institutions, innovation and growth london school of economics iris stavanger, 5 may 2009 andrés...
TRANSCRIPT
Institutions, innovation and growth
London School of Economics
IRISStavanger, 5 May 2009
Andrés Rodríguez-Pose
Page 2Do institutions matter for regional development? Andrés Rodríguez-Pose
Introduction
Do institutions matter for innovation and growth? The link between institutions and growth has traditionally been overlooked Traditional approaches to spurring economic development were based on:
1. Greater investment in the stock of physical capital (neoclassical)2. Endogenising innovation, technology, and physical capital (endogenous growth)3. Agglomeration, externalities, and distance (new economic geography)
This system tended to work in the past1. National intervention in the postwar period had coincided with growth and a reduction in
disparities2. The first two approaches informed the European regional development effort during the
reform of the Structural Funds
Page 3Do institutions matter for regional development? Andrés Rodríguez-Pose
Do traditional approaches still work?
These approaches, however, seem today less capable of explaining economic growth and development1. Regional convergence shifted to stability and divergence
- Cross-country convergence- Intranational stability or even strong divergence
2. Growth in the residual factor Institutions being rediscovered
1. Work by sociologists, geographers, and some economists since the mid-1980s2. Becoming mainstream in economics
- ‘Institutions matter’ (Hall and Jones, 1999; Rodrik et al, 2004)- Research now trying to understand which institutions matter - Some institutional arrangements are more appropriate than others, depending on the
circumstances (Aghion and Howitt, 2006)
Page 4Do institutions matter for regional development? Andrés Rodríguez-Pose
Aim of the presentation
If1. We can explain less and less how economic development is being generated2. The role of institutions as a shaper of economic development is being regarded
as more prominent3. Economic development efforts have, by and large, overlooked local
institutions Ergo
1. Institutions should become an essential element of development effort. But, is that the case? If so, how can institutions be included in the local innovative and
development effort?
Page 5Do institutions matter for regional development? Andrés Rodríguez-Pose
The role of institutions in growth
Across the world development strategies seem to be becoming less effective1. Neoclassical orthodoxies regarded as inadequate and perhaps providing
imperfect interpretations of regional development (Yeung, 2000) Growing attention has been paid to other factors and, especially
institutions Belief that different local institutional arrangements are key to
our understanding of development1. Emphasis on social capital (Putnam, 1993, 2000)2. On institutional thickness (Hudson, 1994; Amin and Thrift, 1995)3. Learning regions (Morgan, 1997)
Page 6Do institutions matter for regional development? Andrés Rodríguez-Pose
But, what are institutions?
Concept of institutions is:1. Subjective2. Controversial3. Difficult to operationalise
Numerous nuances and distinctions in concepts1. Formal vs. informal institutions2. Informal institutions of community (norms, trust, face-to-face) vs. social
capital3. Institutions vs. organisations (rules vs. players) (North, 1990)
Page 7Do institutions matter for regional development? Andrés Rodríguez-Pose
How do institutions promote development?
Markets as socially constructed (Bagnasco, 1988)1. This makes the role of institutions greater than simple regulators of economic
activity2. They determine the level of activity and its efficiency3. They facilitate knowledge and innovation transfer4. They shape incentives and disincentives
Different forms of institutions are in constant interaction1. The balance between formal and informal institutions (society and
community) ‘Institutional thickness’ determines the development capacity of
every territory
Page 8Do institutions matter for regional development? Andrés Rodríguez-Pose
Society, community and development
Communities (Gemeinschaft or social capital) are complemented by Society
Communities refer to:1. features of group life (i.e.: informal rules and norms, tradition and
social expectations, contacts and connections, and relationships). Society refers to:
1. universal and transparent rules (i.e.: property rights, rule of law, promotion of individual choice, and factor mobility).
Page 9Do institutions matter for regional development? Andrés Rodríguez-Pose
The economic impact of communities
The optimistic view: Communities are good for development1. Community improves:
- provision of public goods (Coleman, 1990; North, 1990) - market organisation (Granovetter, 1985)- promotes the embedding of firms in efficiency-enhancing networks of
relationships (Grabher, 1993)- generates institutions such as trust (Fukuyama, 1999; Putnam, 2000;
Bowles and Gintis, 2002)- reduces transaction costs (Storper, 1997)- reduces moral hazards and free-riding (Streeck, 1992)- mitigates information asymmetries (Granovetter, 1985; Wade, 1987)- matches individual and aggregate interests (Rodríguez-Pose, 1999)
Page 10Do institutions matter for regional development? Andrés Rodríguez-Pose
The economic impact of communities (II)
The pessimistic view: Communities are bad for development1. Community leads to:
- pervasiveness of rent-seeking (Trigilia, 1992)- insider-outsider problems
2. unsatisfactory distributional effects- clientelism, and nepotistic practices (Trigilia, 1992)- it may be a second best solution in the absence of developed societal
institutions
3. Communities may - generate greater social polarization- hamper equal opportunity- exacerbate problems of imperfect competition, impacted information, and
principal-agent problems (Durlauf, 1999; Durlauf and Fafchamps, 2004).
Page 11Do institutions matter for regional development? Andrés Rodríguez-Pose
The economic impact of society
The development of societal institutions is generally perceived as a positive sign
But, under certain circumstances it may be detrimental for development:1. In contexts dominated by weak group life, societal rules and laws
cannot always insure against opportunistic defection (Streeck, 1991) 2. Higher transactions costs and costly conflict resolution through
litigation, i.e. a confrontational society (Storper, 2004). 3. Inadequate production of public goods (education and training,
environmental management, or innovation)
Page 12Do institutions matter for regional development? Andrés Rodríguez-Pose
Interaction between society and community
Society and community are thus generally viewed as mutually opposed
But they interact in all contexts Relations in any space take place in the form of:
1. ‘bonding’: within community relations2. ‘bridging’: across community relations (Putnam, 2000)
A system of checks and balances can be developed:1. Developed communities can offset the potentially negative effects of
society2. A developed society can offset the potentially negative effects of
community
Page 13Do institutions matter for regional development? Andrés Rodríguez-Pose
Society and community interaction
Society Community Low High High Sub-optimal Optimal Low Worst case scenario Sub-optimal
Page 14Do institutions matter for regional development? Andrés Rodríguez-Pose
Society and community (II)SOCIETY COMMUNITY LOW HIGH
HIGH Responsibility without autonomy: individual agency but insufficient voice
dominance of arms-length transactions; moral hazards contained when information
transparent only asymmetrical strength of individual agents; certain interests have no voice/no autonomy
(effort and reward markets are imperfect); costly conflict resolution and
confrontational society; insufficient public goods; tendency toward inequality;
Autonomy with responsibility: a good balance of voice and agency
costs for all kinds of transactions minimized; moral hazards contained for both transparent and
specific information; autonomy strong and participation high (strong
community reduces losses due to anonymity, fragmentation);
rent-seeking contained through competition, entry and exit (strong society modernizes communities);
LOW Neither autonomy nor responsibility: chaos and the law of the jungle (voice of the powerful, ubiquitous agency problems)
high costs for all types of transactions generalized instability: weak societal rules,
weak local bonding; high moral hazards, generalized
opportunism, low sanctions for defection and cheating;
public goods destroyed or stolen or appropriated;
Autonomy without responsibility: collective voice, but with agency problems
High transactions costs for arms-length transactions;
prevalence of primitive, non-modern communities;
rent-seeking widespread; individual voice subjugated to groups
(insufficient competition and mobility); insufficient generalized trust and confidence; skewed distribution of public goods
Page 15Do institutions matter for regional development? Andrés Rodríguez-Pose
Integrating institutions in development
Developing and improving institutional capacity is therefore increasingly regarded as key for development
There is a need to integrate institutions in development strategies
But this is easier said than done Several factors limit the integration of institutions in
development strategies
Page 16Do institutions matter for regional development? Andrés Rodríguez-Pose
Key problems
Measuring institutions is difficult and controversial1. Local institutional constructs tend to be intangible (Fine, 2000)2. Identical formal institutions may yield very different economic returns in different contexts
Efficient institutions are context- and geography-specific1. What is solid and efficient in one region may not be so in another2. There is a need to integrate institutions in development strategies
The effectiveness of institutions changes with time1. What are ‘good’ institutions in one period may no longer be appropriate in another (Storper,
2005)2. Institutions adapt (institutional migration)
Institutions are extremely resilient to change1. Persistence of family structures (Duranton et al., 2009)
Page 17Do institutions matter for regional development? Andrés Rodríguez-Pose
Key problems (II)
Identifying the right mix of institutions is problematic1. More than the density of institutions…2. It is the quality of institutions
Endogeneity between institutions and development1. Direction of causality difficult to predict
Endogeneity between institutions and other constituents of growth1. Institutions may hide the effect of other factors and especially human
capital (Glaeser et al., 2004)
Page 18Do institutions matter for regional development? Andrés Rodríguez-Pose
So, how to link institutions and innovation?
With difficulty and not devoid of problems…
Page 19Do institutions matter for regional development? Andrés Rodríguez-Pose
Approaches to the analysis of innovation
How can innovation and growth be generated? 3 traditional approaches:
1. The ‘linear model’ - Analysis of the link between R&D, patents and growth
- Fundamentally quantitative (econometric analysis)- Conducted mainly by ‘mainstream’ economists
2. The ‘systems of innovation’ approach- Analysis of the ‘territorially-embedded’ institutional networks that favour the generation of innovation- The capacity to set these networks depends in turn, on a series of social and structural conditions (‘the social
filter’) - Fundamentally qualitative- Conducted mainly by geographers, evolutionary economists, and some economic sociologists
3. Knowledge spillovers- Look at the diffusion and assimilation of innovation
- Quantitative and qualitative- Economists and geographers
Page 20Do institutions matter for regional development? Andrés Rodríguez-Pose
Linking the approaches
Link betweeninvestment in R&D, patents,
and economic growth.(Fagerberg 1988, 1994 and 1997; Grossman and
Helpman 1991;Maurseth and Verspagen 1999)
Existence and efficiency of regional innovation systems.
(Camagni 1995, Becattini 1987, Morgan 1997 and 2004, Cooke et al. 1997, Iammarino 2005,
Rodriguez-Pose 1999)
Geographical diffusion of regional knowledge spillovers;
(Anselin et al. 1997, Adams and Jaffe 2002; Audretsch and Feldman 2003, Leamer and Storper 2001, Storper and
Venables 2004, Sonn and Storper 2005)
Page 21Do institutions matter for regional development? Andrés Rodríguez-Pose
Linking the approaches (II)
Link betweeninvestment in R&D, patents,
and economic growth
Existence and efficiency of regional innovation systems
Geographical diffusion of regional knowledge spillovers
Page 22Do institutions matter for regional development? Andrés Rodríguez-Pose
Innovative factors behind growth
Investment in R&D and patents, when other factors are controlled for, do not
lead to greater growthBut, social conditions
(fundamentally education)
matter
As do institutional conditions
(specialisation in clusters, focus and
diversification)
Lag 0
Constant 2.157***
0.350
Log GDPpc 0.757***
0.038
R&D Filter 0.009
0.008
Social Filter 0.049***
0.005
Clusterisation Index 0.013**
0.005
R2 0.925
F 614.21
Number observations 1756
Page 23Do institutions matter for regional development? Andrés Rodríguez-Pose
Innovative factors behind growth (II)
But R&D and patents become significant with time The social filter
(fundamentally
education) remains the
most significant throughout
But institutions lose
significance in time
lag 1 lag 3 lag 6
Constant 1.956*** 1.683*** 1.392***
0.314 0.243 0.248
Log GDPpc 0.785*** 0.853*** 0.899***
0.034 0.028 0.028
R&D Filter 0.015** 0.017*** 0.015**
0.007 0.006 0.007
Social Filter 0.043*** 0.031*** 0.024***
0.005 0.004 0.005
Clusterisation Index 0.011** 0.006 0.002
0.005 0.005 0.005
R2 0.932 0.947 0.968
F 582.94 705.77 1281.37
Number observations 1596 1276 796