERT TABLE 1 HERE> It must of course be stressed that Nelson's own definition of innovation is much broader than merely equating it with input (R&D expenditure) or output (patents). He defined innovation as to encompass the processes by which firms master and get into practice product designs and manufacturing processes that are new to them, if not to the universe or even to the nation (Nelson, 1993, p.4). But all the fifteen country studies in his comparative analysis are defined in a formal sense. In our study, I employ a combination of the two approaches, but place an emphasis on tracing the impact of national technology policies on the innovative activity of firms, measured in the formal sense of the term. However, I do take into account the interaction of firms with various elements in the system, for instance with the higher education sector or human resources development. Thus although my framework has more pronounced features of the so- called narrow approach of (Nelson, 1993), at the same time it combines elements of the (Lundvall, 1992) approach. Systematic empirical studies on the science and technology aspects of the country are few and far between 1. A notable exception is (Moeini and Zwadie, 1998). The authors study based on a detailed survey of 95 firms in three industries namely automotive vehicles, chemicals/petrochemicals and electrical and electronic industries reached the conclusion that technological learning was limited to the acquisition of mechanical and operative skills, while industrial R&D that would lead to product and process innovation was either absent or ineffective. Over-dependence on oil as a source of income; the absence of a competitive environment in the domestic market; the restrictive conditions of the terms of technology transfer; and the incoherence in S&T and R&D policy and planning were identified as the reasons for the state of affairs. Against the context of such findings, it will be instructive to 1 The UNCTAD is in the process (c23) of conducting a Science and Technology and Innovation Policy review of the country. 4

5 analyze the efforts that are now being mounted to correct for some of these distortions in the country's innovation system. The paper is organized into three sections. In section two, I survey three dimensions of the manufacturing sector. This is followed by a third section that maps out the present state of what is eventually to become an innovation system of sorts, discusses the performance of the system and identifies two critical factors that have a bearing on the performance of the system. Section four concludes with the specific policy implications that emerge from the study. 5

6 2. PERFORMANCE AND STRUCTURE OF THE MANUFACTURING SECTOR Three dimensions of the manufacturing sector are considered; (i) growth performance; (ii) structural changes; and (iii) the extent of foreign participation. 2.1 Growth performance of the manufacturing sector The manufacturing sector accounted for, on an average, about 16 per cent of GDP during the 199s. I begin by mapping out the structure of the country's manufacturing sector (Table 2). This is done by computing the relative share of value added in the county's total manufacturing value added. As expected given the importance of oil based manufacturing activities, chemicals and chemical products account for the largest share. It is interesting to note that the transport equipment industry accounts also for a significant share and is one of the industries in which the process of import substitution has been very religiously subscribed to. The manufacturing sector has however grown at an average real rate of about 4 per cent per annum. But the variability in the annual rates of growth has registered some significant increases during the latter half of the 199s. The reasons for this may be linked to the fluctuations in oil and gas revenue of the government as a share of total government revenues. 2 Public investments account for a large proportion of total manufacturing investments and hence fluctuating oil and gas revenues can lead to fluctuations in the growth performance of the manufacturing sector. But this line of causation is open to further inquiry. Economists have tended to measure efficiency of resource use by computing estimates of total factor productivity growth (TFPG). Estimates of TFPG of the manufacturing sector, however, are not readily available. But some economy-wide estimates are available (Figure 2). <INSERT TABLE 2 HERE> <INSERT FIGURE 1 AND 2 HERE> The productivity estimates show that over all efficiency of resource use has improved during the latter period and this has been mainly brought about by the increases in labor productivity, although it must be added that the increases in TFP has been very modest indeed. 2.2 Structure of the Manufacturing Sector The manufacturing sector can be divided into three according to the scale of operation namely (i) small scale; (ii) handicraft; and (iii) large. Further it can also be divided into public and private according to ownership. Small scale industry 3 : The small-scale industrial workshops are scattered throughout the cities and rural areas. The rural ones operate principally along traditional family lines, and 81 percent 2 The share of oil and gas revenues fluctuated between as low as 36 per cent of total government revenues in to 67 per cent in 2-1 and then declining to about 6 per cent in See International Monetary Fund (23), p For a detailed statistical picture of the SME sector in Iran see especially Chapter 3 of the UNIDO (23). 6

7 of their products are textiles including fine carpets, coarse carpets, mats and so forth. There are an estimated 1.2 million small rural workshops. Their share of the value-added to the entire economy is negligible, but they are useful in assisting rural households to make ends meet. The case is rather different in urban areas, and small workshops play an important role in most fields. The textiles workshop account for 35 percent of total value-added of the small-scale industry. Food products constitute 1 percent of total output and 3 percent of total value added. Machinery, tools and metal-works turn out 8 percent of total output and account for 14 percent of total value-added of the small-scale industry. The most important workshops of the latter branch of industry are the ironworks and tanneries. There are no systematic data available on the degree of technology development in the SME sector. (UNIDO, 23) has used investments in capital goods as a proxy for technology investments (albeit of the embodied variety). According to this definition, fifty per cent of total investments by the SME sector is towards the purchase of new capital goods- the share being the highest in technology-intensive sector such as machine tools and the IT industry. The study identified the following factors as impediments to further technological development of the SME sector in the country, namely: (i) lack of schemes for financing innovation and the rather high transaction costs involved in obtaining loans for investing in technology; (ii) high cost of imported technology; and most importantly the absence of any specific governmental policies for the development of technology in the small scale sector. Handicrafts: Ninety percent of the raw materials used for production of handicrafts are obtained domestically and this is an important characteristic of this industry. There are no precise figures of the number of handicrafts workshops, mainly because they are included in small-scale industrial workshops. Handicrafts output, notwithstanding carpets, is comparatively low. Carpet weaving, which involves 4-5 million people, is still the most important branch of the Iranian handicrafts industry, although it has been facing a constant crisis in the past few years, prompted by strong fluctuations in exports and competition by machine-made carpets and floor covering. The government agencie s responsible have been endeavoring to change the orientation of handicrafts workshops from producing decorative and ornamental items to turning out consumer goods. They have achieved some degree of success too. The Construction Crusade and Agriculture ministries, furthermore, have tried to promote rural industries by increasing government aid, providing training, raw materials and tools. Forming co-operatives to produce and directly market the handicrafts produced, has been encouraged as a way of increasing the earnings potential of the producers. According to data published by the Statistical Centre of Iran there has been a dramatic decline in the number of establishments over time (Table 3). While the decline in the number of public sector enterprises can be attributed to recent processes of privatization and restructuring, one does not see a corresponding increase in the number of private sector establishments. The difference between the number of private sector establishments in and is so great that one wonders whether these numbers are accurate or not. Even if one disregards the data for , there is no real evidence of an increase in the number of private establishments especially during the last three years. On the contrary there has been a steady decline in the number of public sector establishments. This reduction in the number of establishments may also be an additional reason for the fluctuations in manufacturing output. Large scale sector: The large scale manufacturing sector in Iran is dominated by public sector enterprises. Of the many public enterprises, two are particularly important, namely (a) the Industrial Development and Renovation Organization of Iran (IDRO) (22) and (b) Iranian Mines and Mining Industries Development and Renovatio n Organization (IMIDRO). Established in 1967, IDRO is essentially a holding company covering enterprises in a number of industries: (i) automotive (ii) oil, gas and energy equipment (iii) machinery and equipment (iv) agricultural machinery (v) marine and shipbuilding and (vi) industrial services. Currently the company has 2 affiliated companies and it employs 8, persons. Approximately 18 per cent of the value added in mining and manufacturing is contributed by this company alone. IMIDRO was established only in 22. It is also a holding company comprising eight 7

8 enterprises spread over the five industries of mining, mineral processing, mineral industries; metallurgy and mining explorations. <INSERT TABLE 3 HERE> In 21, the IDRO group attained the first place in the list of top 1 Iranian companies in terms of revenue. All in all 17 companies of the top 1 Iranian companies were its subsidiaries. Table 4 maps out its growth profile over the last four years. Following the third economic development plan, the corporation is undergoing a process of privatization and by the end of 22 it had already transferred US $ 758 million of its shares to the private sector by way flotation in the stock exchange and through auctions. The corporation plans to off load a further US $ 725 million by the end of 26. Thus this multi-technology corporation accounts for a very significant component of the country s innovation system. The technological role of IDRO will be discussed in some detail in the next section. <INSERT TABLE 4 HERE> 2.3 Extent of Foreign Participation Almost 98 per cent of total industrial investments in the country come from domestic sources. The liberalization of rules with respect to FDI has become a reality through the enactment of the Foreign Investment Promotion and Protection Act in See Box 1 for specific features of this Act. Box 1: Liberalization of rules with respect to FDI in Iran (as contained in the FIPPA of May 22) The volume of FDI in each individual case is not subject to any limitation There is no restriction on the percentage of foreign shareholding FDI enjoy all rights, protections and facilities available to local investments The FDI principal may be repatriated in hard currency The dividends may also be repatriated Foreign capital is guaranteed against nationalization and expropriation The maximum rate of direct taxation is 25 per cent Source: IDRO Source: (accessed on March 16 24) Perhaps in view of severe rigidities in the earlier policy of 1955, Iran has hardly attracted any FDI during the 199s. An analysis of the inward FDI flows during the 199s confirms this proposition (Table 5). There has been an increase in the extent of foreign inflows especially during the period since the mid 199s: from an average negative inflow of 47 million US dollars per annum it has since improved to 37 million US dollars during the latter half of the 199s. Even at this level it is significantly lower 4 For a detailed interpretation of the various provisions of this Act and for a comparison with the previous Act of 1955, see (accessed on March 16, 24) 8

9 than those attracted by West Asian countries as a whole 5. Another interesting feature is that the outward FDI from Iran is significantly higher than the inward FDI and further it has even jumped over a billion US dollars during the last two years. Given the fact that FDI is a major source of state-of-the-art technologies to the local economy, failure to attract substantial inflows of FDI can be a serious lacuna of the innovation system. However this can also encourage the government to put in place incentives for domestic technology generating efforts. But this does not seem to be happening in the Iranian context, although it must be added that the good quality data for assessing this statement was not easily forthcoming. According to the data from the Ministry of Finance and Economic Affairs (cited in the UNIDO, 23 study), Canada is the single largest investor in Iran followed by Italy and France. The three major industrial recipients were manufacture of fabricated and metal products, textiles and chemical and chemical products. <INSERT TABLE 5 HERE> 5 However these data are at variance with some unpublished data on foreign investments provided by the Ministry of Economic Affairs and Finance (Table 5 F). Given the divergence between this data and that provided by UNCTAD (Table 4), it is very likely that this data (Table 4F) refers only to approved inflows and not actual inflows. It is of course very interesting to note that FDI inflows have actually shown many increases after the announcement of the new liberalised FIPPA in 22. Table 5F: Foreign investment in Iran Financial year Foreign investments (million of US $) Source: Unpublished data from Ministry of Economic Affairs and Finance 9

10 3. TOWARDS DESIGNING AN INNOVATION SYSTEM FOR IRAN S MANUFACTURING SECTOR The state in Iran is currently (c23-4) in the process of designing a national system of innovation for the country. There are a number of technology supporting institutions and policy instruments which are at the moment functioning in isolation and in some cases competing with each other. Needless to add this is a characteristic feature of a number of developing countries and may not therefore be unique to Iran. This has led to the emergence of a fractured innovation system (see Figure 3 for a depiction of this). It must be stressed, however, that it was difficult for us to access data on the innovation system as most of the detailed information is available only in Persian and often in an unpublished form. This applied as well to good quality and reliable data on policy instruments and institutions. However, based on our field research and on the basis of special translations of texts in Persian made available to us by the Department of High-tech industry, we have been able to construct the following picture. The technology policy of the country is contained in the successive five year plans. Hitherto there have been three such plans. Table 6 summarizes the main technology pronouncements contained in the first three five year development plans. <INSERT TABLE 6 HERE> The third, and current plan, contains a number of articles dealing with S&T development (articles 1 through 12). The relevant extracts of these articles appear in the Annexure. There have been at least two policy pronouncements that are of relevance for this discussion. The first is the establishment of a number of research grants that are targeted largely at the private sector. Second, is the target set for raising the R&D intensity to one per cent of GDP by 24. However we could not obtain any detailed data on whether these research grants have already been established. It is our understanding (based on discussions during our field research) that research grants are being administered by the Technology Co-operation Office, the Ministry of Industry and Mines and the Department of High Tech Industries. Regarding the second objective, as can be seen below in Figure 6, that this is unlikely to be achieved. <INSERT FIGURE 3 HERE> An interesting feature of the first policy pronouncements is that it encourages both the importation as well as local development of technology. For local development two routes are envisaged: (i) encouraging the establishment of in house R&D centers in manufacturing enterprises; and (ii) improving the interface between research centers in universities and other government research institutes and manufacturing enterprises. However, the only instrument that is discussed is the provision of loans at concessional rates of interest. Another interesting feature of the more recent policy pronouncement is the reliance on market forces for encouraging innovative efforts in manufacturing enterprises. But given the very highly concentrated nature of the manufacturing sector and the continued domination of public sector enterprises, this is more likely to remain a policy objective for the future. Nothing more specific is known about the pr ocesses for implementing the above pronouncements and that indeed is one of the major drawbacks of the country s innovation system. The country requires an explicit statement of technology policy. This policy document must consist of policy instruments, an indication of the responsible governmental agency that is to be charged with its implementation, the necessary budget and the precise time-frame for achieving the desired results. Simultaneous efforts must also be placed on developing statistical and other indicators for measuring and 1

11 evaluating the effectiveness of specific policy instruments. In this context, it may be worthwhile for the country to learn from the experiences of both Malaysia and South Africa towards the design and evaluation of innovation policy. Given the extremely fragmented nature of the country s innovation system, we propose to organize our discussion as follows. First we will present some indicators for measuring policy outcomes. This is followed by a discussion of an important area of concern from the point of view of innovation policy instruments, namely the supply of scientists and engineers. Next is a brief discussion of the role of IDRO towards the development of domestic technology. This is because, as mentioned above, IDRO occupies an important place in the manufacturing landscape of the country. Almost all areas of high and medium tech production are in the hands of the subsidiaries of this huge holding company. Also it must be stressed that during our field research it became quite evident that IDRO was the only major institution with a clearly articulated strategy and instruments for achieving the objectives of the technology policy content of successive economic development plans. 3.1 Policy Outcomes At the outset it must be stressed that good quality data on policy outcomes is extremely hard to come by. Nevertheless, three separate but standard indicators are used for the analysis, namely (a) growth in R&D investments; (b) patenting behavior; (c) high technology exports and the growth of high tech industries. Further given the important role that IDRO plays (as discussed in the previous section) in the manufacturing sector of the country, I will also attempt at a brief evaluation of the technological role of this important component of the country's innovation system R&D investments The data on R&D investments are not systematically collected and hence they are proxied by the total research expenditures of all the ministries in the country. This (Figure 4) has shown some sharp increases over time and now works out to.42 per cent of GDP, although since 1993 the research intensity has been showing only sharp year to year fluctuations and not any growth. Hitherto the only survey on R&D in the country was conducted by the Statistical Centre of Iran in No details of the methodology, the sampling frame, the response, and so on, are mentioned. The greatest weakness of the survey is that it does not provide data on the value of R&D projects, but only the number of R&D projects. Data are available for just one year, namely 2-1 so they cannot be used for tracking changes, even in the number of projects. A positive aspect of this survey, however, is the fact that it contains data on the number of research scientists and engineers actually engaged in R&D in both the public and private sectors. Table 7 presents a synoptic picture of these figures. <INSERT TABLE 7 HERE> <INSERT FIGURE 4 HERE> The following inferences can be drawn from the Table. First, only about 19 per cent of the total number of projects can be considered as real R&D projects with an explicit budget, and so forth. Second, given the fact that there are about 15 units engaged in R&D (although the distinction between major and minor is not clear), the number of R&D projects (both major and minor) works out to less than two projects per unit. In other words, there appears to fragmentation of 6 I am grateful to Mr Mohammad Halimi and Mr Borna Barkhodar of the Department of High Tech Industries, Ministry of Industry and Mines for providing me with a translated copy of this survey. 11

12 R&D projects across a very large and motley assortment of institutions ranging from production enterprises to religious schools. Third, it is not clear whether these R&D projects include those in social sciences as well and all indications are that they do. Finally, even though most of the units engaged in R&D are in the private sector, it is not necessarily the case that all the R&D projects are in the private sector too. In fact it is quite likely that most of the large or major R&D projects are within the public sector (in state universities, government research institutes and in public sector enterprises such as IDRO). Given the generality of the data, it is not possible really to use it to measure policy outcomes in its present state Patenting Behavior A second commonly employed measure of outcome is the number of patents granted. Given the political situation in the country, it is quite likely that Iranian organizations may have applied for patents only within Iran and not abroad. However we do not have any data on the number of patents that are granted to Iranians within Iran. Data on foreign patents and especially from the US PTO (Table 8) indicates an interesting picture. All the patents secured by Iranians in the US are secured by Iranians during the period <Insert Table 8 Here> High technology exports and the growth of high tech industries The major export products of the country are mineral products, food products, carpets, pistachio, caviar, skin and leather, handicrafts and clothing, followed by petroleum, gas, oil and petrochemical products. During 22-3, the value of non-oil products exports was billion rials (Statistical Centre of Iran, 23). The major import items include base metals, vehicles, chemical products, heavy machinery, animal and vegetable fats, and plastics. During 22-3, value of imports was billion rials. As expected the country has a very high comparative advantage in the export of minerals (which includes fuels and lubricants). But its comparative advantage in industries where the import substitution policy has been vigorously pursued, such as transport equipment and chemicals is considerably less (Figure 5) as measured by the values of Revealed Comparative Advantage Indices 7 (using the Balassa method). The country has also a very low rank in these industries as well. The counter argument is that the focus of these industries was not on exports, but the substitution of imports based on local development of technology. Nonetheless, this analysis does indeed raise some concerns about the cost of such import substitution. Given the fact that the country is now planning to specialize in the systematic development of certain specific high technology industries, this analysis, although limited in scope does indeed raise some pointers for public policy. The specific industries selected for special treatment are: electronics, biotechnology, new materials, laser and optics, IT and software, civil aviation and nano technology. Recognizing the importance of high-tech industries for economic advancement and growing domestic needs, the Iranian public and private sectors invested in telecommunications, electronics and computers in the 199s to expand their operating units and to establish new facilities, especially in those areas in which they had no prior experience. This was part of the reconstruction programme following the Iran-Iraq War, which lasted from 198 to 1988 and cost millions of lives. The reconstruction programme continues to date. The computer industry, which emerged in the 199s, is a successful example both in hardware and software streams. The production of PCs grew from 8, units in 1998 to about 15, in The index compares the share of a given sector in national exports with the share of this sector in world exports. A value of 1 for the index indicates that the country is specialized in that sector. 12

13 However, despite its large number of manufacturing plants (about 1,1 in 1998), the Iranian tech sector is significantly less advanced than in South Korea and Taiwan, for instance. This is notwithstanding the fact that Iran is a producer of various high-tech products, including a wide range of telecommunications devices - telephone sets, cellular phones, digital telephone systems and fiber-optic terminals - and solar energy equipment. Western economic sanctions and restrictions have greatly contributed to Iran's lack of progress. Because of the sanctions, many products cannot be imported or their imports are subject to unacceptable political demands. This has been a major motivation for both private and public sectors efforts to embark on high-tech projects. The Iranians' plan to diversify their exports to decrease their heavy reliance on oil exports is another major incentive to invest in the high-tech industry, apart from satisfying the growing domestic need for its products for civilian and noncivilian purposes. The main institution responsible for promoting high technology development in the country is the newly (in 21) established Department for high tech industries 8. The department has an annual budget of about US $ 18 million, has a total manpower of 16 9 and is organized into seven technical committees and two research groups. Each technical committee focuses on one of the seven high technology industries identified for further development and the research groups focuses on technology studies and management, respectively. Exports of high technology products from the country started picking up from 2 onwards: high tech exports in that year increased by as much as 326 per cent to US $ 4 million, while the intensity of high tech exports has increased to 1.7 per cent of manufactured exports (Figure 6). While this is not, in itself, a major achievement, even by developing country standards, it is a significant improvement when measured against the county's own past record. The data available do not, however, allow for a disaggregated picture of this surge in high tech exports. It must however be mentioned that Iran, at least in the short-term, does not aspire to become a high technology exporter, being more concerned about the use or diffusion of high technology in the national economy. Notwithstanding, there are well known exceptions to this line of thinking. The production of optical disks (Box 1) and telecommunications equipments (Box 2) are two areas where the country would like to emerge as a major player, at least in its region (namely the middle east). The systematic development of the above mentioned industries means that the country must put in place a strong and effective institutional support mechanism. The newly established Department of High Tech industries, its parent ministry, the Ministry of Industry and Mines along with the Ministry of Science, Research and Technology and the Technology Cooperation Office (which functions directly under the President s Office) are expected to provide this institutional support. Together, all these organizations are in the process of crafting a national 8 The department has the following objectives: (i) Determining the vision and overall strategies of High Tech Industries in Iran; (ii) Doing research on the guidelines and policies of high and new technology development in industry; (iii) Organizing and putting forward plans and programmes of high and new technology development in industry; (iv) Organizing the implementation of the National Programmes for Key High-tech projects in industry; (v) Promoting the national innovation system reform in industry and the construction of a new NIS for the country; (vi) Providing necessary infrastructure for development of high tech industries; (vii) Conducting research in Technology Foresight and Technology Assessment; and (viii) Providing financial aid for professional laboratories in the high tech fields. 9 The break up is as follows: 3 executives, 37 full time technical and administrative staff, and about 12 part time researchers. It is interesting that most of these researchers have doctoral degrees and are employed by universities and other institutes of higher learning. The department thus keep its administrative costs to the minimum while involving highly experienced and talented personnel from universities to actually involve themselves in the initiation and management of high technology research projects. 13

14 system of innovation. The main components of this include: (i) specif ic policy support (ii) human resource development leading to the supply of high quality scientists and engineers (iii) government research institutes and R&D labs attached to public and private sector enterprises (iv) financial and other incentive schemes for the local generation of technology and (v) support for venture creation (including venture capital). <INSERT FIGURE 6 HERE> Case of CDs and DVDs 1 In a bid to expand its high-tech industries, Iran has announced a plan to turn itself into the second-largest producer of blank CDs and DVDs - after Taiwan - by 25. While blank disc production is hardly a path breaking industry, added to various projects including personal computer production and software development by its public and private sectors, it reflects Tehran's desire to expand into technology partly for economic reasons and partly consolidate its self-sufficiency to withstand economic sanctions. The Iranian state news agency IRNA on July 6 quoted an unnamed manager of Iran's Optical Disk Production Company (ODPC) who described a three-phase production plan to turn the country into a major international player in the production and the export of CDs and DVDs, with the first phase to begin in late summer and followed by the second and third phases in late spring 24 and early 25, respectively. The project, the manager said, is to be a joint venture with STEAG Hama Tech AG a worldwide leading global supplier of manufacturing equipment and process technology for the manufacture of optical media (CD/DVD).. Iran imports 55 million blank CDs and DVDs annually, a situation the OPDC plans to reverse - not only by ending Iran's dependency on imported items, but also by turning the country into a major exporter with an anticipated annual export value of US$38 million. The ODPC manager did not specify whether this would be the expected revenue for the first phase or for the third, when the company will operate at full capacity. The Iranian government regards high-tech industries as essential for economic and technological advancement, while preserving the country s independence. Unlike many Middle Eastern countries, Iran has a relatively well-developed industrial sector. However, it lags the Southeast Asian states, although certain high-tech industries (for instance, electronics and telecommunications) began in the late 195s. In addition to Japan, the world s second largest economy and home too many high-tech inventions, most Southeast Asian countries have come to dominate much of the high-tech international market, particularly in consumer goods. Thanks to years of investment and planning, countries like South Korea, Taiwan and Singapore have turned themselves into major players in certain high-tech fields such as semiconductors and cellular phones, and China is fast catching up. The CD/DVD project should be analyzed in the larger context outlined above. In addition to meeting internal demand, it has a very ambitious target - turning Iran into the second largest CD and DVD producer within a very short time frame as stated by the ODPC manager, who expects this to happen "once the project is put into full operation". If successful, Iran will emerge as a major competitor to Taiwan, which now reportedly produced 9 percent of the world market. While the July 6 (23) announcement is important on its own, perhaps, it is even more important in demonstrating two necessary trends in the Iranian economy: (i) Investing in hitherto neglected industries; and (ii) Moving beyond an import-substitution strategy in economic development as reflected in the CD/DVD project's ambitious export target. 1 In working out the ideas contained in this case, I have drawn freely from Peimani (23) 14

15 Case of telecommunications equipment industry According to a report published in November 23 by Broad Group, the London based broadband and mobility consultancy, suggests that Iran is positioning itself to become a telecoms hub between Asia and Europe. The report, The Telecommunications Market in Iran, is a survey of the current state of play in communications in the country, covering fixed, mobile, Internet and data communications sector. The report analyses the Iranian market opportunity (with a population of 68 million, similar to that of France) across all sectors and provides forecasts for growth over the next five years and value projections for the fixed and mobile infrastructure markets. The telecommunications sector in Iran has undergone significant changes over the last few years. See Table 9. The number of fixed telephones has doubled and the ratio of mobile to fixed telephones shows significant increases. In 23 the government announced that Iran's mobile phone market would be opened up to foreign companies within 18 months. The government would allow foreign private mobile phone operators into Iran from March 24, and would seek to avoid a private monopoly by licensing several firms by the end of 24. Further the government aims to double the number of fixed lines from 1 million to 2million by the end of 24, and increase the number of mobile phone lines eight-fold, to 1m. However, the ministry and the main service provider, TCI, lack the investment capital to fund such an expansion. Foreign participation is an obvious answer, but notwithstanding the opening up of the Iranian market to foreign equipment suppliers, many investors remain wary of the volatile business environment. Expected bidders for the contracts to expand the fixed and the mobile phone networks include Germany's Siemens, Nokia of Finland and Ericsson of Sweden, as well as Japan's NEC. Siemens should in theory enjoy first-mover advantages, since it was not only the first foreign equipment supplier to enter the market -delivering telecoms switching and communications technology in the 195s -but has played a direct role in helping Iran to shape its telecommunications industry. <INSERT TABLE 9 HERE> Although there is some domestic manufacturing of telecommunications equipment, the country remains a net importer (Figure 7). <INSERT FIGURE 7 HERE> Domestic manufacturing of telecommunications equipment is carried out by five subsidiaries of the Ministry of Post, Telegraph, and Telephone. Besides, there are over 1 private manufacturing companies. The most important of these is the Iran Telecommunication Manufacturing Company established in 1969 with foreign equity participation with Siemens. The country has also established a dedicated public research laboratory, Iran Telecommunication Research Centre (ITRC). The ITRC is organized into 11 research groups: switching systems, mobile communications, optical systems, radio systems, antennas and waves propagation, information society, group for technical support of telecom plans and adoption of standards, data networks and processing, network management and quality control. The activities of the research centre were considerably expanded during the second five year plan period to The laboratories total budget ranged from US $ 3.5 million in to US $ 5.5 million in However I do not have any further information on the actual output of this lab over the years or even its manpower strength. Apart from the ITRC, telecommunications research is also performed in the following three public laboratories, namely (i) IROST; (ii) Iran Broadcasting Research Centre; and (iii) Defense S&T research centre. The necessary conditions are therefore in place for the country s emergence as an important manufacturing hub for telecommunications equipments in the region. 15

16 3.1.4 Technological Performance of IDRO IDRO established high tech industries vice presidency in The vice presidency is divided into two main divisions: entrepreneurship and technology development. The former aims at promoting engineering, design, and manufacturing capabilities. Further it facilitates access to modern technology by encouraging the use of domestic experts. Loans are provided to interested entrepreneurs. Thus the aim of this division is to promote a class of technoentrepreneurs within the country. The second division, namely on technology development, supports R&D projects in areas of high technology through its affiliated companies and encourages improvements in the quality of products. Projects which lead to reverse engineering too are encouraged. The main instrument of support is once again through the provision of loans. The division acts like a venture capitalist by supporting the creation of Small Business Development Centers to convert the results of doctoral and masters dissertations in S&T to viable business plans. Table 1 summarizes the progress of these schemes and Table 11 presents the major outputs of the R&D projects. <INSERT TABLE 1 and 11 HERE> It is thus seen that IDRO has an important role in developing technologies in areas of high technology and it is also attempting to create a class of techno-entrepreneurs in the country. In the context learning from the experience of Singapore towards the creation of technoentrepreneurs would be very beneficial. 16

17 3.2 CRITICAL FACTORS AFFECTING THE INNOVATION SYSTEM Two factors that are critical to the health of an innovation system are: (i) the availability of a critical mass of scientists and engineers; and (ii) financial schemes to aid local technology generation Supply of scientists and engineers Literacy levels in Iran have shown tremendous increases since the revolution of 1979, (Figure 9). The country has done very well in higher education too with the number of university enrolments: currently it works out to about 2.5 per cent of the country's total population (Table 11). University enrolments in the last two years have been stagnant. A closer look at the data shows that over 5 per cent of the enrolments at the university level are in the Azad or open universities, the quality of whose teaching programmes and output is in doubt. Table 12 shows impressive increases in the outputs of scientists and engineers, with a balanced ratio of the two. But scientists and engineers account for only about a quarter of the graduates in the country. Along with this one must take into account the brain drain from the country. An educational problem in Iran since the early twentieth century has been the general perception among the upper and middle classes that foreign education is superior. Thus, there have been large numbers of Iranians studying abroad. For as long as the foreign-educated students returned to Iran, they were able to apply their skills for the overall benefit of the country, however, under both the monarchy and the Republic, thousands of Iranians elected not to return to their homeland, creating a veritable "brain drain." 11. Since becoming a Republic, the government has tried to discourage Iranians from going abroad to study, although it has not prevented the practice. In order to attain its goal of creating a knowledge-based economy, it is essential for the government to both encourage foreign training and experience for Iranian students and professionals, while at the same time encouraging them to return to the country. In the context, the country may look at the 'brain pool' programme of Korea which is the most successful 'reverse brain drain' programme. <INSERT FIGURE 8 HERE> <INSERT TABLE 12 AND 13 HERE> In addition to the human resource problem discussed in the preceding section, Iran also experiences a very low density of researchers engaged in R&D (Table 14). Given the fact that the total labor force in Iran is about 2 million, the number of researchers alone translates itself to just 7 per 1, labor force. However if one includes the total R&D personnel the density improves to about 19 per 1, labor force (.386/2*1). <INSERT TABEL 14 HERE> In addition to this low density, the quality of the existing trained manpower is another cause of concern, which because of want of data is beyond the scope of the present study. 11 According to Mani (22), there are about 48, Iranian born scientists and engineers in the U.S alone. 17

18 3.2.2 Fiscal Incentives During our field research it became apparent that research grants administered by the TCO, the Department of High Tech Industries and the Ministry of Industry and Mines do exist, but no quantitative data were made available by any of the agencies. Further discussions revealed that the main mode of assistance for local technology development is in the form of concessional loans. Availability of financial schemes and especially targeted research grants is a critical factor affecting the innovation system. 18

19 4. POLICY CONCLUSIONS As was made clear at the very outset, this study has been hampered by the lack of good quality published data on issues related to science and technology in the country. Nevertheless based on our present exercise, the following conclusions emerge: There is an earnest desire on the part of policy makers in Iran to design a proper and cohesive innovation system for the country; The country has the potential to emerge as a high technology manufacturing hub especially, in the middle eastern region; The quantity of human resource and especially with science and engineering education has shown some tremendous increases and this is the main asset of the country; Based on our analysis of available data as well as discussions with various officials linked to institutions supporting technical change in the country, the following policy conclusions emerge. It is not easy to rank them, but they are arranged into three broad groups according to those dealing with: (a) the administrative apparatus governing local technology development; (b) the promotion of local technology development, especially at the level of manufacturing enterprises; and (c) with human resource development for science and technology activities. 4.1 Administrative Apparatus The innovation system of the country as it exists now is highly fractured even compared to other developing countries (Figure 5). There is very little interaction between the various agencies on the LHS of Figure 5. In fact there is much duplication and some amount of rivalry between the various organizations. Once again, I must emphasize that this all too familiar in a number of developing countries. It is very essential to nominate one agency or ministry to co-ordinate the various efforts that are now being pursued by different agencies. It is more prudent to choose one organization that is acceptable to all agencies and whose impartiality is unlikely to be questioned; The country requires the enunciation of an explicit technology policy statement consisting of policy instruments and institutions (see pp.12-13). While doing so, it is also essential to spell out the budgetary implications, the implementing authority and the time frame. To the best of my knowledge, at present, the only document that comes close to a technology policy statement are the successive development plans. However most of the statements in the plan are so general that it does not lend itself to an easy implementation; and The nodal agency for Science and Technology must develop and publish good quality data on innovation indicators. In this direction the efforts that are being mounted at ASEAN countries is likely to be very useful. 4.2 Promotion of Local Technology Development Financial instruments for encouraging local technology development are limited to a few loan schemes. Information on research grants, although may be available is very hard to come by and tax incentives are virtually absent (p. 27). Given the high cost of capital and the general apathy of commercial banking system it may be necessary to craft a few research grants especially in those areas where the country has sufficiently well trained human resource; 19

20 4.2.2 A beginning towards in-house R&D centers has been made. This must be encouraged. For the country as a whole it may be necessary to define a few areas of high technology as "highly advanced national projects'. Of course, the Department of High Tech industries has made a beginning towards this definition by identifying a number of important high technology areas (p. 2). 4.3 Human Resource Development for Science and Technology The issue of brain drain will have to be tackled in a pro active manner. Students must be both encouraged to go abroad for higher studies and must also be encouraged to return as well. For this, incentives for R&D scientists and engineers as a profession must be examined and strengthened (pp ); It is very essential for Iranian scientists and engineers to be in touch with counterparts elsewhere in both developed and developing countries. The existing bilateral treaties can be used as a conduit for this. This is important as the country has not attracted much FDI and cases of disembodied technology imports through licensing route is also likely to be very few in view of the imperfect world market for such technologies (pp ); and Given the low level of private entrepreneurship in the country, concerted efforts must be made to encourage this activity through the initiation of state sponsored venture capital (p.27); Given the earnestness of the Iranian government s efforts to design an innovation system for the country, these recommendations are not likely to be insurmountable provided there is sufficient political will. In my view political will is an important requirement if this designing of the nation's innovation system is to succeed. Finally, like most developing countries, Iran is torn between two alternatives: whether to target the development of technology-based SMEs or focus on large enterprises. In fact as the Singaporean strategy has shown (Mani, 22) the two objectives need not conflict with each other as the SMEs of today can be encouraged to become the large enterprises of tomorrow. 2

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