Fostering innovation and entrepreneurship. International experiences. José Luis Solleiro National University of Mexico.

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1 Fostering innovation and entrepreneurship. International experiences. José Luis Solleiro National University of Mexico. Introduction. In essence, innovation is the ability to manage knowledge creatively in response to market articulated demands (OECD, 1999). For that reason, innovation has always been and will remain one of the most efficient ways for a company to differentiate itself from its competitors and thus build a real competitive advantage (Feneuille, 1997). Innovation allows firms to generate new and improved products, capital savings and, in the case of industrial processes, it brings cost reductions or quality improvements. Radical innovations and the comittment of entrepreneurs lead to the creation of new businesses and even new industries. That explains why firms are the main actors of the process of technological innovation. Their capacity to innovate is partly determined by their own capabilities, partly by their capacity to adapt and apply knowledge produced elsewhere. The increasing complexity, costs and risks involved in innovation enhance the value of networking and collaboration to reduce moral hazard and transaction costs (OECD, 1999). This provides an incentive to find new forms of technology cooperation involving two-way relationships, and attempts to share technological knowledge and collaborate on research and development (R&D), training, manufacturing, information management and marketing. Such technology partnerships are knowledge links that give firms access to other organizations' skills and capabilities. The growing need for these networks has led to a systemic approach for the policy analysis in innovation. National Innovation Systems (NIS) are defined as the "set of distinct institutions which jointly and individually contribute to the development and diffusion of new technologies and which provide the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artefacts which define new technologies" (Metcalfe, 1995). Assumption of the concept of NIS implies that public policies to foster technological innovations will undergo a drastic change in nature and composition. Governments should now address different obstacles that block the functioning of innovation systems and are therefore increasingly assuming the role of honest brokers, along with some of their traditional functions in supporting education, training and R&D. This paper presents different policy mechanisms undertaken in different countries, with the objective of advancing in the conception of benchmarks for the promotion of innovation.

2 The new production of knowledge. Gibbons et al. (1994) made an important contribution explaining changes in the mode of knowledge production in contemporary society. They propose a new form of knowledge production (Mode 2) as an evolution from the traditional form (Mode 1), that has been characterised as a complex of ideas, methods, values and norms "that has grown up to control the diffusion of the Newtonian model to more and more fields of enquiry and ensure its compliance with what is considered sound scientific practice". In contrast, Mode 2 deals with a socially distrib uted system of knowledge production in which creativity is mainly conceived as a group phenomenon, with the individual's contribution seemingly subsumed as part of the process, and quality control being exercised as a socially extended process which accomodates many interests in a given application process. "Just as in Mode 1 knowledge was accumulated through the profesionalisation of specialisation largely institutionalised in universities, so in Mode 2 knowledge is accumulated through the repeated configuration of human resources in flexible, essentially transient forms of organization" (Gibbons et al., 1994). Table 1. Characteristics of knowledge production in Modes 1 and 2. Attribute Mode 1 Mode 2 Participation Disciplinary Transdsiciplinary Evolving framework to problem solving Empirical and theoretical components Communication Organisation Evaluation Quality control Institutional channnels Proffessional journals and conferences Around disciplines and a scientific leader By scientific community Peer review Traditional scientific indicators Peer review judgements Dynamic Complex networks Heterogeneous Socially distributed system Multiple sites for knowledge generation Interconection of sites Determined by socioeconomic context In the context of application Intellectual interest Cost effectiveness Social acceptance Competitiveness Social accountability

3 Since generation and exploitation of knowledge in Mode 2 requires increasing participation constituting a socially distributed knowledge production system, the organisation of that participation becomes a crucial factor. This reveals the need for a different approach to policy, particularly for the integration of education, science and technology and competition policy into a comprehensive innovation policy. Governments need then to play an integrating role in managing knowledge by making technology and innovation policy and integral part of overall economic policies. These policies shall be aimed at establishing the size and global coherence and effectiveness of the innovation system needed to acquire relevant knowledge. The National Innovation System and its components. The concept of systems of innovation has been increasingly employed by researchers studying technological change. Because innovation involves groups of actors, new forms of learned institutional behaviour, and interactivity with some regularity and structure, the conceot of innovation system is attractive (Davis, 1998). It has been promoted by some of the most influential science and technology policy agencies innthe world, notably the Organisation for Economic Co-operation and Development (OECD). As mentioned before, the NIS establishes mechanisms for a collective system of knowledge creation, use and diffusion in which institutions interact with each other in an environment characterised by specific values, norms and legal frameworks. According to the broad perspective on NIS by Lundvall, the NIS is not designated solely to produce and accumulate scientific and technical knowledge, but also to help firms to assimilate, use, adapt, change or even create technology, and finally to develop new products and processes in response to a changing environment (Lim, 2000). The NIS consists of various research institutions, firms, universities and other institutions. Andersen and Lundvall (1988) explain different types of institutions in the NIS: national R&D institutions which have grown up as part of universities and the public sector and are funded principally by the government, other public funds and in some cases non-profit making organisations; institutions which are linked to firms, including formal R&D in the form of industrial laboratory R&D capacity; educational and training institutions which supply not only scientists and engineers, but also technicians and skilled workers posessing appropriate skill profiles; science and policy making institutions which monitor the implementation of R&D in the public sector and possibly ensure some degree of coordination with private sector R&D. The notion of NIS can be put into operation in terms of finantial flows, legal measures, policy linkages, standards, and flows of information, science, technology and people (Niosi et al., 1993). This underscores the need for active policies and sound instruments aimed at

4 fostering the flows required for the implementation of the innovation system in a given country. Changing importance of public policies. Although the relative role of governments in funding R&D is decreasing everywhere 1, the role of governments in structuring a supportive policy environment for innovation is more important than ever. In a new competitive environment, there are several specific challenges to face for policy definition (Ratchford, 1997): One challenge relates to the need for fair and consistent "rules of the game" for industrial research and innovation. Intellectual property rights, for instance, are a fundamental concern. Standards, the treatment of R&D subsidies under the WTO and non-tariff barriers to trade of high technology products are among other challenging issues that affect innovation and competitive performance, laying at the intersection of trade and technology policies. Definition of explicit industrial policies affect innovative environments in many ways and constitutes another challenge. Tax policies; access to credit and venture capital; environmental regulations; measures to attract foreign investment; specific programs aimed at promoting development of priority sectors; etc. are policy issues that will influence the environment for R&D and innovation. Another governmental issue relates to the question of continued support for education and basic science. Governments still face the challenge of giving attention to improving the effectiveness and efficiency of scientific and education systems. Beyond these challenges, governments need to play an integrating role in managing knowledge on an economy-wide basis by making technology and innovation policy an integral part of overall economic policy. According to OECD (1999), this involves: Refocusing specific objectives and adapting the instruments of technology and innovation policy. Policies to promote research collaboration Facilitation of firm networking and clustering removing barriers to co-operation and alliances and easing the access of firms to knowledge -intensive services Ensuring that the public research infrastructure works in close collaboration with business Promotion of institutional ties Personnel mobility Securing framework conditions that are conducive to innovation. 1 In the United States, between 1960 and 1994 overall federal support of R&D increased by about 50% in real terms, compared to the almost 400% increase in the R&D spending by industry,

5 Stable macroeconomic environment Policies to increase innovation-driving competition Collaborative research Training policies to develop human capital Building an innovation culture. Favourable framework conditions for business Technology diffusion programmes to include elements that promote firm-level capabilities for identifying, accessing and incorporating new knowledge and techniques Enhancing technology diffusion. Manufacturing extension services, information networks, demonstration and benchmarking schemes and technical assistance Better designed and integrated pubñic schemes that include an element of industry cost-sharing Increasing the innovative performance of the services sector Education policy promoting multidisciplinary and life-long learning Flexible labour markets Worker training and mobility of personnel Leveraging R&D Increasing the efficiency of existing financial support programmes Making greater use of public/private research partnerships Fostering commercialisation Responding to globalisation Upgrading the indigenous technology base and improving international linkages Stimulating the growth of localised innovative clusters or competence centres Enhancing international cooperation in R&D. Learning from best practices. Table 2 shows examples of best practices, according to a recent analysis conducted by OECD (1999). Table 2. Typology of good policy practices (adapted from OECD, 1999) Theme Policy aim Means Country example Securing appropriate framework conditions To develop human resources in S&T Reforms to postsecundary education Increased government and industry support to Austria -Fachhochschulen study courses Finland- public/private partnership program

6 Building an innovation culture Enhancing technology diffusion Promoting networking and clustering Leveraging research and development Responding to globalisation Improving policy making To close market gaps in the financing of innovation To reduce asymmetry in information To diffuse best practices in innovation management To promote the creation of innovative firms To increase firms' absorptive capacity To improve linkages between SMEs and public research To stimulate the formation of innovative clusters of firms To ensure a better match between the S&T infrastructure and industry needs To sustain technological opportunities in the long run To increase economic return from public research To increase linkages between domestic and foreign owned firms To increase country's attractiveness as a location for knowledgebased activities To enhance policy coordination To improve policy proffessional education Establishment of a legal framework for venture capital Internet-based business information network Funding greater use of benchmarking and diagnostic tools Public investment in venture capital Co-financing of consultants to upgrade firms' organisational ability Co-financing of technology uptake via public/private partnerships Brokering and procurement policies Competition among regions for funding of cluster iniatives Co-funding of centres of excellence to facilitate university-industry interactions Building networks between public research actors and firms Increased government spending on basic R&D Increased public support to R&D Public/private partnerships Technology foresight for policy setting Regulatory reform (univ.- industry interface Building networks of competitive domestic firms Building innovative clusters Systemic upgrading of the S&T infrastructure Raising the coordination function to the highest policy level Making evaluation Hungary- Venture capital act Canada- Strategis initiative Norway-Bunt programme Spain- Miner scheme Mexico- National Technology Award USA- SBIC programme Brazil- Incubator network Norway-Bunt programme Spain- CDTI Centre and OTRIs Network Chile- FONDEF Netherlands-Clustering policies Germany- Bioregio initiative Sweden- NUTEK competence centre programme Germany- Baden- Württemberg's Model France- Réseaux Nationaux de la Recherche Japan, Korea Finland Australia CRC rogram Austria CD Society and Laboratories New Zealand Japan Ireland- National Linkage Programme See above Mexico Korea Science and Technology Council Brazil- Ministry of Science and Technology United Kingdom-

7 evaluation obligatory Developing new methodologies ROAME-F Model Switzerland Supporting innovation: the need for evolution. Adoption of above presented best practices by developing countries can be a difficult task, mainly because those countries, in general, lack mature technology markets, research infrastructure and technological culture. It is therefore that it has been recognised that a principal objective of R&D support in less developed countries is to promote innovation learning, and that an effective learning process for an economy that did not conduct R&D before consists in the generation of a "critical mass" of projects. Once such objective is achieved, the country can enter into a more mature policy making process in which innovation policies must be restructured, reducing support to routine projects and increasing support for more complex innovation models. Malaysia is a good example of the adoption of an evolutionary model for innovation policies. In the 60s, industrial R&D was conducted mainly by public research institutes. The Standards and Industrial Research Institute of Malaysia focused on enhancing the utilization of local resources and improving domestic application of proven industrial technology. The Industrial Master Plan (IMP) drawn up with private sector inputs and launched in 1986 identified 12 priority industrial sectors for development. Later, a National Action Plan for Industrial Development was launched in 1990 to follow uo on implementation of the IMP to import technology, internalize imported technology, and identify R&D for priority sectors. A comprehensive manpower development programme was instituted in order to create an indigenous supply of technically skilled labour (Chin Lye Ha, 1996). From 1990 to 1995, a large number of R&D projects were carried out, particularly in microelectronics, information technologies, automation, nuclear technology and material science. Significant progress was made in increasing private sector involvement in R&D activities. This sector's contribution to total R&D expenditures went from less than 20% to 45% in that period. The main obstacles for the success of innovation policies identified in the Malaysian experience reflect the situation of most developing economies trying to foster innovation and entrepreneurship. They are: Inadequate industrial technology base. Inadequate supply of indigenous skilled technical manpower. Small number of private sector R&D activities, Strong reliance on public R&D. Limited access to financial support for R&D activities. Teubal (1998) proposed a basic model for the evolution of policies that is shown in Tables 3 and 4, in which each phase is assigned specific objectives and goals, a specific set of

8 obstacles, market failures and policy restrictions to deal with, and a policy framework.. The objective of the starting phase is to assure a collective, cumulative and multidisciplinary learning process on innovation setting the base for the assimilation of the R&D process in the economy. In this phase, direct support in the form of grants is the best instrument to mobilise firms towards the definition of R&D projects. The objective of the mature phase is to restructure policies fostering innovation in terms of getting greater private sector's involvement in more complex and entrepreneurial projects. This maturity is an indication of the feasibility of new forms of financing innovative projects through venture capital mechanisms. Table 3. Technology policies cycle: the starting phase. Objectives and goals Obstacles, market failures and policy restrictions Policy framework and components Generalising R&D in domestic firms Lack of good R&D projects Learning process: government agencies promote links and certain typology of projects, and codify experiences from different policies. Programmes for specific firms Cumulative process of colective and multidisciplinary learning To reach a critical mass of projects Capacity building for policy definition and implementation Definition of specific incentives for R&D in private sector. General market failures Lack of R&D activities in firms Little development of markets of concultancy in R&D and technical advice Inadequate institutional framework (like SMEs) and sectors Solid and flexible support Combination of economic and financial incentives with policies for institutional and market development Reduction of bureaucratic procedures Granting of innovation awards Increase international collaboration Training in policy development Pro-active policies to promote projects including tax incentives. Definition of both horizontal and specific support mechanisms Table 4. Technology policies cycle: the mature phase Objectives and goals Obstacles, market failures and policy restrictions Policy framework and components Policy reformulation Budget limitations Political limitations (v.g. large companies political Leveraging resources Partnership promotion Innovative financial

9 Reduction of support for routine projects Fostering transition to more complex R&D projects Support to new categories of technological enterprises influence) Lack of capacity to identify relevant market failures and appropriate categories for R&D projects Lack of personnel for R&D High transaction costs Market failures and technical restrictions mechanisms (venture capital) Best policy practices Increased selectivity. Specific incentives Capacity building International cooperation New categories of projects. Private sector as integrator of sectorial innovation clusters New challenges for policies: knowledge management and innovation. An ability to understand and exploit the relationship between knowledge management and innovation processes is of increasing significance in today's competitive environment, where a dynamic capability to meet rapid change is an essential ingredient in achieving sustainable business success in global and national market places (Hull et al., 2000). Knowledge management practices include a wide range of activities such as the writing and dissemination of technical reports, the secondment of R&D staff, and the use of information technologies. They refer, indeed, to teh ability to creatively combine the stocks of knowledge of technologies (internal and external), markets and operations to develop new business propositions. Hull et al. (2000) define the main groups of activities of sound knowledge management practices. They give a good indication of benchmarks for their promotion by effective public policies aimed at capacity building for knowledge management and for strategies at the level of the firm: Knowledge management practices for innovation. To build, maintain, share and manage experience gained from R&D and other technical activities. Project managment skills. Quality monitoring. Formal and informal communication patterns between technical and non technical groups. Networks of gatekeepers. Mapping of knowledge. Coordination of internal and external R&D capabilities, inter-firm relationships and market requirements. Analysis of capabilities for innovation.

10 Benchmarking and identification of opportunities. Monitoring of external standards and regulations. Mapping of potential technology partners. Competitive intelligence. Technical human resource management Systems for motivating and reguarding technical personnel. Managment of interdisciplinary work. Training and career development activities. Intellectual property management. Identification of intellectual assets. Development of specific strategies to protect firm's knowledge. Use of patent information to asess the company's relative position in specific fields of technology. Development of technology transfer strategies. Management of trade secrets and other confidential informations. Information management. Regular access to data bases. Development of internal mechanisms to clasify and store information. Systems for selective dissemination of information within the firm and to clients and suppliers. Systems for the analysis and assessment of information. Mechanisms for the use of information in decision making. References. Andersen, E.S. and Lundvall, B. (1988), "Small National Systems of Innovation" in Small Countries facing the Technological Revolution, Pinter Publishers, London Chin Lye ha (1996), "Malaysia's experience in technology-based enterprise development", in UNCTAD, "Exchanging experiences of technology partnerships. The Helsinki Meeting of Experts", United Nations Conference on Trade and Development, New York and Geneva,, pp Davis, C. (1998), "Competitiveness, Sustainability and ths North American Regional System of Innovation", in Anderson et al., eds., Innovation Systems in a Global Context. The North American Experience, McGill-Queen's University Press, Montreal Feneuille, S. (1997), " Science and technology in French industry: research and innovation", Technology in Society, Vol. 19, Nos. 3/4,

11 Hull, R. Et al. (2000), "Knowledge management practices for innovation: and audit tool for improvement", Int. J. Technology Management, Vol. 20, Nos. 5/6/7/8, Lim, Y. (2000), "Development of the public sector in the Korean innovation system", Int. J. Technology Management, Vol. 20, Nos. 5/6/7/8, Lundvall, B, (1992), "National Systems of Innovation", Pinter Publishers, London Metcalfe, S. (1995), "The economic foundations of technology policy: equilibrium and evolutionary perspectives", in P. Stoneman, ed., Handbook of the Economics of Innovation and Technical Change, pp , Blackwell, London Niosi, J. et al. (1993), "National Systems of Innovation: In search of a workable concept", Technology in Society 15, 2; OECD (1999), "Managing National Innovation Systems", Organisation for Economic Cooperation and Development, Paris Ratchford, J.T. (1997), "Science and Technology in government and industry: whence and whiter?", Technology in Society Vol. 19, Nos 3/4,