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Jacques Charmes, Fred Gault and Sacha Wunsch-Vincent

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1 Jacques Charmes, Fred Gault and Sacha Wunsch-Vincent
8th Conference on Micro Evidence on Innovation and Development (MEIDE - UNU MERIT) February 10-12, 2015, New Delhi Formulating an agenda for the measurement of innovation in the informal economy Jacques Charmes, Fred Gault and Sacha Wunsch-Vincent

2 This agenda – and the present reflexions - are part of a book about to be published:
The Informal Economy in Developing Nations: Hidden Engine of Innovation ? - New economic insights and policies – Project implementing WIPO Development Agenda Recommendation 34

3 Research Questions What is the role of the informal sector in economic development? How does innovation occur in the informal economy, how is it diffused, who are its actors and what are associated innovation impacts? How do inventors and entrepreneurs in the informal economy reap the benefits of their innovations? What forms of appropriation such as secrecy or intellectual property rights are in use? To what extent does the absence of appropriation harm the scalability and impact of innovation in the informal economy? What is needed by the statistical community to more accurately capture and survey informal sector innovation in developing countries? What are suggested policy recommendations to improve innovation impacts in the informal economy?

4 Contents of the book After an assessment of the rise and persistence of the informal economy and of innovation in the informal economy  Three country studies are presented -- Metal manufacturing in Kenya’s informal sector -- Informal manufacture of home and personal care products in South Africa -- Herbal medicine in Ghana’s informal sector  Then the mechanisms to appropriate returns from innovation in the informal economy are examined  Finally policy guidance and metrics to harness innovation in the informal economy are provided And the formulation of a measurement agenda for the innovative informal economy is proposed

5 What is the informal economy?
According to the international definitions adopted by the 15th and 17th ICLS in 1993 and 2003, The informal sector is comprised of small economic units operated by individual entrepreneurs without being registered, and/or without registering their employees and/or under a given size threshold Informal employment refers to all jobs that are not covered by social security, either in the informal sector or in the formal sector The informal economy is comprised of the informal sector and informal jobs outside the informal sector (especially in the formal sector)

6 What are the size, contribution and trends of the informal economy?

7 Regions/Countries/Years Southern and South Eastern Asia
Share of employment in the informal economy in total non-agricultural employment Regions/Countries/Years Northern Africa 39.6 34.1 47.5 47.3 53.0 Sub-Saharan Africa 67.3 72.5 76.0 86.9 70.0 Ghana 65.3 Kenya 61.4 70.1 71.6 76.8 South Africa 46.2 32.7 Latin America 52.5 54.2 55.9 57.7 Southern and South Eastern Asia 52.9 65.2 69.9 69.7 Western Asia 43.2 Transition countries 20.7 22.6

8 Main characteristics of the informal economy
Sub-Saharan Africa Asia Latin America MENA Transition countries % informal sector 80 79 65 59 51 % self-employed 54 52 40 % in paid employment 35 46 48 60 % industries 24 41 27 18 % women 36 47 16 32

9 Contribution of informal sector to GDP

10 What is its role? Beyond its economic importance, the IE also has a vital social component as the main provider of livelihoods, a mean to foster local knowledge and skills, and it is intricately linked to the community. Most developing countries have indeed witnessed a marked increase in informal employment along with pronounced economic growth in the last two decades. In most cases, formal and informal actors and their innovative activities are also inextricably linked. In developing countries the IE is often shown to be a greater source of innovation than the formal sector. Small or larger family entities or enterprises that constitute the IE produce new products or processes under conditions of scarcity in very diverse sectors ranging from automotive, and health, to household appliances. In informal manufacturing clusters products range from resourceful simple goods like kitchenware or furniture to more complex tools and machines. Innovation in the IE is rarely a result of research and development (R&D). Rather it is often driven by knowledge gained through adopting, adapting and improving available good ideas, best practices and technologies in novel ways to solve problems in light of available materials and customers' wallets.

11 Barriers to Innovation in the IE
Location and infrastructure constraints Lack of space and infrastructure to expand operations paired with inconsistent energy supply and other factors Financial constraints Capital market imperfections, risk and uncertainty coupled with risk aversion, pressure to achieve immediate return, and lack of demand for informal sector products Skill constraints Lack of competencies and skills, including entrepreneurial ambition Information constraints Imperfect functioning of the information market about new machines Social constraints Relating to the need of entrepreneurs to share their profits with a family or extended network or to invest in informal collective social insurance schemes (discouraging them from developing their business in the first place) or to employ family members such as sharing obligations with the extended family Institutional constraints Such as ill-managed government regulations and exposure to corruption and the lack of insurance

12 A measurement agenda to capture informal or developing country innovation, its drivers and related barriers is proposed to the statistical community

13 Innovation measurement approaches applied to the formal sector
Innovation is about bringing a new or significantly improved product to market or finding a better way of getting it there. The better ways of getting product to market include the transformation and delivery processes, organizational change including the use of business practices and market development or the finding of new markets. The Oslo Manual by the Organisation for Economic Co- operation and Development (OECD) and newer editions since have introduced standard definitions and indicators in 1992.

14 Innovation surveys in the formal sector
In this well-established innovation framework, innovation activities could include the acquisition of machinery, equipment, software and licenses; engineering and development work, design, training, marketing and R&D where undertaken to develop and/or implement a product or process innovation. Objectives to innovate include the desire to increase market share or enter new markets, to improve the product range, to increase the capacity to produce new goods, to reduce costs, etc. In addition to these questions, formal innovation surveys include other questions, such as on (i) the sources of information for innovation, (ii) types and drivers of collaboration and (iii) expenditures on selected innovation activities. To date, national innovation surveys have been carried out by 95 countries, 15 of them in Africa. None of these surveys aims to survey innovation in the informal sector.

15 Are these innovation surveys designed for the formal sector applicable to measure innovation in the informal economy? At the outset, one might ask if conventional intellectual property (IP) and innovation indicators are appropriate in the context of the IE. Innovation activities, its actors, the underlying innovation incentives and impacts of innovation might be different in the IE than in the formal sector of developed and developing countries alike. As a result, existing indicators, survey instruments, notions of collaboration and linkages, and impact assessment tools may not all apply directly in this setting.

16 Innovation surveys in Africa (1)
The benchmark is the innovation survey conducted in African countries with a large informal economy. These countries are also part of the African Science, Technology and Innovation Indicators (ASTII) project co-ordinated by the New Partnership for Africa’s Development (NEPAD) Science, Technology and Innovation Hub (NSTIH) with involvement from the African Observatory of Science and Technology Innovation (AOSTI). The findings of this survey are well documented in the African Innovation Outlook (AU-NEPAD 2010, 2014) and in country reports. Despite this focus on African innovation survey, Community Innovation Survey (CIS)-like surveys are used in other parts of the world, both developed and developing, to measure innovation and the observations made here can easily be applied in other contexts. Countries involved in the second round of ASTII innovation surveys were: Egypt*, Gabon, Kenya, Lesotho*, Mali, Senegal, South Africa*, Tanzania*, Uganda* and Zambia*. Those with an asterisk were also present in the first round, along with Burkina Faso, Ethiopia, Ghana and Mozambique. A total of 14 countries have done innovation surveys as part of the ASTII initiative. Their innovation surveys are based on that of South Africa which in turn is based on the Community Innovation Survey (CIS) in the European Union. At the outset it can be said that many of the questions in the CIS-like surveys used now in Africa in the formal sector are applicable in the informal sector. The informal groups that approximate to firms will know that they have introduced a new or significantly improved product to the market. They will also know if they have improved their transformation or delivery process, their organization or their market development.

17 Community Innovation Survey 2012
To give an example, the harmonized Community Innovation Survey 2012 includes questions which follow the following eleven themes of enquiry:  1. The General information about the enterprise 2. Product (good or service) innovation 3. Process innovation 4. Ongoing or abandoned innovation activities for product and process innovations 5. Activities and expenditures for product and process innovations 6. Sources of information and co- operation for product and process innovation 7. Competitiveness of your enterprise’s product and process innovations 8. Organisational Innovation 9. Marketing Innovation 10. Public sector procurement and innovation 11. Strategies and obstacles for reaching your enterprise’s goals On product innovation some of the questions are the following: 1 During the three years 2010 to 2012, did your enterprise introduce: Goods innovations: New or significantly improved goods (exclude the simple resale of new goods and changes of a solely aesthetic natur Service innovations: New or significantly improved services   2 Who developed these product innovations Your enterprise by itself Your enterprise together with other enterprises or institutions Your enterprise by adapting or modifying goods or services originally developed by other enterprises or institutions

18 Innovation surveys in Africa (2)
Some modifications would be needed in terms of modifying or dropping existing questions or adding new ones. For instance, questions on the sources of information for innovation In Africa, and in other developing economies, there is a growing recognition that innovation happens differently than it does elsewhere. Many terms and definitions are emerging to characterize these different innovation approaches, drivers, processes and outcomes. Examples are “Grassroots” innovation, “base-of-the- pyramid” innovation, innovation “for the poor by the poor”, “frugal” innovation, “jugaad” innovation and “inclusive” innovation. The finality of innovation in terms of improving standards of living and inclusiveness receives increased attention in this context. New concepts such as affordability, opportunity and sustainability and “social innovation” are connected to the innovation process and outcomes. Innovation is seen here as a “way to improve people’s lives by transforming knowledge into new or improved ways of doing things in a place where or (by people for whom) they have not been used before”.

19 Finally, the problem in the collection of information about innovation in the informal sector is not only the content of the questions. An important challenge is how one can ensure that informal sector contexts questions are tested and then administered accurately through a survey. Identifying and properly sampling respondents, deploying a questionnaire and ensuring reliable responses are more challenging in this context than if an innovation survey is sent to a standard list of firms in the formal sector, addresses of which can be easily gleaned from business registers

20 Measurement efforts targeted at the informal sector so far
Several types of surveys have been implemented in the aftermath of the 1993 definition of the informal sector: Classic establishment censuses and sample surveys Mixed household/establishment surveys Combined surveys associating household surveys for home- based and mobile activities and area sampling establishment surveys for micro, small and medium-sized enterprises, for instance in Kenya LSMS surveys (in the absence of the other types), for instance in Ghana Approximately ¾ African countries have implemented at least one type of these surveys, at national level

21 Informal sector surveys
The main objectives of the current surveys on informal sector are the measurement of employment and of its characteristics for labour force statistics and the measurement of production, value added and income for the national accounts Most surveys include modules on skills and training, capital and investment, barriers encountered and incentives desirable Combined surveys focussing on micro, small and medium-sized enterprises already include sets of questions or modules on innovation

22 Proposed strategy for the measurement of innovation in the informal economy
Extending the large-scale innovation surveys to the IE is not considered a viable option Two viable scenarios emerge: adding three to four innovation questions – or even a short set of questions or a module - to existing large-scale surveys of the informal economy; and/or (ii) conducting ad hoc questionnaire- and interview-based sectoral studies in selected countries, as used for the WIPO project. Both options benefit from the lessons learnt when conducting the three different but mutually supporting types of innovation and IE surveys and their respective expert communities which have different but complementary skills.  

23 Option 2: Ad-hoc non probability surveys
Ad hoc - more flexible and qualitative survey approach based on semi- structured interviews in particular sub-sectors or clusters of the informal economy in specific countries are the only way to build trust with the respective interviewee to obtain any reply at all. Three main non-probability sampling techniques are often used independently or in conjunction to increase the representative nature of the sample: namely (i) purposive, (ii) snowball, and (iii) quota sampling methods This method is better apt at contributing to our understanding of how innovation is happening in the IE, where ideas from innovation come from, how skills are acquired, how the benefits are appropriated, and what economic and social context and outcomes are, especially when enquiring on topics such as the sources of knowledge which contributed to innovation or, as to which appropriation methods, including secrecy, the respondent is relying on to protect his or her innovation : this is the method applied for the sector country studies as conducted for this book

24 Ad-hoc non probability surveys (continued)
It is attempted in these ad hoc interview-based approaches to also survey a broader set of actors of the relevant innovation ecosystem. Specifically, the following entities are also surveyed: (i) formal companies supplying informal manufacturers, including contract manufacturers; (ii) the customers of the IE entity often playing an important role as source of knowledge, (iii) government and regulatory bodies, (iv) intermediary organizations engaged in knowledge transfer, (v) associations representing the informal cluster, (v) NGOs working to promote innovation and the understanding of IP in the informal sector, and, finally, (vi) agencies providing training and skills

25 Contents of semi-structured interviews
(i) Level and nature of innovation activities, including questions relating to imitation and adaptation versus originality: “Have you originated a new product/changed the process of producing the product since you started working? Why? Where did you learn about the new process? Do you do any research to improve the process of production? Did any of the following institution assist you in overcoming production weaknesses? What benefits did you have from the change in process?”.

26 Contents of semi-structured interviews (ct’nd)
(ii) Relevant sources of information and knowledge: significant attention is spent on apprenticeships and on-the-job or other training, e.g.: “Where have you learnt your craft? What is the relationship with your trainer? Do you provide training on production processes? ”. A number of questions try to disentangle the possible shared sources of knowledge in the cluster such as, “Are your products based to some extent on indigenous and/or traditional knowledge?”). The portability of skills and knowledge from one job to the other is also an area of enquiry (“When you move jobs, do you keep or share the secrets of production from your previous employer?”).

27 Contents of semi-structured interviews (c’tnd)
(iii) Relevant innovation partners and collaborators, with a focus on useful network and linkages, (iv) Innovation endowment and capacity in terms of skills, apprenticeships, teaching and learning (“Where did you learn the process of making the product from?”), (v) Obstacles to innovation, (vi) Relevant support measures and role of the national or local governmental authorities, and finally, given the specific focus of our questionnaires (vii) Role of various methods to appropriate innovation investments such as lead time, secrecy, and formal IP rights.

28 Contents of semi-structured interviews (c’tnd)
The topic of knowledge flows, and collaboration in the cluster, and reasons for and against are also surveyed intensively. A number of questions are particularly concerned with the determinants of cooperation, e.g. the underlying personal relationships such as family ties or friendships, or factors which relate to geographical proximity or belonging to the same association, cluster, community or another social or professional group. Care is applied when surveying collaboration between the different potential partners (e.g. suppliers, producers, customers). The role of private or government associations as source of information and knowledge is surveyed.  To conclude, significant portions of the interviews are also dedicated to the different methods which informal sector participants might use to appropriate their innovation efforts, ranging from lead time, over secrecy to more formal IP rights. E.g.: “What mechanisms do you use to protect your innovation or innovative ideas?” “Are you concerned with possible commercialization of your innovations without your knowledge or consent?”, “What forms of appropriation are most appropriate for your sector (list of options indicated)?”. The experience and results generated with these surveys are a necessary stepping stone to better formulating and deploying large-scale formal and informal innovation surveys as well.

29 Conclusions To make progress on the first option, further work should be encouraged to develop a core set of innovation-related survey questions, some from CIS and some from the described informal sector surveys. In Africa, this work could be supported by AOSTI and by AU/NEPAD. At the outset, a short set of questions could be suggested to the stakeholders of the mixed and combined surveys, if they were convinced of the interest of such an approach for the understanding of the dynamics of the informal sector in Africa. After experience is gained, a standard AU survey of informal economy activities, including innovation and IPR use, could be considered. The theme could be picked up in future editions of the African Innovation Outlook. Work in other regions, and in particular in Latin America and in South East Asia should be considered too. The second option of more ad hoc and qualitative surveys in selected countries is the more promising one. First, studies and results can be obtained more quickly. Second, sector studies based on more qualitative work could be more effective in helping us to deliver a rich understanding of innovation in the informal sector. In turn, these will also help better formulate questions to be included in systematic large-scale surveys as developed under Option 1  

30 Thank you for your attention

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