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Instruments to Build Firm Capabilities and Accelerate Technological Catch-Up in

Instruments to Build Firm Capabilities and Accelerate Technological Catch-Up in Developing Countries A Practitioner’s Guide to Innovation Policy Xavier Cirera, Jaime Frías, Justin Hill, and Yanchao Li Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 2 A PRACTITIONER’S GUIDE TO INNOVATION POLICY Instruments to Build Firm Capabilities and Accelerate Technological Catch-Up in Developing Countries A PRACTITIONER’S GUIDE TO INNOVATION POLICY From invention to upgrading: A broader definition of innovation is needed to enhance the impact of innovation policy Innovation has traditionally been associated with science and research and development (R&D). This view has bi ased the formulation of innovation policies and institutions in many countries by focusing on a “linear” or “supply side” approach, whereby research is seen as generating R&D and inventions and then is transformed into innova tions introduced by firms in markets. This view of innova tion, which has been very influential in defining innovation policies, prioritizes policies that aim to create new knowl edge and more radical, disruptive, and novel innovations, at the expense of efforts to adopt existing knowledge and technologies, and more generally, create and build basic innovation capabilities. While more novel or radical innova tions are, of course, important, the “linear” view misses the fact that incremental innovation and upgrading are more characteristic of innovation systems in developing coun tries. Crucially, most firms in developing countries can ob tain substantial improvements in productivity by adopting knowledge and technologies that have already been gen erated. Thus, a broader view of innovation that includes in cremental innovation and upgrading is needed to improve innovation policies. Related to this more inclusive view of innovation, innova tion policy involves the design and delivery of an array of policy instruments through which governments attempt to overcome market and systemic failures that prevent broadly desired innovation outcomes from being attained. Thus, innovation policy encompasses a combination of in struments that interact and complement one another—the so-called policy mix—to encourage various types of inno vation. This guide focuses on the group of instruments that target innovation in businesses, and that take the firm as the target group. These innovation instruments are typical ly designed to influence the behavior of firms and induce them to invest in innovation activities broadly defined, with the medium-term goal of increasing sales, employment, and productivity. The innovation imperative in developing countries Innovation is widely recognized as a central factor in driv ing economic growth. Innovation drives the Schumpeterian creative destruction process and can facilitate econom ic convergence for the countries farther from the frontier (Schumpeter 1942). Innovation is the critical ingredient in historical accounts of how countries achieve economic INNOVATION POLICY plays a central in the growth strategies of developing and developed countries by removing barriers to business innovation and facilitating the adoption of technologies. However, innovation policies in develop ing countries tend to be fragmented, often mimicking conditions and designs of policies in most advanced economies, which are likely to be inadequate for domestic innovation capabilities. Thus, improving the effectiveness of these pol icies is critical, especially in the current context of rapid technological change and digitalization. However, improving such policies is not an easy task. Policy makers face a shortage of information and lack of clarity about what works and what doesn’t and what innovation instruments are most effective at different stages of devel opment. This policy guide aims at filling this information gap and supporting policy makers in developing countries in their quest to design more effective policies to foster innovation. 3 A PRACTITIONER’S GUIDE TO INNOVATION POLICY growth and prosperity. A growing body of evidence has shown that increased innovation activity has a measurable and positive impact on firms’ productivity (Mohnen and Hall 2013). This is becoming ever more important with the rapid development of new technologies. Countries and regions with vibrant innovation ecosystems tend to experience higher productivity rates, increased economic growth, and more robust job creation. Innovation is becoming more important in a world that is undergoing significant and rapid technological change that is reshaping how and where goods and services are produced. Some refer to this transformation as either the Fourth Industrial Revolution or Industry 4.0, where produc tion is characterized by the integration of cyber-physical systems such as robotics, 3D printing, artificial intelligence, and machine learning. While production processes are still transitioning to this new technological regime, a signifi cant increase in digitalization of business and production functions is already occurring, given rise to new business models and economic activities. Some commentators see this new paradigm as an opportunity for firms in developing countries to “leapfrog” stages of development and join the leaders at the technological frontier. But there is a more plausible possibility that the technological gap and the in come divide between developing and developed countries will widen. The scant evidence available documenting the adoption of general-purpose technologies supports the second view. While the speed of technology adoption (the key form of innovation for developing countries) across countries has accelerated, the intensity of adoption within countries has diverged (Comin and Mestieri 2018)—which means that most firms in developing countries may fall fur ther and further behind. These new technologies are likely to be more demanding in terms of some of the comple mentary factors needed for effective adoption across firms, such as sound infrastructure, a supportive business envi ronment, workforce skills, and core competencies in rela tion to key firm-level business practices, including market ing and management skills. Technology leapfrogging is a challenging prospect for de veloping countries and only those countries that have well designed policies and a good support system to adopt these new technologies will succeed. This increases the urgency for more effective and focused innovation policies that address the key challenges in adopting these new technologies. The innovation policy challenge in developing countries Managing complex innovation policies with scarce government competencies Innovation is inherently risky and uncertain. Thus, firms may undertake less innovation than they should, or under take it less effectively than they could. This is especially the case in developing countries where market and system failures that prevent investments in innovation activities are pervasive. Research quality is often insufficient, the skills base is very thin, the business environment is frequently costly and unfavorable, and markets may not reward in novation because prospective consumers lack purchasing power. In addition to these challenges, policy makers and practitioners in developing countries often do not have the necessary competencies to diagnose and identify ade quate policy solutions and implement policies effectively. This situation translates into an important policy dilemma for policymakers: how to manage complex innovation poli cies with scarce government capabilities. Confronting this dilemma and minimizing the risk of failed innovation policies requires action in three different areas: ●Getting the right focus and appropriate mix of innovation policies using a gradual approach and prioritizing the support to build innovation capabilities. ●Investing in government capabilities and competencies through better processes and institutions. ●Addressing the information gap about what works and what does not and in what context. Getting the set of policies right—Supporting the capabilities escalator Improving innovation policies starts with a clear and realis tic focus on the existing capabilities the private sector has for innovation. To have a sizeable impact on innovation and 4 A PRACTITIONER’S GUIDE TO INNOVATION POLICY STAGE 1 Incipient NIS STAGE 2 Maturing NIS STAGE 3 Mature NIS Level of development • Long-term R&D and technological programs • Minimize innovation gap leaders and laggards • Collaborative innovation projects • Building managerial and organizational capabilities • Start collaborative projects • Need to develop STEM skills and engineering • Need for basic infrastructure—NQI and Incubation • Elimination of barriers to physical, human and knowledge capital • Building technological capabilities • Incentivize R&D projects • Link industry and academia • Improving quality of research, innovation and export infrastructure productivity, innovation policies in developing countries need to aim first to ensure that most firms develop the nec essary capabilities to undertake basic incremental innova tion. Redressing the frequent funding bias towards R&D is crucial for effective policy targeting. The objective is not to stop funding instruments to foster R&D, but to balance the composition of budget allocations to be more aligned with the actual and evolving capabilities of the private sector. Innovation policies in developing countries also need a clear focus on building managerial and organizational prac tices to manage and accumulate knowledge and organize the business routines needed for innovation. The intuition is simple. Managing R&D projects or the introduction of new processes efficiently and successfully requires the effective use of human resources, the deployment of effective mar keting strategies, and the efficient implementation of other key business functions. For example, target setting, or qual ity management and monitoring, are key activities to man age innovation projects across different sectors. Innovation requires internal incentives to ensure that workers are allo cated to tasks where they can be more productive, and are incentivized (or not penalized) to propose improvements at early stages and later to propose and uploads/Science et Technologie/ a-practitioner-x27-s-guide.pdf