INNO-Grips Newsletter No. 2

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INNOVATION

POLICY NEWS02

INNO-Grips Newsletter April 2011

www.proinno-europe.eu/innogrips/newsletters

TABLE OF CONTENTS

LEAD ARTICLE

Editorial – The Future of Innovation in an Enlarged, Post-Crisis Europe // P 02

The anti-cyclical potential of innovation policy

Thinking through the Role of Innovation in Economic Growth // P 03 Venture Capital – Expectations and Prospects // P 06 The Impact of Environmental Regulation and International Agreements on Innovation and Technological Development // P 07 Innovation in Higher Education and in the Academic Sphere // P 08 International Innovation Policy News // P 11

Refuelling Economic Growth through Innovation The current economic crisis has seriously damaged Europe’s economy. Huge debts have been accumulated to bail out systemically relevant institutions. Genuinely new growth is needed for recovery. As innovation can be a source and driver of economic growth, it is frequently argued that strong investment in innovation could be a route to facilitate recovery from economic downturns – but is there any evidence that such anti-cyclical innovation policy works in practice?

A recent policy brief by INNO-Grips explored this question. read more on Page 03

About INNO-Grips // P 13 Imprint // P 14

European Commission Enterprise and Industry

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// EDITORIAL

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Cohesion or Divide

The Future of Innovation in an Enlarged, Post-Crisis Europe Dear Readers,

Renata Anna Jaksa Director ICEG European Center

Europe faces several challenges in the domain of innovation. The EU27 has to improve its R&D&I activities otherwise it will be defeated in the global game of innovation and growth. Innovation trends and developments vary a lot even within the EU27, and it is a major challenge to avoid the “innovation divide” as the Communication on Innovation Union warns us. In this Newsletter, we devote special attention to this issue and to the problems to be solved in order to create cohesion in the Innovation Union.

The lead article presents the debates on the role of innovation policy in times of economic downturn, poses questions about the Schumpeterian idea of “Creative Destruction” and finally presents conclusions on the potential incentives that could enhance innovation output in an anti-cyclical conjuncture.

The role of venture capital (VC) in supporting young and innovative enterprises is crucial for Europe to overcome the hardships of the recent economic crisis and to reboot growth and development.

Our interview with Thomas Meyer, senior economist of Deutsche Bank Research, describes the major trends with special attention devoted to VC developments in Central and Eastern Europe.

Smart thinking and innovative solutions are indispensible if global challenges are to be met, e.g. slowing down the pace of climate change. Herewith this newsletter deals with questions relating to what regulation can do in order to push and motivate innovators to deal with this challenge. One thing is clear already: regulation and policies targeting sustainable economic growth, research, innovation

and technological development should be implemented in tandem in order to achieve anything significant in tackling climate change.

Higher education (HE) should naturally be a haven for creativity, new ideas, and inventions, yet in many countries the sector underperforms in this role. This is especially the case in Central and Eastern Europe, where many HE institutions (together with the classical academic research sector) are still suffering from the out-dated structures, institutional rigidity and lack of well-targeted policies.

European policy-setting, strongly relying on academy-industry cooperation, can only work well if higher education and academia fulfil their expected roles in the national innovation systems and in the European Research Area.

Finally, we also provide some brief news on innovation policy developments in Europe and in other selected countries.

If you are interested in further reading and news on innovation in Europe, please visit the PRO INNO Europe and the INNO-GRIPS websites.

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LEAD ARTICLE

eRecommendations on anti-cyclical innovation policy

Thinking through the Role of Innovation in Economic Growth A new policy brief by INNO-Grips explores the potential of innovation policy to foster recovery from the financial and economic crisis. The authors recommend that policy should focus on SMEs, and that credits and subsidies should be deployed to balance the fall-off in private investments in innovation during economic downturns. But they also emphasise the importance of innovation policy’s long-term orientation.

The current economic crisis has seriously damaged Europe’s economy. Huge debts have been accumulated to fund the bail out systemically relevant institutions. Genuinely new growth is needed.

Theoretically, economic growth can be driven by innovation.

Consequently, it is frequently argued that strong investment in innovation during economic downturns is the best response, both for immediate relief and as the route to rapid and sustained recovery from the crisis. Schumpeterian “Creative Destruction”, well-known in economic theory, predicts that during economic downturns innovation can restructure economies: less productive firms are squeezed out, while highly productive firms succeed. As a result, overall productivity levels rise.

PRIVATE R&D&I ACTIVITIES HAVE TENDED TO BE PRO-CYCLICAL – HAS THE PATTERN CHANGED IN THIS CRISIS? A long-term observation of indicators on private research, development and innovation (R&D&I) activities indicates that they are pro-cyclical. Insufficient availability of financial means is commonly quoted in studies as the main reason that R&D&I activities are reduced during economic downturns. However, when one turns from these general findings regarding long-term patterns to the current crisis, a new picture seems to emerge. Eurostat

data and Innobarometer 2009 survey responses indicate that firms’ behaviour in the current financial and economic crisis potentially differs from the assumed pro-cyclical pattern, i.e. firms are keeping their R&D&I activities stable or increasing them despite the economic downturn 2008/2009. Nonetheless, drying up cash flow and banks’ risk-aversion during the current crisis may still leave many firms no other choice than to cut back on their R&D&I. Does this then present a case for providing specific incentives for innovation during the crisis?

THE CASE FOR ANTI-CYCLICAL INNOVATION POLICY – AND THE LIMITATIONS The policy brief concludes that although innovation policy is fundamentally longterm in nature, there is also evidence in support of innovation policy’s short-term effect. Innovation policy can provide (short-term) incentives to encourage private R&D&I activities during a recession. As private-sector R&D&I investments are likely to dry up in an economic and financial crisis, the public support is an appropriate tool for keeping these investments at a socially optimal level even during the crisis. The focus of such measures should be to support companies in continuing their ongoing innovation projects which may be at risk of being cancelled otherwise.

Ideally, short-term measures during a crisis can have a two-fold impact: they can

trigger additional private R&D&I spending (short-term economic stimulus), and at the same time reduce the risk of negative longterm impacts on competitiveness due to cancelled or delayed innovation activity.

Several studies concur in their assessment of the “stimulus effect”; the consensus is that one Euro of public support triggers between 0.4 and one Euro of additional private R&D&I spending.

Besides triggering economic activity, a major objective of innovation support measures during a crisis is to prevent longterm negative impacts on competitiveness due to cancelled or delayed innovation activity. This aspect creates links between short-term initiatives and longer-term perspectives.

Finland’s recovery from the crisis of the early 1990s, when the country was on the verge of bankruptcy, is often cited as a prime example of the positive effects of anti-cyclical innovation policy (see box), even if the “anti-cyclical” timing of the actions and measures may have occurred by coincidence. The country’s industry was completely restructured, switching from pulp and paper to ICT and mobile phones, which led to sustained economic growth.

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CASE STUDY: FINLAND IN THE 1990s – AN EXAMPLE OF ANTI-CYCLICAL INNOVATION POLICY? Finland was among the countries hardest hit by the European currency crisis in 1992-1993. Additionally, a huge share of its international trade was lost with the collapse of the Soviet Union, causing the most severe economic downturn seen in any OECD country since World War II. However, the Finnish economy recovered surprisingly quickly. This has been most usually attributed to a proclaimed anti-cyclical innovation policy.

Although much can be learned from the innovation policy of the Finnish government at that time, the case should not be misinterpreted. This was not innovation policy providing a quick fix. Instead, several political, economic and social factors contributed to the rapid recovery of the economy.

However, the wider evidence reviewed

by INNO-Grips for this policy brief also shows the constraints of anti-cyclical innovation policy as a short-term measure.

First and foremost, empirical studies point to a significant time lag between investments in innovation and their economic impact – often between two and five years. Moreover, the policy brief stresses that the importance of a well-functioning

First and foremost, a long-term political strategy had put innovation at the centre of the country’s development since the early 1980s. In addition, policymakers ensured that all stakeholders’ opinions were taken into account for each step of the innovation policy, and especially during the crisis.

Finland’s economic recovery was also characterised by major transitions in the country’s industry, with the main development being the shift from resourcebased industries, such as forestry, pulp and paper production, to high-tech industries, notably in the ICT industry (including telecommunications and mobile services). Nokia was highly influential in this transition and its role in the Finnish recovery should not be underestimated.

innovation system as a whole should not be underestimated for the effectiveness of such measures. Specific innovation policy measures need to build on the innovation system; the Finnish case study most convincingly supported this fundamental insight.

So a European innovation policy should aim to create a positive and interactive

This process was only possible, it should also be noted, because of international demand for the new technology.

But the essential building blocks for innovation and for this industrial transition lay in Finnish society. Finland’s small population of some five million people is spread out across a large country - creating an almost natural demand for wireless telecommunications. There are also tight social networks resulting in many cross-sectoral linkages, often based on personal contacts. In addition, Finns are renowned for their technological and engineering expertise.

environment for innovation, to encourage strong but fair competition, and to provide substantial support for basic research. Innovation policy also needs to be closely integrated with education policy, as well as with economic and labour policies. All the experts interviewed for the policy brief agreed that this form of integration is decisive in coping with economic crises. Another lesson from the

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Finnish case study, emphasised by many interviewees, is that a Schumpeterian restructuring of the economy can have harmful regional effects. There is the risk of negative reinforcement: poor regions tend to emerge poorer from the crisis, while economically strong regions profit in the longer term. Consequently, it is vital to make innovation policy complementary to regional development policy, and to support regions which are likely to suffer disproportionally during crises by applying other policy measures.

Drawing on the other empirical evidence, subsidies and grants are the instruments with the most pronounced direct effects during an economic downturn. They can be used very selectively and therefore put taxpayers’ money to the most efficient use. Their “R&D&I stimulus” effect may be supported by introducing a compulsory private investment as a condition for receiving public funds. Keeping the crisis in mind, it is also relevant to consider what kind of additional support policy-makers have to provide to different recipients.

a potential for innovation policy-makers to react flexibly in the short-term, in particular by using direct financial support measures to keep private R&D&I activities at a desirable level. Sustained or increasing R&D&I activities during economic crisis are likely to foster economic recovery. In essence, Europe’s innovation policy should be stable but flexible.

WHICH INNOVATION POLICY INSTRUMENTS ARE MOST EFFECTIVE IN THE CRISIS?

A distinction should be drawn between private and public recipients in that respect. While private R&D&I entities have significant incentives to use the financial support for projects which are likely to result in short-term successes, public R&D&I organisations such as universities need further support in order to be able to turn R&D&I results into marketable products and services. Public-private-partnerships (PPPs) offer a particularly promising avenue in that respect.

Research for this policy brief was conducted by Institut der deutschen Wirtschaft Köln Consult GmbH

Subject to these reservations, pro-active innovation policy instruments nevertheless have some potential to trigger additional private sector innovation investments in economic downturns. Principally, following the example of Finland, it is essential to provide public support to balance decreasing private investments in innovation.

Insight gained directly from the IW Future Panel – a representative survey of 3,500 German companies conducted in three waves per year – indicates that creditbased support for innovation activities would be a good measure (see chart). It is immediate, supports entrepreneurial activity, and sets minimum criteria for the stability of the supported firm, thus reducing the risk of supporting firms that would not have been viable without financial support.

ACKNOWLEDGEMENTS & CONTACT INFORMATION

http:// www.iwconsult.de CO N TAC T S Study leader: Dr. Roman Bertenrath bertenrath@iwkoeln.de Research analyst: René C.G. Arnold arnold@iwkoeln.de

MAIN CONCLUSIONS

The full policy brief (a document of about 80 pages) can be downloaded from the INNO-Grips website at

Summing up, the Policy Brief offers two main conclusions with regard to innovation policy as a response to economic downturns. First, all empirical evidence supported the importance of innovation policy’s long-term stability, i.e. stabilising and improving the innovation system to the benefit of all the actors involved, thereby enhancing Europe’s resilience.

Second, the results show that there is also

http://www.proinno-europe. eu/innogrips2

COMPANIES’ PREFERENCES ON POLICY INSTRUMENTS IN SUPPORT OF R&D (points achieved as percentage of the maximum number of points possible)

Data references: IW Future Panel

47

32

28

28

26 17

%

%

LOW-INTEREST CREDIT

TAX-BENEFITS FOR R&D

% EXTERNAL PERSONNEL FOR INNOVATIONS

%

%

%

SUPPORT OF PPPS

KNOWLEDGE POOL

EXTERNAL PERSONNEL FOR NETWORK MANAGEMENT

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// VENTURE CAPITAL – EXPECTATIONS AND PROSPECTS

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Venture capital market in European context

Venture Capital – Expectations and Prospects Deutsche Bank economist Thomas Meyer shares a cautiously optimistic outlook on European venture capital activity.

INNO-GRIPS: According to a common view, the venture capital market may have a positive impetus on the innovation activity of European firms. However, the venture capital endowment of Europe is still challenging, and there is a conspicuous difference in the case of Central and Eastern Europe.

Whether and to what extent is the behaviour of European venture capitalists modified by the recent global crisis? How does the crisis affect the expectations on the venture capital endowment of Europe?

THOMAS MEYER: In the wake of the financial crisis, venture capitalists did slash investments severely in Europe and the US. Interestingly, early-stage investments held up better than later-stage VC. This is the opposite of what happened after the dotcombubble, reflecting the fact that this time the culprit was not technology overinvestment but capital market woes. Within this general trend, we’ve also seen a small boom in investments towards energy and clean-tech start-ups following the spike in oil prices and the growing interest in alternative energies.

This boom has abated as of late reflecting a more sober outlook on alternative energies. European investment and fundraising conditions will remain challenging in the near future. However, I’m optimistic that in the long run, European activity will pick up as there are already encouraging signs of recovery from the US market.

INNO-GRIPS: Are European venture capitalists typically more interested in innovative firms that are already in the market?

THOMAS MEYER: Our research findings suggest that the supply of promising and potentially very profitable business start-ups is crucial for the creation and development of an active VC environment. Ideally, this creates a kind of feedback-loop where strong VC activity also encourages new and better

entrepreneurial activity. Bear in mind that 40% of VC in the US is still invested in Silicon Valley with its dense network of super-innovative start-ups. This means that part of the reasons why Europe lags behind in VC is its overall lack of entrepreneurial zeal – particularly in high-tech start-ups.

Czech Republic, which is the richest of the medium-size CEE economies, also has the most VC investments. To put it differently, VC activity is likely to increase as many CEE countries catch up economically.

INNO-GRIPS: Are venture capitalists willing to invest in innovation and R&D in Central and Eastern Europe?

THOMAS MEYER: Venture capitalists currently invest only tiny amounts in Central and Eastern Europe (about 1% of overall European VC investments). Many do suspect that start-ups in CEE are not at the technology frontier (and thus do not warrant VC investment). Moreover, there are clearly difficulties for international VC funds in spotting and nurturing promising start-ups in CEE and very little activity originates from within CEE. Dr. Thomas Meyer // thomas-d.meyer@db.com

INNO-GRIPS: How should the policy promote venture capital investment in innovation and R&D in Central and Eastern Europe?

Do CEE firms have sufficient absorption capacity in regard to venture finance?

THOMAS MEYER: International research calls for moderation in direct government activity. Too much government-sponsored VC may crowd out private investments and thus hinder the development of a self-sustaining VC market. Getting the framework conditions right (encouraging technology and entrepreneurship, e.g. by reducing red tape) is usually a step in the right direction.

High costs of starting a business, for instance, are a drag on entrepreneurial activity and thus on VC. Moreover, creating sound rules for VC funds themselves (e.g. tax transparency) is helpful. In the end, overall economic progress also benefits VC investments. The

ACKNOWLEDGEMENTS & CONTACT INFORMATION Dr. Thomas Meyer (thomas-d.meyer@ db.com) is a senior economist with Deutsche Bank Research, a unit responsible for macroeconomic analysis and a consultant for the bank, its clients and stakeholders. Dr. Meyer focuses on technology and innovation and has published widely on the role of entrepreneurship and venture capital for economic performance.

Most studies are available for download at www.dbresearch.com.

The interviewer was Olivér Kovács (okovacs@icegec.hu), ICEG European Center, Budapest.

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// THE IMPACT OF ENVIRONMENTAL REGULATION

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Mega-trends and innovation policy

The Impact of Environmental Regulation and International Agreements on Innovation and Technological Development Mega-trends such as climate change call the attention of policymakers to the importance of harmonisation across various policy objectives and measures. Aiming at mitigation of climate change needs such policies which are tailored to sustainable economic growth by stimulating innovation and the use of a wide portfolio of technologies.

According to the common view of ecologists, mankind’s only chance of survival is to provide the sustainability of Earth’s biosphere. This includes the sensitive equilibrium disturbed by the greenhouse effect. If the latter decreases significantly, the annual average temperature at the Earth’s surface may change to a downward trend. As a result, more and more water would freeze intensifying global cooling due to the fact that ice and snow will reflect back more light than water. In the opposite case, water would evaporate faster leading to a higher concentration of vapour in the air. Since vapour is able to absorb infrared rays easily, global warming would be a self-sustaining process.

There is a high degree of confidence in the broad conclusions of climate science stating that human greenhouse gas emissions are very likely responsible for the experienced increase of greenhouse gas concentration in the atmosphere causing incrementally higher annual average temperatures since the middle of the 20th century. Accordingly, there is a need for adaptive policy actions.

LEGALLY BINDING REGULATIONS ON CLIMATE CHANGE While the long-term impact of climate change will take place unevenly in the Globe, international agreements, environment-aware policies and mechanisms have

to reflect to a large extent a consensual view without being in conflict with each other. Nonetheless, the UN Climate Change Conferences in Copenhagen and Cancun in 2009 and 2010, respectively – the aim of both being to achieve a legally binding agreement on the necessary amendment to the Kyoto Protocol by defining further commitment to greenhouse gas emission reduction for the post-2012 period – were not able to endorse the amendment.

Although, the Cancun Agreements urged developed countries to aspire distinctly to reduce greenhouse gas emissions, the details were not explicitly discussed and agreed upon.

For this reason, the role of innovation is becoming ever more emphatic as illustrated in a current study prepared by MERIT in the framework of INNO-Grips (Lot 2) on “Implications of climate change, resource scarcity and demographic developments for innovation policy” [1]. “Mitigating climate change is probably the most pressing problem for innovation policy in the world today”, says Anthony Arundel, Professor of Innovation at the University of Tasmania in Hobart, Australia, and concurrently a Professorial Fellow at MERIT. “However, we need an integrated policy approach that goes way beyond investments in R&D. The so-called ‘R&D investment model’, which is often proposed, might have worked if it had been implemented a decade ago.”

Transitions are slow processes, and the

transition to a low-carbon economy is expected to be a slow and difficult process as the transition must confront a cheap, plentiful, and socially embedded energy system based on fossil fuels.

“There is no technical fix for it”, says René Kemp, who is also a member of the study team and a professorial Fellow at MERIT. “It really requires a transformation of our transport system, the building stock and the energy supply system.

Climate protection requires that we move forward on four fronts: decarbonisation of the power sector and electrification of the transport sector, getting more energy out of fossil fuels, dematerialisation and adaptation to the consequences of climate change”.

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INNOVATION POLICY AND EXIT STRATEGY AS AN OPPORTUNITY The Ad Hoc Working Group on Trade and Climate Change accentuated that international trade regulations have to be harmonised with innovation policies [2]. Although innovation and innovation policy could enhance green technologies and thus this latter may accelerate the worldwide transition towards a lowcarbon economy, the non-negligible tariffs on environmentally-friendly goods and services induced by innovations are still hampering this objective. Diminishing

such barriers is crucial, because people have to start utilising the partly or completely new green technologies as soon as possible.

Another equally important innovation stimulating effect could come from the side of national innovation policies. In the aftermath of the financial and economic crisis, which erupted in 2007, several European countries have recognised the opportunity to spend more on green technologies and innovations in order to facilitate the developments of environmentally-friendly technologies

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and innovations regarding the creation of renewable energy resources [3].

The Keynesian renaissance, i.e. the decisive role of fiscal stimulus calls on the EU member states to emphasise that the exit strategy (aiming at overcoming the effects of the financial and economic crisis) should incorporate the importance of the above-mentioned green initiatives by maintaining the enhancement of innovations which are tailored to sustainable development.

FURTHER READINGS [1] “Implications of climate change, resource scarcity and demographic developments for innovation policy”, INNOGrips study conducted by MERIT, available at the INNO-Grips website: http://www.proinno-europe.eu/inno-grips-ii/ workshop/workshop-no-3-implications-climate-change-resource-scarcity-and-demographic-d [2] Ad Hoc Working Group on Trade and Climate Change (2010): From Collision to Vision: Climate Change and World Trade.

World Economic Forum, Discussion Paper, November 2010. See: http://www3.weforum.org/docs/WEF_ClimateChange_ WorldTradeDiscussionPaper_2010.pdf [3] Robins, N. – Clover, R. – Saravanan, D. (2010): Delivering the green stimulus, HSBC Global Research, New York. See: http://xa.yimg.com/kq/groups/8518353/643699190/name/100310+GREEN+STIMULUS+HSBC.pdf

Innovation policy challenges in Central and Eastern Europe

Innovation in Higher Education and in the Academic Sphere The education system and the Academia can be portrayed as institutions whose aim is the creation and the transfer of knowledge. Central and Eastern European (CEE) EU member states are still coping with the legacy of the past, therefore the evolvement of a healthy innovative milieu is hampered.

Now we are living in a ‘learning economy’ where knowledge production and the ability of actors to rapidly gain new competences are the key driving forces of innovations and, as a result, also of competitiveness. The withering growth performance of the European Union (EU) relates partly to the research performance

in which the roles of the academic sphere and higher education are crucial.

Consequently, the Science and Technology Policy (STP), as the accelerator of scientific and technological development and also as the institutional factor in the economic utilisation of innovative outcomes, is a noteworthy field in the EU (Ref. 1). Since

new technology is not a panacea in itself, the raison d’être of higher education and of the academic sphere is the provision of well-educated graduates with developed learning skills who are able to generate and use new knowledge in order to increase society’s capacity to absorb new technologies.

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While higher education reforms formulated to encourage innovation have been introduced across Europe during the last two decades, the innovation gap has gently decreased between the EU and its traditional competitors, the US and Japan as well as with Asia which is rapidly catching up. Behind the curtain of this performance gap, a plethora of authentic studies have demonstrated that European universities have been underachieving due to their unsatisfactory autonomy and the lack of the inevitable managerial approach (Ref. 2). Other equally important constituents of the gap are the relatively low investments in the university system, the perceivable shortcomings in the issue of monitoring and assessment, and distorting incentives. STP and innovation policies should address these imperfections and also need to be aware of the different situations decipherable in the case of CEE countries.

From the supply-side, the school attainment of the proportion of the population

aged 25-64 in post-socialist CEE countries is substantially higher than in the same age group in other similarly developed countries. This demonstrates that the efficiency of the education system is much lower compared to traditionally marketoriented economies. From the demandside, the epochal transformation that took place in the 1990s calls attention to the more complex set of issues in the case of CEE countries.

PATH-DEPENDENCY: HAS THE PAST A GREAT FUTURE IN CENTRAL AND EASTERN EUROPE? One of the fundamental leitmotifs behind the collapse of state socialism was the inability to innovate, which can be attributed to the characteristics of the institutional system rather than to the conventionally postulated dominance of state ownership and to the absence of private ownership (or to its infinitesimal presence). With the benefit of hindsight, it can be easily justified by the relatively low innovation

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performance of the post-socialist EU member states conveying the message that the institutional features have not gone through significant changes. For example, the Hungarian path can be regarded as a more or less ubiquitous phenomenon in the CEE countries.

This underpins the fact that lower-thanexpected level of innovation-driven economic development is, to a non-negligible extent, induced by the organisational, operational and managerial features of the academic sphere.

As far as innovation is concerned, the current institutional framework of Hungarian science, research and higher education can be generally portrayed as a system facing the gargantuan task of further reforms owing to the distorted scientific employment, career and performance assessment structures suffering from an academic thinking that does not place enough emphasis on the relevance of economic utilisation.

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The actors of the higher education system, especially state universities in post-socialist countries are mainly self-managing and behave like socialist enterprises with the dominance of bureaucratic coordination (Ref. 3). These peculiarities are unequivocally influencing their willingness to innovate. As a result of self-management, their major aim is to maximise wages and salaries whereby they are to a large degree disposed to use their innovation ability primarily for obtaining subsidies and allowances provided by the state. This kind of rent-seeking is very much preferred in the actual situation where the proper performance assessment structure is barely working. Governments support R&D and innovation through various entitlements and define on what research and innovation the financial resources should be spent on. The possible reason behind this is the governments’ assumption regarding the universities i.e. that they would not be able to target the financial resources as efficiently as the government.

It follows from these considerations that organisations managed under non-market coordination tend to be condemned to a low level of innovation efficiency.

According to János Kornai (Ref. 4), the major prerequisites of an impulsive innovation process in capitalism are the following: decentralised initiation; high rewards; competition; opportunity for wide experiments and flexibility of financing.

State universities have a hierarchical career system which affects decentralised initiations negatively, because upper level representatives of the organisation incline to exercise control over the knowledge emerging at lower levels in order to benefit from it. Ambitious rewards for those who explicitly carry out innovations are principally exceptional. The employment system promises salient incomes at the end of a university (academic) career for those who have network capital, accumulate different

leading positions in state organisations and concentrate on rent-seeking. As a result, this type of employment and income system places obstacles in the way of healthy competition. The career model narrows the latitude of opportunities for providing extensive experimenting opportunities, because the burdens on the employees are the greatest when they just have the best intellectual conditions. As far as the flexibility of financing is concerned, resources are planned on a governmental rather than an institutional level. This obviously raises the question whether the resources available for the lower levels of the organisations are sufficient.

LOCAL CIRCUMSTANCES TO BE INCORPORATED Policymakers designing STP should take greater account the repercussions of the industrial restructuring that took place in the CEE countries in the 1990s (Ref. 5).

Despite the rapid industrial restructuring, CEE countries have been more or less locked into low value-added economic activity in contrast with the requirements of the new techno-economic paradigm (Ref. 6) (i.e. high value-added products and services via knowledge management in companies instead of specialisation into the lower end of the value chains).

Modular production – especially in ICT – had a distorting impact on the basis of the innovation policy of CEE countries.

The statistics took into account the low value-added export products (e.g. screens of cell phones) as high technology products envisioning that the share of hightech export is relatively high. Nonetheless the general expenditure on R&D and innovation as a percentage of GDP as well as the number of patent applications declined simultaneously in the aftermath of industrial restructuring. Accordingly, the industry needs were not captured by the innovation policy adequately. The innovation policy took inadequate account of the

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fact that the structural changes resulted in specialisation into the lower end of the value chains.

Even the Europeanisation of innovation policy in CEE countries, especially access to EU structural funds, also had a negative impact on innovation policy. There were not enough administrative capacity and experience with long-term (market economy) planning, and the routine in cooperation and coordination of networks also suffered from hiatus.

Consequently, the innovation policy not only neglected the local circumstances, but also the fact that society’s absorption capacity mostly depends on a higher education system in which the structural lockin effect of the past institutional settings and managerial attitude are converted into a coordination-ready status, and to be complemented with the necessary autonomy. Taking into account these considerations would be essential, if for no other reason than the weakness of labour market requires that these positive changes be invoked to enable not only the unemployed but also those in work to maintain and upgrade the skills they have acquired.

The ability of people to learn, apply and utilise new knowledge bears the torch of innovation and of human well-being in general at present and in the future, as well. As Leonardo Da Vinci once said: Knowing is not enough; we must apply.

REFERENCES (1) Olivér Kovács – Ágnes Orosz (forthcoming 2011): Innovation leaders with different outcome. The Annals of the University of Oradea, Department of International Affairs (2) Aghion, P. – Dewatripon, M. – Hoxby, C. – Mas-Colell, A. – Sapir, A. (2007): Why reform Europe’s universities? Bruegel, Policy Brief, Issue 4. (3) See about these complex set of issues: István, Polónyi (ed.) (2010): Az akadémiai szféra és az innováció (The Academic Sphere and Innovation). Új Mandátum, Budapest. (4) János, Kornai (2010): Innovation and Dynamism.

Interaction between systems and technical progress. Economics of Transition Volume 18(4) pp. 629–670. (5) Rainer, K. – Reinert, E. S. – Suurna, M. (2009): Industrial Restructuring and Innovation Policy in Central and Eastern Europe since 1990s. TUT Institute of Public Administration, Working Papers No. 23. (6) See for example: Perez, C. (2009): Technological revolutions and techno-economic paradigms.

TOC/TUT Working Paper No. 20.

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// INTERNATIONAL INNOVATION POLICY NEWS

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Renewed strategies, new programmes and evaluations

International Innovation Policy News INNO-Grips monitors international developments in innovation policy. A network of correspondents from more than 30 countries worldwide reports regularly about the launch of new initiatives and other relevant events in their country. Their news reports are published on the INNO-Grips website. This article features a selection of news from some of the countries covered.

CANADA. As a result of a recent pan-Canadian consultation on its new programme architecture, the Canadian Foundation for Innovation is launching the College-Industry Innovation Fund. It provides colleges with the funds to acquire significant research infrastructure that facilitates partnerships with the private sector, with the aim of supporting business innovation. This is expected to boost their applied research and technology development capacity in the natural and social sciences, engineering, humanities and health sciences, in order to help them expand existing partnership opportunities and attract additional private sector partners. The investments will allow colleges to strengthen their participation in college-industry clusters in which they already play a pivotal role. Ultimately, business innovation resulting from these partnerships will lead to socio-economic benefits both regionally and nationally.

CZECH REPUBLIC. The registration for the next round of the “Czech Technology Accelerator CzechAccelerator” initiative ended on 31 December 2010. The programme is based on a recognition that several Czech firms are about to target the US market. To this end, the “CzechAccelerator” provides funding and strategic partnerships for selected innovative projects of Czech technology start-ups and SMEs, to convert R&D results into practice and to accelerate the penetration of technology companies in North American markets. Participants in

the programme are selected by a panel of experts in which the representatives from the Ministry of Industry and Trade also take part. Firms operating in specific areas (information and communication technologies, biotechnology, environmental technologies or microelectronics) and employing at least 100 employees have been selected.

FINLAND. At the end of 2010, the Research and Innovation Council adopted the policy report on education, research and innovation policy. The report stresses that the major aim is to maintain the level of R&D funding and innovation in the period 20112015, as well. The Council emphasised that 4% of GDP should be spent on R&D and innovation while public spending should represent 1.2% of GDP. Furthermore, the Council envisages annual increases in R&D funding by a minimum of 4% in real terms. The priority is to safeguard the competitiveness of innovative business and industries.

HUNGARY. Since January 2011, Hungarian science, technology and innovation policy has been governed by the National Innovation Agency which took over the task from the National Office for Research and Technology. While the former institution was a self-operated budgetary authority, the new body is under the chapter

of the Ministry for National Economy in the state budget. Beyond the traditional objectives such as the design and implementation of national innovation policy, the new agency is to provide appropriate incentives for further investments in research and innovation, and to bring the Hungarian R&D and innovation results closer to international markets. Another equally important, newly introduced, role is to participate in the operation of venture capital funds investing in knowledge- and technology-intensive SMEs. INDIA.

By January 2011, most of the prominent Indian policymakers had accentuated the importance of the shift in science and higher education paradigm to support innovation and to help Indian people keep abreast with new challenges. Due to the still incidentally evolving and primarily short-term cooperation between the academic sphere and industry, there is much room for improvement in Indian science policy. However, it has been going through a significant restructuring since 2009. In an effort to enhance the innovation milieu, 14 national innovation universities were established in 2009. Furthermore, the establishment of a national innovation council can also be regarded as a distinct step towards better policies. The council prepared an elaborated roadmap for innovation in the period 2010–2020.

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NETHERLANDS. The approved budget law for 2011 reflects the ambition of the Dutch Government to foster quality research and development work. In one initiative, the Netherlands introduced a tax incentive by reducing the payroll tax and social security contributions due on account of R&D activities. From January 2011, there has been a deduction of 46% applied for the first € 220,000 in terms of R&D-related payroll costs. Compared to 2010, the rate of deduction has been decreased to 16% for R&D-related payroll costs above € 220,000.

The budget also contains an “Innovation Box” which provides for a 5% tax rate for income from high quality patents and research and development activities.

ROMANIA. Romania has decided to invest in the European project of the Extreme Light Infrastructure (ELI) about EUR 289 million for the next six years. The financial resources will be mainly attracted from the Structural and Cohesion Funds transfers that Romania has and will receive in the period 2007-2013. Romania will cooperate with the Czech Republic and Hungary in this project, as each country will build a pillar of the major European infrastructure project of extreme light, the aim of which is to develop the most powerful laser ever. The Czech Republic will contribute EUR 260 million and Hungary EUR 189 million. This would be by far the largest RDI investment Romania has ever made since 1989. In terms of policy implications, this would mark a shift from the current strategy, which has sought to cover as many fields of research as possible, dispersing the available resources,

to a prioritisation and concentration strategy, which will focus more on a few key priorities, backed by state-of-the-art infrastructure.

SWEDEN. Despite the crisis which is beset with financial difficulties, the Swedish government intends to facilitate further higher education and research in 2011, as well. The government has earmarked SEK 5 billion (approx. EUR 562 million) for research and innovation in the period 2009-2012. The generousness of Swedish higher education has gone through a perceptible rationalisation: tuition fees were introduced from January 2011 for students coming from Switzerland and outside the European Union and European Economic Area. As a result, the Swedish government expects to be able to maintain the attractiveness of the Swedish higher education system which has better conditions and is of a higher quality when compared to other European countries.

UNITED KINGDOM. The government has put more emphasis on the importance of innovation initiatives in order to accelerate the rebalancing of the UK’s economy. The fact that the invitation of organisations to form a technology and innovation centre concentrated primarily on high value manufacturing also exemplifies that ambition. The planned centre will be the first of a national network of centres to be established and supervised by the Technology Strategy Board which – according to preliminary expectations – will work in partnership with businesses and higher education to promote the

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commercialisation process of results in terms of research in specific technology areas. The Technology Strategy Board also inclines to invite ideas during January 2011 on the potential list of candidate areas, and other reasonable areas, for future centres.

USA. In early January 2011, President Barack Obama signed the reauthorisation of the Creating Opportunities to Meaningfully Promote Excellence in Technology, Education and Science Act (COMPETES), extending the federal competitiveness initiative that provides funding for numerous science, STEM (Science, Technology, Engineering and Math) education and commercialisation programmes. Though the final bill represents a significantly scaled-back version of the legislation passed in May 2010 by the House, the final version will allow the programmes introduced in the COMPETES Act to continue for another three years. The reauthorisation also includes a new regional innovation programme to award competitive grants for activities relating to the formation and development of regional innovation clusters.

FURTHER INFORMATION More news and updated innovation policy country reports are available at the INNO-Grips website at: http://www.proinno-europe. eu/innogrips/latest-news

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// ABOUT INNO-GRIPS

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Renewed strategies, new programmes and evaluations

About INNO-Grips This newsletter is an INNO-Grips publication. INNO-Grips (http://www.proinno-europe.eu/innogrips2) stands for “Global Review of Innovation Policy Studies”. It supports policy-makers in adopting appropriate responses to emerging innovation needs, trends and phenomena. It analyses framework conditions as well as barriers and drivers to innovation and innovation policy, and offers intelligence on international developments in these fields. INNO-Grips is part of the European Commission’s PRO INNO Europe portal (http://www.proinno-europe.eu/), a focal point for innovation policy analysis and cooperation.

INNO-Grips has two strands of activity. One concentrates on innovation policy (this newsletter is part of this strand), the other conducts economic studies of framework conditions, barriers and drivers to innovation.

INNO-GRIPS WORKSHOPS (RECENT / FORTHCOMING):

INNO-GRIPS POLICY BRIEFS IN 2010 / 2011:

01 February 2011, Brussels: Innovation policies for high-growth SMEs

Innovation policy in an anti-cyclical conjuncture (summary in this newsletter)

30 May 2011, Budapest: Policies in support of service innovation

Innovation policy in support of high-growth innovative SMEs (expected: April 2011)

FURTHER RELEVANT EVENTS IN 2011: 31 May 2011, Budapest: Perspectives of Innovation Policy in Europe 2011 (PIPE 2011) Conference (http://www.pipeconference.eu)

Policies in support of service innovation (expected: June 2011) The impact of regulation on disruptive innovation (expected: November 2011)

The INNO-Grips policy analysis and monitoring is carried out by empirica GmbH, Bonn (http://www.empirica.com) and ICEG European Center, Budapest (http://www.icegec.hu), with support from Institut der deutschen Wirtschaft Köln Consult GmbH, Cologne (http://www.iwconsult.de), based on a service contract with the European Commission, DG Enterprise and Industry, running until the end of 2012.

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// IMPRINT

INNOVATION

POLICY NEWS02 The INNO-Grips Newsletter

IMPRINT This INNO-Grips newsletter has been prepared by ICEG European Center, Budapest, Hungary, on behalf of the European Commission, Enterprise and Industry Directorate General.

Editors: Olivér Kovács, Renata Anna Jaksa (ICEG European Center) Design and Layout: KITZ.KOMMUNIKATION GmbH Werbeagentur, Bonn © European Communities, 2011. Reproduction is authorised provided the source is acknowledged.

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