1 managing innovation the context of innovation & the role of the state

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Managing Innovation

THE CONTEXT OF INNOVATION &

THE ROLE OF THE STATE

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Managing Innovation

INTRODUCTION

The management of the innovation process is an extremely demanding discipline for converting:

However, the capability of organizations in initiating and sustaining innovation is to great extent determined by the widely local/national context within which they operate. This is essential as

“innovation within” requires a favorable “context outside”

i.e. to look out of the company’s window at the business environment (economic and social conditions play a major role)

ProductNew discoveryInvention Output

Innovation

CommercialExploitation+

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Managing Innovation

INTRODUCTION

QUESTION

Is there any scientific and technological gap between “industrialized nations” (West) and “late-industrializers” (e.g. Japan)? If yes, which If no, how did they manage to close it.

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INTRODUCTION

1.imitation by diffusion of technology

2.development of new technology(creativity)

3.efforts to develop their own capacities(transformation). This transformation requires:

continual efforts by entrepreneurs and business and

a collaborative framework promoted by the state.

1. Imitation

2. Creativity

3. Transformation

“Late-industrializers” have managed to close the gap with strategies which focus mainly on industrialization. In these countries economic growth was achieved through:

ANSWER

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Managing Innovation

INTRODUCTION

QUESTION: Would it be easy for the latecomers to reach maturity in today’s economy? How?

ANSWER

To be able to create high-value-added & knowledge-based products/services, would appear to be a gigantic task for the latecomer-nation(s).

The state must play a significant role:• in its regulatory and redistribution functions• through strategic intervention into

infrastructure development and technological capacity formulation

human capacity formation

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Managing Innovation

INTRODUCTION

QUESTION

For Schumpeter the idea of being entrepreneurial was not simply buying something cheap and selling it for a quick profit. It was bound up with new products and new methods of production; by implication it was long-term rather than short term in nature. Is our understanding of entrepreneurship different now?

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INTRODUCTION

ANSWER

No, it is exactly the same. Entrepreneur is consider “one who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on them.”Characteristics:success or failure rests on his/her shouldershe/she has to pay the bill personallyhe/she owns the building and/or equipment if the business fails, the personal wealth of the

owner can be normally used to cover the business’s debt, which may lead to a compete wiped out

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Managing Innovation

NATIONAL INNOVATION SYSTEM [NIS]

A national innovation system [NIS]is broadly defined as the structures and

institutions by which a country’s innovation activities are encouraged and facilitated, both directly and indirectly

orThe network of public and private

institutions within an economy that fund and perform R&D, translate the results of R&D into commercial innovations and effect the diffusion of new technologies.

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Managing Innovation

KEY ASPECTS OF A NIS

The key aspect of a NIS, according to Archibugi & Michie* are:

1. Education and training

2. Science and technology capabilities

3. Science and technology strengths and weakness

4. Industrial structure

5. Interactions within the innovation system

* “Technology, Globalization and Economic Performance”, 1997

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In general, governments are responsible for formal provision of education

High rates of participation to education is a key to national economic growth

Qualitative issues such as high-quality graduates in the new technologies - IT and biotechnology – are important and governments are keenly aware of the need to have them.

1. Education and Training

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Managing Innovation


0 10 20 30 40Germany

France

US

UKNetherlands

Percentage of same age group with a university-level degree

Source: OECD (2000) in Financial Times, 26.10.2000


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0 2 4 6 8Germany

France

US

UKNetherlands

Average years of study until graduation

Source: OECD (2000) in Financial Times, 26.10.2000


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QUESTION: What the figures show?

ANSWER

That Germany should concern that it is producing too few graduates too slowly.

In fact the average German graduate is 28 years old and only 16% in the same age group graduate from universities.

0 2 4 6 8

Average years of study until graduation

0 10 20 30 40

Percentage of same age group with a university-level degree


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QUESTION

Then how can the country make-up for skills shortage in the short term?

ANSWER

They can offer, like the US and UK, work permits to foreign (IT) specialists.


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Countries differ in the resources devoted to R&D, in both public funding and business expenditure.

The richest countries devote ~3% of their GDP to R&D; the others much less while the developing countries hardly figure.

2. Science and Technology Capabilities

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Managing Innovation


Business-funded R&D as a % of GDP, 1981-99(not in scale)

0

1.5

2.5

1981 19991992

Japan

USA

Total OECD

EU

Source: OECD (2000) in OECD Observer, September 2000


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Managing Innovation


Government-funded R&D as a % of GDP, 1981-99 (not in scale)

Source: OECD (2000) in OECD Observer, September 2000

0

0.8

1.6

1981 19991992

Japan

USA

Total OECD

EU


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Managing Innovation


Government funding of R&D declined in the 1990s, while business investment in R&D increased.


Business-funded R&D

0

1.5

2.5

1981 19991992

Japan

USA

Total OECD

EU

0

0.8

1.6

1981 19991992

Japan

USATotal OECD

EU

Government-funded R&D

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QUESTION

Where government spent is often linked? To which industry?

ANSWER

To defense objectives.

For example, US government defense spending declined in the 1990s after the cold war


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Countries differ in their areas of specialization and the intensity of R&D activities.

Japan is a good example, with its intense investment in R&D in the fast-growing consumer electronics industry in the 1970s-80s

India’s growth in software development is a more recent example of building competitive advantage

3. Science and Technology Strengths and Weakness

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Large-scale investment in R&D are carried out by country’s large firms, as only they are able to undertake the long-term R&D programmes and the accompanying risks. Research has shown that the share of large firms is on average about 49%.

Of course large spending in R&D does not necessarily ensure successful innovation

4. Industrial Structure

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Managing Innovation


Large-scale investment in R&D are carried out by country’s large firms, as only they are able to undertake the long-term R&D programmes and the accompanying risks. Research has shown that the share of large firms is on average about 49%.

Of course large spending in R&D does not necessarily ensure successful innovation

QUESTION

What is your opinion about small firms. Do they play a role?


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Managing Innovation


ANSWER

Yes indeed. Small firms can also play a role, as has been the case in high-tech areas.

The small start-up is flexible and less bureaucratic than the established firms; they may also be rich source in ideas. A good example is Microsoft.

In US, venture capital for start-up companies has been more developed than in either Europe or Japan. In fact, the rapid growth of biotechnology start-ups in US in the 1980s owned much to funding by venture capital.


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Interactions contribute to innovation activities within a country and to their diffusion. They can be either: a formal coordination or in-formal networking.

5. Interactions within the Innovation System

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Government guidance differs substantially from country to country. See the examples of Japan vs. ex-Soviet Union.

The co-ordination role of the Japan’s Ministry of International Trade and Industry is often cited for its crucial role in the country’s economic development

Strong state guidance in the ex-Soviet Union, by contrast, was much less successful and the separate research institutes for each industry sector had only weak links with each other. Ex-Soviet Union had concentrate on military and space projects where it spent about 3% of its GNP. This together with the rigid command economy, left little scope for civilian innovation links to develop

A more (recent) trend globally is the growing interaction between academic researchers and firms.

5. Interactions within the Innovation System

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There is no one model of innovation system that can be said to be superior in generating and diffusing technological innovation

Innovation is linked to economic growth

Countries show a good deal of diversity in their NISs

Simple quantitative comparisons of R & D expenditure tell only a partial story

Conclusions [1/3]

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Social, cultural and historical differences have an influence on the ways in which learning, scientific curiosity and entrepreneurial flair are allowed to flourish in national environment.

Government initiatives are more influential in some countries than in others.

Huge investment in industrial R&D in Germany and Japan in the post war period was crucial in their efforts to catch up economically.

Conclusions [2/3]

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The ability to assimilate and imitate innovations from elsewhere as the basis of further local innovative developments has been a particular feature of Asian tigers.

While the process of technology transfers can be the basis for innovation for all nations, technical change has proceeded unevenly among countries as the adaptation of technology and use in local environment is still dependent on diverse national systems.

Conclusions [3/3]

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THE ROLE OF THE STATE

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Managing Innovation

PORTER’S DIAMOND

• Why does CH excel in the production and export of precision instruments and pharmaceuticals?• Why does Japan do so well in the auto industry?• Why do Germany and US do so well in the chemical industry?

Porter claims that there are four attitudesof a nation that shape the environmentin which local firms compete, see figure:

FACTOR CONDITIONS: skilled labor, necessary infrastructure

DEMAND CONDITIONS: the nature of home demand for the industry’s product or service

RELATED & SUPPORTING INDUSTRIES: the presence or absence in a nation of suppliers & related industries

FIRM STRATEGY, STRUCTURE & RIVALRY: how firms are created, organized and managed and the nature of domestic rivalry.

Factor condition

s

Related &

supporting

industries

Demand condition

s

Firm strategy, structure

and rivalry

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Managing Innovation

THE ROLE OF THE STATE IN INNOVATION

Factor conditions

Innovative firm

Suppliers and

supporting industries

CustomersInstitutional

setting

In parallel to Porter’s industry framework, the model tries to highlight the possible role the state can play in relation to innovation

It underlines a firm’s relationship with: Customers, i.e buyers Factor conditions, i.e. labor, capital, raw materials Related and supporting industries, i.e. technology providers,

and Other institutions that help facilitate strategic orientation

and innovative capabilities

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Managing Innovation


Factor conditions

Innovative firm

Suppliers and

supporting industries

CustomersInstitutional

setting

FinancingR&D

Education andother societal

effects

Competitionregulation

Environment andsafety regulation

Infrastructurebuilding

Macro-economicconditions

Information anddecision center,political stability

Purchaser

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Managing Innovation


The state can impact:

1. As a financier of R&D and major purchaser, e.g. in 1995, US spent $ 71.4 bio for R&D (defense, health, space, energy, environment, agriculture, general science) funding industrial research labs, universities, non-profit labs and federally funded research R&D centers.

There also are indirect ways of financing R&D, such as tax exemptions, subsidies, loan guarantee, export credits and form of protection, e.g. Boeing paid no taxes between 1970 and 1984, and also received a tax refund amounting to $ 285 mio.

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Managing Innovation



2. As a major purchaser, the state can also reduce uncertainty and create favorable cash flows for firms by its willingness to pay higher (monopolistic) prices for early models.

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3. Through education and other societal actions, e.g. in the formation of highly qualified workforce Interdependence between state and

society may create a favorable national culture which welcomes scientific development, and remote the potential for conflict between economic interests and social forces, cultural traditions and new trends

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4. Through regulation of competition. A very critical area for the reproduction/expansion of the capitalist system, as the state can promote the system by preventing monopolies that can result in under-innovation and by protecting the society against possible abuse by companies.

[see case study - Microsoft takes antitrust case to Supreme Court]

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Managing Innovation

QUESTION: Microsoft practices


You are a member of an international ethics commission assembled by the World Trade Organization [WTO] that has been asked to assess the global tactics of Microsoft in recent years. A primary issue is whether Microsoft took unfair advantage of its powerful position in the computer industry by using “strong-arm tactics” on software customers throughout the world, and by crushing weaker rivals. Regardless of whether or not Microsoft is guilt of anticompetitive acts in a legal sense, do you believe Microsoft has conducted itself in a ethical manner in its business dealing? Has it abused its power in the industry, or is Microsoft simply a tough competitor? Do you think the WTO should develop a policy to control such competitive tactics of global powerhouse like Microsoft?

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Managing Innovation

THE ROLE OF THE STATE IN INNOVATION - COUNTRIES

JAPAN• It provides extensive support and subsides to promote industrial

innovation• A good example of state role is TRINITRON television (a

dominant electronics technology that dominated home electronics for more than 20 years) which brought together:

→ universities→ state organizations such as the Ministry of International

Trade and Industry→ sector organizations→ business enterprises

• The Japanese model has been acknowledge by many for a long time but it has also received severe criticism by Porter et al., as a result of the recent economic slowdown. However, the weakness mainly attributed to:

1. the lack of concern for strategy in Japanese companies which have been stuck in between two competitive strategies of cost and quality, and

2. low profitability

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Managing Innovation


USA

• It spends ~trillion dollars in universities and governmental labs

• It performs half of the word’s basic research • US tries to create positive effects in the

economy by letting the market achieve the most efficient allocation of resources with minimal possible intervention [it follows the so-called Chicago School paradigm for promoting competitiveness and innovation, which created a belief in the free market to maximize innovation and productivity].

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GENERALTwo extremes:

PREDATORY STATES which captures most of the funds

in the economy and relocate them in the form of “rents” to a small

group of population (thus impending the growth

potential in the state)

DEVELOPMENTAL STATESwhich, in some states, is used to achieve a major transformation

of the economy and society

αρπακτικό

There is another framework to show the way in which some states achieved a major transformation of the economy and society: the concept of “develomental- & “predatory-states”

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Managing Innovation


PREDATORY STATES which captures most of the funds

in the economy and relocate them in the form of “rents” to a small group

of population (thus impending the growth potential

in the state)

DEVELOPMENTAL STATESwhich, in some states, is used to

achieve a major transformation of the economy and society

QUESTIONName the countries to which the “Predatory States” development is a major characteristic?

ANSWERTo Asian tigers, like Korea, Taiwan, Singapore and Hong Kong as well as to Turkey

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Managing Innovation


QUESTIONWhy is it NOT surprising that many consumer products such as in-car satellite navigation guidance, mobile telephones and computers have their origins in defense research?

ANSWER

(Remember) in the question “Where government spent is often linked?”, the answer was “To defense objectives” ……

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Managing Innovation

QUESTION

How can the state encourage entrpreneurs and business to invest in longer time-horizons?


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Managing Innovation

ANSWERThough indirect ways of financing R&D,

such as tax exemptions, subsidies, loan guarantee, export credits and form of protection, e.g. remember Boeing, which paid no taxes between 1970 and 1984, and also received a tax refund amounting to $ 285 mio

By reducing uncertainty and create favorable cash flows for firms by its willingness to pay higher (monopolistic) prices for early models

Through education and other societal actions, e.g. in the formation of highly qualified workforce


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Managing Innovation

ANSWERThrough regulation of competition. A

very critical area for the reproduction/expansion of the capitalist system, as the state can promote the system by preventing monopolies that can result in under-innovation and by protecting the society against possible

Through partnership, e.g. TRINITRON TV in Japan

Through more direct interventional, e.g. by giving incentives as direct support: subsidies, location provision, etc.


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Managing Innovation

INNOVATION IN CAPITALISM

Historical Overview-Kondratief waves of growth and their main features

K1Early

mechanization

K2Steam powerand railway

K3Electrical and

heavy engineering

K4Fordism

(use of mass-production methods)

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s

Eco

nom

ic a

ctiv

ity

?

ProsperityRecovery

Recession

Depression

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Managing Innovation


Historical Overview- Geography of Innovation

K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s

Eco

nom

ic a

cti v

ity

?

Britain France Belgium

USGermany

USGermany[strengtheningtheir position]

+Japan

Sweden

+Taiwan

S. KoreaLEADERS:

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Waves and growth in capitalismIn these Kondratief waves, the capitalist economy grew on the

basis of major innovations in product, process and organization with accompanying shifts in the social arena.

Each wave comes to an end due to its major short-comings and the successive fundamentally restructures and improves those weakness

The decline of the previous wave gives birth to the next one which offer features able to give solutions to the weakness of the earlier phase

Each major phase of innovation produced a “star” industry or industry branch, which seemed to affect the way the economy was organized.

Product, process and organization created by technological development became universal and cheaply available to a vast population, which, in turn, created the economic shift.

The leap forward provided by a “star” industry(ies) resulted in a major transformation of the economy and economic relations – given that other factors such as demand, finance, industrial and social conditions were favorable.

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Managing Innovation


K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s

Eco

nom

ic a

cti v

ity

?

Organizationalcharacteristics

Individualentrepreneur

Smallfirms

MonopoliesOligopolies

cartels

CentralizedMulti-

nationals

Networktypes

Waves and growth in capitalism

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Managing Innovation


K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s

Eco

nom

ic a

cti v

ity

?



Smallfirms


cartels

CentralizedMulti-

nationals

Networktypes


WHAT ARE THE NETWORK TYPES-ORGANIZATION?

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Managing Innovation


K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s

Eco

nom

ic a

cti v

ity

?



Smallfirms


cartels

CentralizedMulti-

nationals

Networktypes


They are flexible organizations, small and large firms

Trust based networks with close cooperation in technology, QC, training and production planning (i.e. JIT)

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Managing Innovation


K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?



Smallfirms


cartels

CentralizedMulti-

nationals

Networktypes


K0Initially

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• Limitations of K0: Limitations of no mechanization

• Advantages of K1 (Early mechanization): Solutions offered through mechanization and factory organization towards productivity and profitability

K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?

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Managing Innovation


Waves and growth in capitalism• Limitations of K1 (Early mechanization):Limitations of water power, scale of

production

• Advantages of K2 (Steam engines & railway): Solutions offered through steam engines and transport systems towards productivity and profitability

K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?

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Managing Innovation


Waves and growth in capitalism• Limitations of K2 (Steam engines & railway):

Limitations of iron as an engineering material (strength, durability, precision, etc) overcome by steel and alloys

Limitations of steam engines overcome by electrical machinery, power tools.

• Advantages of K3 (Electrical & heavy engineering):Solutions to layout improvements,

standardization and capital savingsK1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?

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Managing Innovation


Waves and growth in capitalism• Limitations of K3 (Electrical & heavy engineering): Limitations of batch control

• Advantages of K4 (Fordism):Solutions offered by mass

production, full standardization, replaceable of components, universal availability and cheapening of mass consumption goods

K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?

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Managing Innovation


Waves and growth in capitalism• Limitations of K4 (Fordism): Limitations of inflexible dedicated assembly lines and process plants

• Advantages of K5 (Information & communication): Solutions by flexible manufacturing systems, networking and economies of scope, electronic control systems and networking provide for necessitated flexibility

K1Early

mechanization


K3Electrical and

heavy engineering

K4Fordism

K5ICT

1770s-80s 1830s-40s 1880s-90s 1930s-40s 1980s-90s?

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QUESTION

Networks constitute a key organizational attribute to the current wave of economic growth. Does this mean it is not possible for a firm to be innovative on its own?

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Initially, all were exporters of raw materials and importers of higher-technology products

Both, they transformed from simple technology sectors towards higher-value-added and heavy industries (which, by the way, was the key to their success)

This was achieved with the complementary use of:

Import-substituting industrialization (ISI), and

Export-oriented economic policies (EOI)

Comparison between Latin American & Asian Tigers

Similarities DifferencesThe Asian tigers after the

initial phase of ISI, they opened up to international competition through an EOI regime in contrast to Latin American countries (and Turkey)


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Managing Innovation

QUESTION

Innovation cannot be separated from: its local, national and global contexts political and social processes main economic trends (mainly).

Why is it connected so much with economic trends?


ANSWER

Because of you do not have a good ROI, why to be innovative in the first place, why to invest in people, scientists, facilities, etc.

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Managing Innovation


Factor conditi

ons

Innovative firm

Suppliers &

supporting

industries

Customers

Institutionalsetting

FinancingR&D

Education &other societal

effects

Competitionregulation

Environment andsafety regulation

Infrastructurebuilding

Macro-economicconditions

Information anddecision center,political stability

Purchaser

These will determine to a great extent the firm’s opportunities together of course with its inner strengths, i.e. its strategy-making capabilities and structural features.

QUESTIONWhy this kind of development worked with the Asian tigers and not with Turkey?

1 managing innovation the context of innovation & the role of the state

Documents

context of innovation

sustaining innovation

innovation process

innovation introduction

countrys innovation

state slide

answer slide

new business