E CONOMIC R ATIONALES U NDERLYING I NNOVATION P OLICIES Analysis of Policy–Making Practices in Finland, Spain and the United Kingdom Roberto E Lopez–Martinez Supervisor: Prof. Luke Georghiou PREST – Manchester Business School The University of Manchester

ROADMAPROADMAP Systems Approach Complex Systems Systems of Innovation Evaluation ST&I Policies Policy Measures Economic Foundations Neoclassical Economics Evolutionary Economics Systems Approach Complex Systems Systems of Innovation

OUTLINEOUTLINE Introduction and research questionsIntroduction and research questions The policy – making processThe policy – making process Typology of policy measuresTypology of policy measures Results from the case studiesResults from the case studies Discussion topicsDiscussion topics Introduction and research questionsIntroduction and research questions The policy – making processThe policy – making process Typology of policy measuresTypology of policy measures Results from the case studiesResults from the case studies Discussion topicsDiscussion topics

INTRODUCTIONINTRODUCTION Adoption of the National Systems of Innovation approach by international organisations and countries: ○Framework to analyse, design and implement policies to improve innovative and economic performance ○For this study it has been assumed that the NSI framework is grounded on evolutionary economics

RELEVANT RESEARCH QUESTIONS To what extent has this framework been actually applied? How have different economic rationales been used in the design and implementation of innovation policies? Are innovation policy instruments the same that have been applied for several years? ○Can we identify some sort of incremental changes? ○Is it possible and desirable to suggest radical changes?

ECONOMIC PERFORMANCE ECONOMIC AND TECHNOLOGICAL PROCESSES IN THE REAL WORLD SELF-REFERENTIAL PLANNING PROCESS ECONOMIC POLICY THEORETICAL MODEL OF THE ECONOMY INDUSTRIAL PERFORMANCE ST & INNOVATION POLICY THEORETICAL MODEL OF TECHNOLOGICAL CHANGE

SIMPLIFIED POLICY-MAKING MODEL / UNIT OF ANALYSIS ECONOMIC ARENA PERFORMANCE ASSESSMENT EXTERNAL INPUTS THEORETICAL FRAMEWORK AND RATIONALE MEASURES POLICY ANALYSIS AND DECISIONS ECONOMIC GOALS

MODELLING THE SYSTEM CLASSIFICATION EVOLUTIONARY COMPLEX SYSTEMS AVERAGE AGENTS SELF- ORGANIZING DYNAMICS AVERAGE EVENTS NON-LINEAR DYNAMICS EQUILIBRIUM STATIC EQUILIBRIUM MODELS EVOLUTIONARY ECONOMICS NEOCLASSICAL ECONOMICS BOUNDARIES Assumptions

MAIN FEATURES OF ECONOMIC RATIONALES

INNOVATION POLICIES TYPOLOGY AMPLITUDE INNOVATION POSSIBILITY FRONTIER KNOWLEDGE ORIENTATION FOCUSED GENERAL KNOWLEDGE GENERATION KNOWLEDGE DIFFUSION CORRECTIVE FACILITATING

Type I Policies Orthodox Market Failure General / Corrective / Knowledge Generation and Diffusion Human resources Grants for industrial R&D Volume and incremental fiscal measures Intellectual property rights Competition policy

Type II Policies Transitional with Emphasis on Average Agents and Knowledge Generation Public research University research funding Human resources Infrastructure support Collaborative R&D Awareness schemes Networking measures Type III Policies Transitional with Emphasis on Average Agents and Knowledge Diffusion Human resources Infrastructure support Collaborative R&D Awareness schemes Networking measures Competition policy Standards and regulations

Type IV Policies Transitional with Emphasis on Average Behaviours and Knowledge Generation Human resources Grants for industrial R&D Collaborative R&D Public procurement Volume and incremental fiscal measures Risk capital, loan and equity guarantees Information and brokerage Type V Policies Transitional with Emphasis on Average Behaviours and Knowledge Diffusion Human resources Grants for industrial R&D Collaborative R&D Volume and incremental fiscal measures Risk capital, loan and equity guarantees Information and brokerage

Type VI Policies Systemic Focused / Facilitating / Knowledge Generation and Diffusion Public research University research funding Human resources Infrastructure support Awareness schemes Networking measures Co-location measures Cluster policies Foresight

DECISION TREE TO IDENTIFY POLICY TYPES IIIIIIIVVI General or Focused Corrective or Facilitating Generation or Diffusion

CASE STUDIES Finland ○Dynamic policies and structures ○Explicit adoption of the NSI framework ○Recognition of market failure as policy rationale ○High level of R&D expenditure (from 2.04 to 3.4 % of GDP during the 1990s) ○The following analysis of specific measures corresponds to 2003

CASE STUDIES Spain ○Relatively stable policies and structures ○Recent adoption of some NSI concepts ○No explicit mention of policy rationales. ○Low level of R&D expenditure (from 0.84 to 0.94 % of GDP during the 1990s) ○The following analysis of specific measures corresponds to 2001

CASE STUDIES United Kingdom ○Stable policies and structures ○No explicit adoption of NSI concepts ○Market failure explicitly accepted as policy rationale ○Medium level of R&D expenditure (from 2.07 to 1.84 % of GDP during the 1990s) ○The following analysis of specific measures corresponds to 2002

R&D EXPENDITURE 1981–2002

Distribution of innovation policies by types and delivery mechanisms FinlandInstruments Effort (%) Type I Type II General university funding Academy of Finland funding of public institutions R&D Type III Type IV Tax exemptions (not for R&D but for attracting human resources) Complementary funding of public research centres (VTT) Tekes funding of industrial R&D Type V Tekes Technology Centres (regional development) Risk capital loan and equity guarantees (Tekes, Finvera, Finpro, Sitra) Type VI Tekes funding of public scientific research 11.37

Distribution of innovation policies by types and delivery mechanisms SpainInstruments Effort (%) Type I Volume and incremental tax exemptions 0.14 Type II General university funding National Plan basic research funding for public institutions Type III Type IV National Plan industrial grants for applied research on priority areas Type V National Plan industrial grants for development and networking activities National Plan risk capital loan and equity guarantees Type VI National Plan funding of applied research on priority areas National Plan expenditure devoted to science and technology infrastructure 15.44

Distribution of innovation policies by types and delivery mechanisms United Kingdom Instruments Effort (%) Type I Consumer and competition policies 0.71 Type II General university funding (HEFCs) Research Councils funding of public basic research Type III Promotion of commercial best practices Labour policies Energy and environmental policies Type IV Tax exemptions (SMEs and large firms differentiated programmes) Civil departments R&D expenditure Type V Risk capital loan and equity guarantees Knowledge transfer programmes for industry Knowledge transfer programmes for scientific research institutions Programmes to strengthen regional economies Type VI Research Councils funding of engineering and technology areas Expenditure on science and technology infrastructure 18.23

SYNTHESIS OF RESULTS Support for public and industrial R&D ○Around 40 % of instruments mainly based on a market failure rationale ○Around 60 % of instruments based on a ‘systemic’ orientation Support for industrial R&D and innovation ○Only the UK keeps the same proportion of types of instruments in the policy mix ○Finland and Spain only apply transitional instruments based on a ‘systemic’ orientation

DISCUSSION [Practical] Inconsistencies, between discourse and practice, concerning the rationales for government intervention Market failure is recognised as policy rationale, but the policies implemented could not be designed without rejecting the restrictions imposed by the equilibrium model Market failure is recognised as policy rationale, but the policies implemented could not be designed without rejecting the restrictions imposed by the equilibrium model

DISCUSSION [Practical] A general perception is that the practice of policy–making has been using the equilibrium rationale concerning the specific instruments to influence innovation activities on the one hand, and on the other, it has been relying on a systemic rationale to make changes to the institutional structure that manages those instruments, and to fine–tune specific policies and targets. A general perception is that the practice of policy–making has been using the equilibrium rationale concerning the specific instruments to influence innovation activities on the one hand, and on the other, it has been relying on a systemic rationale to make changes to the institutional structure that manages those instruments, and to fine–tune specific policies and targets.

DISCUSSION [Practical] Little evolution of policy measures and instruments since the 1960–70s ○Shift from framework to focused policies ○Main trend towards supply – oriented policies Competition policies, rarely mentioned in the innovation policy literature, play an important role regarding rationales for government intervention

DISCUSSION [Methodological] The typology is very sensitive A non–orthodox interpretation of the equilibrium approach would radically change the results Such a shift of the framework could lead to the conclusion that the ‘systemic approach’ is an operationalisation of the market failure rationale

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