1. Innovation Systems Research Network From Industrial Policy to Innovation Strategies: The Global and the Local David A. Wolfe Program on Globalization and Regional Innovation Systems Munk Centre for International Studies University of Toronto Presentation to the Industry Canada/ICP Workshop on Industrial Policy and International Trade Ottawa, Ontario, March 13, 2009

2. Innovation Systems Research Network What is Industrial Policy? Definition: –Any government program that directly affects the economic activity of an industry, company or plant –Policies designed to change economic structures, behaviour and/or performance Types of industrial policy –Innovative – designed to promote growth and development by fostering the promotion of new product and process technologies –Defensive – attempt to protect firms, sectors or regions against undesired economic changes –Adaptive – attempt to ease the adjustment process by reallocating capital and human resources away from declining economic activities

3. Innovation Systems Research Network The End of Industrial Policy ? Failure of Industrial Policy, 1970s to 1980s –Adaptive and defensive more than innovative Industry and Labour Adjustment Board Canadian Industrial Renewal Board Individual bailouts – Chrysler, Maislin, Massey-Ferguson –Tier I and Tier II Consultations Great expectations – few results –Megaprojects strategy Sidelined in Cabinet –Macdonald Commission Report In a small open economy, industrial policy and trade policy are synonymous – FTA, CUFTA

4. Innovation Systems Research Network Provincial Industrial Policy Provincial Initiatives – 1980s and 1990s –Ontario Premier’s Council Reports – late 1980s “Competing in the Global Economy” “Industrial Policy Framework” – 1992 –Emphasis on sectors – Sector Partnership Fund Quebec – early 1990s –Industrial Atlas of Quebec Influence of Porter –provincial economy as twelve industrial clusters Parallel initiatives in BC, Sask, Nova Scotia Lack of integration with federal strategy

5. Innovation Systems Research Network Industrial Policy Redux Federal Programs – Innovative & Adaptive –DIPP, TPC and Program for Strategic Industrial Projects –Industrial and Regional Benefits Policy –Regional Development Agencies Subsidy and loan programs –NRC, IRAP, CSA –Science and Research Policy SR&ED NCEs, CRCs, CIHR, NSERC, SSHRC, CFI

6. Innovation Systems Research Network Industrial Policy from an Innovation Systems Perspective Innovation is a ‘social’ process –Networks and relationships facilitate the translation of new ideas, ie. research into commercial products Innovation is ‘place-based’ –Occurs in an institutional, political and social context –Spatial proximity facilitates sharing of knowledge and capacity for localized learning, but global pipelines remain important –Localized learning is facilitated by common set of regional institutions Innovation policy becomes the cornerstone of industrial policy –Focuses on system failures rather than market failures –Recognizes the internationalization of technology development –Learning process are central to innovation and policy design –Knowledge capabilities are person embodied

7. Innovation Systems Research Network Schumpeterian Dynamics in a Small Open Economy Inventive activities of firms in knowledge-intensive industries remain concentrated in home country (Macher & Mowery 2008) –Growth of global production networks –Vertical specialization – firms specialize in a limited set of activities Design, systems integration and R&D located in home base Small open economies face structural disadvantage from the perspective of Schumpeterian competition (Harris 1985) –Smaller indigenous firms perform lower levels of R&D and face greater barriers to entry in Schumpeterian industries –Less than optimal industrial structure for Schumpeterian competition especially in where scale economies represent entry barrier “Industries in which product differentiation is the most important structural feature of the innovation process offer greatest for success for smaller firms from a small open economy to establish export market bases” –Provides justification for targeted support for firms in these industries

8. Innovation Systems Research Network Spatial (nested) Scales National –Corporate organization and governance –Legal/regulatory framework –Fiscal (taxation) and macroeconomic environment –Framework of industrial relations and labour training –Financial system –Government policy State/Provincial –Regional industrial structure –Research infrastructure – higher education sector Specialized training institutions –Government policy/support Industrial attraction and retention Local /Cluster –Civic governance –Physical /communications infrastructure –K-12 education system

9. Innovation Systems Research Network Unique Capabilities of Local Innovation Systems Regional Innovation Systems produce unique local capabilities, which become a key source of competencies for local firms in a variety of sectors Localised capabilities include: –The region’s specific institutional endowment –Local knowledge infrastructure –Specialized knowledge and skills available in the region These capabilities develop and evolve slowly over time A region’s institutional endowment shapes: –Distinctive rules, practices, routines, habits, traditions, customs and conventions –Entrepreneurial spirit, moral beliefs, political traditions and decision-making practices –Regional ‘culture’

10. Innovation Systems Research Network Clustering as a Source of Competitiveness Competition and cooperation are complementary –The old dichotomies no longer apply – (Best 2001) –Cluster members are both suppliers and buyers Beneficial outcomes of cluster collaboration: –Creates linkages among firms –Facilitates specialization Role of lead anchor firms Focus on core competence Builds critical mass Improved branding and marketing Enhanced resources for the cluster Specialized financing, education, policy supports Attracts customers, new investment, skilled talent Growth of a ‘thick’ labour market

11. Innovation Systems Research Network Average Regional Income by Employment in Clusters

12. Innovation Systems Research Network Strategic Management of Local Innovation Systems Regional response to globalization is emergence of strategic management policy –Not for firms, but for regions –“This strategic management of regions has harnessed the propensity for knowledge and innovative activity to concentrate geographically as a locomotive of regional economic development” (Audretsch, 2002) Collaborative institutions - formal and informal organizations that: –Facilitate exchange of information and technology –Foster cooperation and coordination –Enhance civic capital and improve competitiveness by: Creating relationships and establishing trust Forming collective institutions Identifying common strengths and developing common agenda Formulate innovation-based strategic plans –Strategic planning exercises draw upon civic capital created by these institutions –“local social knowledge management exercises”

13. Innovation Systems Research Network Strategic Planning at the Community Level Innovation-based strategic planning –Promotes innovative ideas in all aspects of regional economy –Integrate across all levels of governance –Promotes strategic alignment of policy across spatial scales Strategic assessment of local/regional assets –Workforce skills –Knowledge assets and R&D –Creative elements –Infrastructure –Quality of place –Entrepreneurial networks and clusters Key Role of Community Leadership –Civic entrepreneurs bring civic interests together to collaborate Create broad buy-in across all sectors of community

14. Innovation Systems Research Network Policy Implications Linkages between elements of the system –Especially research infrastructure and clusters –Not just a ‘supply-push’ phenomenon Importance of demand side of innovation system –Absorptive capacity – at both firm and regional level National policies impact at the local level –Best example is IRAP which builds innovative capacity at local level –Need to coordinate role of federal agencies at local level Growing role of networks and clusters –Disaggregation of ‘companies’ and ‘industries’ as objects of policy into supply chains and knowledge networks. –Continuing role of lead anchor firms in grounding clusters CATA’s ‘motherships’ Gaps in capital markets at key stages of cluster evolution Critical role of strategic planning and regional foresight at the local and community level