20 Policy Options and Practical Instruments

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•Some countries have applied policies aimed at improving their technological environment by attracting foreign direct investment (FDI). Strategies to do this include importing technology, attracting investment to “greenfield” sites or establishing new companies through merger or acquisition to build the innovation capacity in a region. Driving this process requires capacity-building in terms of skills, adequate physical infrastructure and access to markets.

•There may be a need for specific policy measures to support the innovation activities of small and medium firms (SMEs). This is necessary as the resources available to SMEs are limited, especially while they are in the early stages of development and vulnerable to cash flow problems. One specific option to support SMEs is to facilitate their integration into supply chains and increase networking across regions

•There are ways of structuring government R&D spending in order to address industrial relations that drive innovation. Examples include funding of knowledge transfer partnerships and, on a more generic basis, knowledge transfer networks. These knowledge transfer networks link broad groups of organizations that have a common interest in a particular technology.

•In addition to supporting investment in R&D through grants for early stage ideas and matched funding programmes for technologies, there needs to be effective fiscal structures encouraging firm investment in innovation.

•Establishing supportive framework conditions for enhancing the innovative capacity of firms therefore requires placing immediate policy based actions into a longer-term strategic policy framework.

•Short-term policies that support business development may include funding support to technology which has commercial potential, creating support services for business, running business awareness courses on how to create an innovative environment in a company, stimulating innovation in business through relevant procurement programmes and focusing on skills that would enhance the market potential of existing industrial activities.

•Strategic policies need to build long-term innovative capacity by more widely promoting the processes that drive innovation, building relevant skills and investing in R&D that has long-term commercial potential.

A. The importance of framework conditions

National policies create frameworks that define priorities for investment. Some of the social challenges faced by society today also represent business opportunities. Strategic investment in technologies that try to resolve these challenges, if they are successful, will not only benefit the country but also create a global market for these technologies. Investing in a range of leading edge technologies is a prerequisite for maintaining international competitiveness and the capacity to innovate.

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The innovative performance of firms therefore depends on the economic, social and policy context in which these companies operate. These framework conditions for innovation shape the overall environment for innovative activity and determine the constraints and opportunities faced by companies.

Typology of framework conditions:

Framework conditions for innovation can be classified into four main groups:4

•Public knowledge creation:

oPublic investment in knowledge

oRelevance of research

oQuality of research

•Cooperation on innovation between knowledge institutions and the private sector:

oCooperation in R&D

o Commercialization of research

oPresence of highly-educated workers

•Innovation financing:

oSubsidies and tax incentives for R&D

oAccess to venture capital

•Market conditions:

oAccess to technology

o Competition policy

o Competencies of users and suppliers

How governments can shape framework conditions?

Governments can intervene to improve these framework conditions. In particular, they can:

•Invest in a country’s science base and design interventions that encourage innovative companies to invest in R&D and collaborate with each other and with academia to turn ideas into profit.

•Support the creation of a large pool of talented R&D personnel that is well resourced.

•Provide a supportive and coherent environment that allows innovation to thrive. This includes:

4 OECD, Benchmarking Innovation Policy and Innovation Framework Conditions, Paris, 2004.

22 Policy Options and Practical Instruments

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oStrengthening the innovation capability of SMEs by facilitating access to relevant technologies.

o Fostering the development of networks.

oAddressing the difficulties that innovative enterprises face in raising finance.

•Encourage society to understand, embrace, and value innovation and technology.

•Ensure that the national physical infrastructure supports business.

•Create markets for technology, removing distortions and generally increasing the scope for competition.

Competition, regulation and innovation

One of the drivers for innovation is the opportunity afforded by a valuable market. The Internet, despite the early setback of the “dot com bubble”, provides numerous examples of the materialisation of these opportunities, including Google and many of the numerous online retailing businesses.

New opportunities are stimulated by:

•The emergence of new platform technologies; and

•The liberalization of markets. For example, earlier rounds of innovation in the UK occurred when the telecoms industry was deregulated in the early 1980s.

The confluence of these two forces results in:

•New products

•New business models.

The entry of new companies in a particular sector can encourage competition and drive innovation (Box K2.1.). However, the relationship between competition and innovation is ambiguous:

•A competitive market is an incentive for companies operating in that sector to innovate, so to obtain an advantage from competitors. However, if innovation can be easily replicated, the expected benefit decreases, so the rationale for innovating declines. Temporary protection may then be justified, as is the case with the award of patents.

•Some degree of market power reduces uncertainty for would-be innovators and facilitates funding.

Absence of formal barriers, as brought about by deregulation is not sufficient. In addition, new entrants require: