Presentación Morris Teubal

Recent Changes in Innovation Policy and Innovation Policy Formulation in Chile Comments and Suggestions (Preliminary, January 2010 ) Morris Teubal

Acronyms
BS-Business Sector; S/E-Systems/Evolutionary
CGD-Commission on Growth and Development [related to the WB]; ESTI--STE and I
I- Innovation; I-Policy: Innovation Policy; IC-Innovation Council
IMC-Interministerial Council; MF-Market Failure
IPR-Intellectual Property Regime
MOEd-Ministry of Education; MOEc-Ministry of th Economy; NIS-N’l Innovation System
STE-Science, Technology, Higher Education
SCA-Sustainable Competitive Advantages

A. Motivation
A consensus seems to exist that while new opportunities (new markets, global resources, etc)are emerging, the Chilean economy is confronting new global challenges or threats (enhanced competition even in areas where the country has a presently strong position) which require a multidimensional restructuring of Policy at various levels of Government.

A-2
The consensus holds despite the overall moderately good growth performance of the country during the last 2 decades or so when income per capital doubled
It is supported by the relative slowdown in overall economic growth from 7 % to about 3.5% during the last decade approximately
On the other hand, the global environment provides new opportunities : a recent report states that “ Chile could well increase its growth potential by 2% per year” (CGD, 2008)

A-3
Having said that , there is realization that materializing both the new opportunities and effectively confronting the new threats requires first and foremost a signficant reinforcement and restructuring of Chile’s Innovation Policies (macroeconomic policies will not suffice)
Innovation Policies should be broadly conceived to include both support of Business Sector (BS) Innovation (I) & Entrepreneurship; and support of the infrastructure for the above in the Science, Technology, Higher Education (STE), Training & Finance areas [see more below] .

A-4
A major factor underlying the new Innovation Policy requirements is the realization that enhancerd growth requires enhanced sector/export diversification , including diversification beyond current leading sectors based on natural resources , such as copper and mining, fisheries,etc
(Imbs and Wacziarg 2003; Klinger and Hausmann 2007, Rodrik 2007)

A-5
Other important factors to be strengthened relate to the so called Weak Spots of Chile ( See CGD 2008, IC 2007, 2008),
Human Capital
R&D
Reinforcement of both factors is necessary both to assure further expansion of (and Value Added generation in) ‘traditional‘ sectors and for the emergence and growth of new sectors/clusters (diversification).

A-6
The expansion of the knowledge base, R&D and of the Human Capital content of Chile’s output (Chile lies low in these indicators compared to other ‘comparable’ countries’) will contribute to prepare the country for a transition towards a Knowledge Economy configuration

B. Background and Objectives
In 2006, a new policy organization, the Innovation Council (IC), was created.
IC is a Knowledge-oriented, Strategic (Innovation) Policy institution/organization directed to advise the Government on a new Economic Growth Strategy for the Country with a focus on Innovation and Structural Change.
Its task includes ‘budgetary allocations for innovation’ and ‘a longer view of what are promising future sectors..’ (see CGD 2008)

B-2
The focus of the two reports put out by the IC (2007, 2008) is Innovation Policy broadly conceived to include actions directed both to the Business Sector and to the STE, Training and Financial infrastructure supporting firms, sectors and clusters.
Policies should be viewed to include both incentive programs, regulatory/institutional changes (e.g IPR) and ‘other actions’, particularly concerning the Policy System itself [‘institucionalidad’].

B-3
Thus ‘Innovation Policy’ would include e.g
Incentive Programs oriented directly to promote R&D/Innovation in Firms
Venture Capital Policies
Industrial Policy e.g Policy Targeting of new clusters or reinforcement of existing clusters
Support of Basic Research at Universities and Support of Specific, mission-oriented technological infrastructures e.g in Nanotechnology

B-4
Creating New Policy Institutions
Two examples from the Chilean context: an Interminis- terial Council (IMC) for high level approval of Strategy and for Coordination ; and (as expresed in the IC reports and supported by recent research) a Knowledge /Research Unit --the Innovation Council itself-- for further defining the Vision and Set of Strategic Priorities which underpinn Innovation Policy Objectives
[Strong reasons to locate them at the highest ‘level’ of Government (President /Executive level)-see below]

B-5
The functional activity or outputs of the above institutions
e.g setting new strategic priorities in light of changing circumstances
Governance of the Innovation Policy System
links and interactions among organizations at the various Levels of Government; and decision making profiles concerning objectives and budgeting (e.g role of Ministry of Finance)

B-6: Objectives
This presentation will comment on two specific areas of Innovation Policies (as reflected in the reports and other documents and in the relevant literature)
The Strategic Level of Innovation Policy and Apects of the overall I-Policy System
This is centraly related to the IC Priority “Institucionalidad”
Programs oriented to Direct Support of R&D/Innovation in (“ Business Innovation” Priority)

B-8
It will also make some general comments on the overall conceptual framework underlying the New (partly actual, partly proposed) Innovation Policy for Chile
In this connection it should be mentioned that the two reports put out in 2007 and 2008 are of outstanding quality and , according to my opinion, lie at the forefront of Strategic Innovation Policy documents of their kind.

B-9
The following evaluation is ‘preliminary’; it will undoubtedly change and be corrected after the predicted interaction and analysis that is part of the current mission

C. Comments on “Strategic Level of (Innovation) Policy ”
I will first present the Notion and General Principles of Strategic Innovation Policy (SIP) based on the literature and on experience of other countries ( some EU and Asian countries, and recent efforts in Israel in this direction)
I will then comment on some aspects of the Strategic Policy proposals (focus on “institucionalidad”) appearing in the Innovation Council documents

C1: SIP-Notion and General Principles
The s trategic level of Innovation Policy or SIP is a new and emerging layer/area of Innovation Policy which complements the operational level which countries promoting innovation already have
Two Main Tasks
Generate a Vision which comprises a number of items including Overarching National Goals like growth, employment, education, health, environment, etc
Setting Strategic Priorities in the relevant areas, technologies and sectors

C1-2
Strategic Innovation Policy is an appropiate response to the turbulent global environment and the radical uncertainty currently facing policymakers
These factors add to the complexity of Innovation Policies (already due to the large number of policies and policy areas and their links ) since policies should be aimed at moving and uncertain targets

C1-3
Thus, frequently the degree of fitness (or successful adaptation) of the actual set of policies of a country to the global/domestic environment (including challenges and opportunities) will be low-actual policies may respond to outmoded/obsolete objectives

C1-4
It follows that it is crucial that setting and re-setting Innovation Policy Objectives be an explicit, ongoing process (and one directly related to determining strategic priorities)
Alternatively, since policy objectives are not obvious any more, they should be explicitly determined through “search, research and discovery”-a Knowledge Intensive Process

C1-5
Having said that, it is important to mention that Strategic Innovation Policy is an area of ‘Knowledge’ which is still in its infancy.
More specifically, the methodology for determining Strategic Priorities is definitely in a Pre-Paradigmatic Phase

C1-6
The complexity of Innovation Policy also relates to a Third SIP Task (beyond Vision and Strategic Priorities), namely
“ articulating a new set of priorities in terms of a new Innovation Policy portfolio ”
This because implementing any one priority may imply several policies; and any one policy may affect several priorities

C1-7
Probably not unlike the fact that “one gene performs many functions and each function is usually encoded by more than one gene”, a phenomenon termed “pleiotropy” (Scientific American, January 2009, p.58)
This relates to the complementarity /substitutability among policies, at a point in time and through time, I.e dynamic policy coordination

C1-8
Our tentative conclusion is :
“ A well implemented Strategic Level of Innovation Policy may facilitate (or be a necessary condition) for a timely adaptation of a country’s policy portfolio”
This because Policy Makers will continuously be able to refer, prior to restructuring policies, to an unpdated set of priorities reflecting both dynamics & uncertainty
Needless to say that the advantages of a such a level of policy will depend, among other factors, on the adequacy and sophistication of the process of setting priorities

C1-9: Strategic Policy is not Planning
Strategic Innovation Policy is not Central Planning
Priorities will include ‘Functional/horizontal’ topics e.g promoting commercial innovation in general; or promoting excellence in STE (whose articulation may involve Horizontal/Neutral Support); and not only ‘Thematic/vertical’ topics e.g promotion of an Aquiculture Cluster (whose articularion may require Policy Targeting)
Priority setting should not be a purely Top-Down process. Agents from business sector, academia, civil society, experts etc will always be present, so bottom up aspects of the overall process will always be central

C1-10
Due to Market and/or System Failures-the ‘unaided’ working of markets may encounter difficulties in allocating resources to STE and (at least to some areas of) commercial Innovation
Relying only on ‘markets’ (assuming they exist, which may not be the case) may bias the allocation of ESTI resources e.g to certain areas, towards the short term
Moreover, several Advanced Countries (with Market Economies) have during this decade made or are making efforts to establish a Strategic Level of Policy; and priorities’ articulation in terms of policies is seemingly enhanceing the role of Policy Targeting

C1-11: Other SIP Topics
Components of “Vision”
Two Types of Strategic Priorities: Functional and Thematic (also, Priorities may be more or less specified, and this will change with time)
Initial Tasks: List of Areas and Points of Entry
Top Down and Bottom Up I-Policy processes
Need for a Specialized Policy Institution and Need to build Sophisticated Capabilities
An ‘Integrated’ I-Policy Profile (preliminary)

C1-12: An “Integrated” Innovation Policy System Profile ( preliminary, for discussion )
Highest Government Level [Vision + Priorities}
For Chile : IMC & Innovation Council (IC) with direct links to President
Middle Government Level [-  Policy “Selection”]
Level of Ministries-Industry, Education, Economy, Finance
‘ Policy Selection’ requires articulation of Vision + Priorities, with participation of institutions at the ‘Highest’ and ‘Lower’ levels
Lower Government Level [Policy execution]
Agencies in charge of detailed design of policies, funding and policy implementation

C2: Comments on SIP proposals (‘Institucionalidad’)
I will be focusing more on ‘Institutional’ and ‘Overall Policy System’ issues and less on other SIP-related issues emerging from the IC reports
I. Concerning the methodology for identifying cluster priorities , I do think that a good job was done (though I may have more specific comments later on), and the methodology used would seem to be very useful and interesting at least for some types of priorties

C2-2
II. Concerning the Overall Policy System , I agree about -
The importance of a Systemic Approach, due to needs of coordination
The Division, broadly speaking, of the National Innovation System into two subsystems: Higher Education and Science (I would call it STE) and Innovation and Entrepreneurship (BS plus )
The need that the highest level of the State should be in charge of directing the system, with implications about the reorganization of the MOEd and MOEc

C2-3
III. General Comment on ‘Institucionalidad’ *:
“ It would be desirable to be more specific and to clarify the overall design of the proposed Innovation Policy System, including a clear list of institutions or organizations with tasks and responsabilities related to Vision + Priorities, Policy (Profile) Selection, Detailed Design & Policy Implementation, and Policy Assessment; the levels of Government where they operate; and the links within the system and with the NIS”
* answers to some of my specific remarks/comments may exist in the relevant documents, parts of which may not have yet been covered in detail

C2-4
While almost all of the elements are there, some aspects could still be further clarified . Consider e.g the following statement:
IV. The overall direction and responsibility for the new Strategy should lie in an Interministerial Council (IMC), with central Ministries being Education, Hacienda and Economy, and presided by the latter Ministry. The IMC would
define the National Innovation Strategy based on the proposal of the Innovation Council
Coordinate budgets for all the NIS
Define Public Policies in support of Innovation; &
management control of the Ministries and Agencies in charge of execution

C2-5
Comments : should emphasize
(i)The need for a specialized, professional body with strong capabilites like the Innovation Council who could perform the basic strategic functions (Vision + Strategic Priorities), which seemingly could not be performed by the IMC nor by its Executive Secretariat
( in all fairness this was mentioned or implied later on in the document… “ should accelerate the legal existence of the IC as a permanent organization advising the President..in charge of proposing the central aspects of the National Innovation Strategy…)

C2-6
(ii) Building the SIP capabilities in such a Knowledge-creating institution should be a central aspect of the new Strategy for Innovation
This would include formal learning domestically and abroad; Learning by Doing and Codification of Experiences; Benchamarking; International Networking e.g participation in the “Science and Science Policy” network, participation in International Symposia, etc
(iii) Both the Knowledge -Creating organization and the above mentioned Political Mechanism (the ICM) should join forces and mutually interact at the highest level of Government.

C2-7
(iv)Their main task would not be the policies themselves . Rather they would be
generating the overall Vision and Strategy
obtaining the political will and consensus required for
*Vision & strategy approval, &
* for proceeding with (i) policy selection and (ii) detailed policy design & implemention, to be undertaken at ‘lower’ levels of Government (Ministries and Funding/Implementation agencies)

D. Direct Support of R&D/Innovation in Firms
The focus in this last Section will be on recent developments in the Conceptual Framework concerning Policies directed to promote innovation in firms and in the BS more generally speaking.
In a subsequent draft, I will –in light of the above-comment on aspects of the IC’s formulation of this topic

D1. Introduction and Background
A new synthesis of Innovation Policy is emerging -the‘Systems/Evolutionary (S/E) perspective to Innovation Policy- whose formulation-starting two decades ago-has accelerated as of late.
See e.g Sercovich and Teubal 2009 among others, where a distinction between the ‘Old’ and‘New” perspectives is analyzed (one aspect being ‘emergence’ of SIP as an important component of Innovation Policy)
These changes parallel changes in the view about the role of the State in promoting economic growth ( even more now with the current global crisis)

D1-2
Innovation Policies-which we have seen covers a wide set of ‘areas’- can be classified as follows:
Incentives (e.g Taxatio n) and incentives/promotion programs (e.g direct, subsidy support of innovation in firms )
Institutional/Regulatory changes e.g reinforcment of IPR, regulation & standrads for new markets/industries; regulation of Capital Markets; regulation of the Communications Industry and Market, etc
Other Policy Actions e.g. changes in the Innovation Policy System and its Governance e.g creating or legitimizing a Knowledge Creation -oriented Innovation Council as a SIP instittution at the highest level of Government; improved STE and I policy coordination; etc

D1-3
In our view the Washington Consensus & Neoliberal view (part of ‘Old’) - which asserted that a set of generic ‘reforms’ largely independent of context, were sufficient for Ec. Dev.- will undergoe a number of changes:
(i) An emphasis on ‘capabilities’ ( e.g in the BS but also ‘policy capabilities’)and of ‘structural changes’ e.g the emergence of new sectors/clusters/markets as engines of growth

D1-4
( ii) T he need for a Strategic Level of Policy
(iii) Wider Acceptance of Subsidy-Based Policy Programs involving, Direct Support of Innovation in firms
(iii) Increased legitimization of Policy Targeting ie. Policies targeting emergence (or re-inforcement) of e.g (new) markets/sectors/clusters (Structural Changes) (Saviotti Pyka various papers; Rodrik 2004,2008; Avnimelech/Teubal 2008a,b, etc )

D1-4
Objectives
Present the building blocks of a S/E perspective to Incentives’ Policies and Programs (‘New’)
Contrast these with the ‘Old’ approaches
Propose a “Benchmark” subsidies-based, Program of Direct support of Innovation in Firms
Comment on Chile’s Incentives policies and programs (in a later draft)

D2: ‘Old’ and ‘New” Approaches to Incentives and Incentives Programs
‘ Old’
Only one incentives’ program, which has to be Horizontal and Neutral
Horizontality means that the incentives’ program supports a function-BS R&D/Innovation- rather than a specific technology or industry ( support of the latter would require a Targeted Program rather than a Horizontal one)
The program would be open to all firms in the BS for whatever BS R&D/Innovation program they want, with no preference or selectivity in favour of specific technologies or industries.

D2-2
Strong preference for R&D-based innovation rather than innovation based on Design, Engineering, Technology transfer, Learning/Training, Consulting Services and Process Start Up. This discriminates agains Indusrializing Economies, and against Non-High Tech sectors in Advanced Economies
Neutrality of Incentives : either for ‘neoclassical’ economics reasons; or (a more advanced view) due to‘ignorance’ of policy makers about the locus and extent of Market Failures.
Policy Learning, which may generate some selectivity of incentives whithin what would still be a broadly Neutral environment and Horizontal Program, is ignored.

D2 -3
‘ New’
Rather than one incentives’ program in support of innovation in firms, a country might have a set of incentives’ programs,
Some oriented to R&D/Inovation within individual firms (or projects within individual firms); others to consortia of firms or of firms and Universities) whether for regular innovation/R&D or for ‘generic’ or ‘pre-competitive’ or infrastructural R&D ( Like Israel’s Magnet program) ; and still others, focused both on innovation and other functions or infrastructures, oriented to a wide set of actors involved in the Emergence of new sectors, markets or clusters

D2-4
A country’s policy portfolio would involve, among other policies, a mix between Horizontal and Targeted Programs. There is a time-dimension to the mix .
Targeted Programs
Are oriented to promote Structural Change (new sectoers, clusters, markets) or specific STE infrastructres (or both in a coordinated way)
e.g areas such as Aquaculture in Chile or Stem Cells, Water Technologies/Industry or a Venture Capital Market in Israel
Our Hypothesis : A necessary but not sufficient for implementing Targeted Programs is existence of one or more areas where some firms achieved Sustainable Competitive Advantages (SCA) (or exisence or appearance of ‘Class A Market Forces’)

D2-5
Triggering (and Sustaining) ‘Emergence’ of a new sector/cluster, etc may require inducing, a ‘cumulative process with positive feedback’ in the relevant area (‘Dynamic Increasing Returns’ or a Cascade or Autocatalytic Process, like that induced by Israel’s VC-directed program-Yozma, during 1993-6/7, see Avnimelech and Teubal 2006)
----------
There is a ‘dynamic link’ between Horizontal and Targeted incentives programs e.g two or more decades of implementation of a Horizontal Program may generate ‘targeted policy options’ i.e areas where a few firms have attained SCA. These areas might then be ‘pre-selected’ for targeting (Avnimelech and Teubal 2008a).

D2-6
Additional issues (suggested among other things by Yozma’s success) are:
the criteria for ‘Selection of sector/cluster/market for Targeting’
the ‘Design’ and Timing of Targeted Programs

D2-7
‘ Targeted Programs’ are an absolute requirement in the present hyper-competitive global environment
While in some cases ‘unaided’ Market Forces could do the job of generating a ‘socially desirable structural change’, in others, an unaided ‘emergence’ process would be ‘too little and too late’.
Thus, to some extent and up to a point, the stronger the firms in a particular new area (before emergence of a new sector or cluster) the stronger the potential justification of adopting a policy targeting perspective.

D2-8
Two Additional Points
Targeted Policies involve not only incentives but also Specific Technological Infrastructures and Institutional Changes
e.g like strengthening of IPR in some cases when the objective is triggering emergence of a Biomedicine Cluster and achieving a critical mass of R&D and Innovation Capabilities

D3: A Benchmarck Direct Support of Innovation- in Firms’ Program
A list of Topics follows with * indicating those to be discussed
Preliminary Planning
Program Objectives*
Functions to be Supported*
Initial Budget and Instruments*
Incentives: Horizontal/Neutral or “Mix”
Implementation*
Summary

D3-2: Specific Objectives
Creaction of Innovation Capabilities
May contribute to endogenziation of Innovation and to enhanced ‘demand’ and Program uptake.
It will assure that this program might be linked with other ‘new’ programs/policies in the future
Learning (both individual and collective) is central for Capability development-  implications for minimum size of program and initial program uptake (see below)
Learning is not only technological learning , but refers also to the other functions such as marketing, production, exporting and linking with partners and suppliers

D3-2
Promotion of Entrepreneurship
And new firm formation
(Eventually) Identification of Areas with Sustainable Competitive Advantages (SCA)
In the medium term (e.g 5-8 years in successful cases) after sufficient experimentation and learning have taken place
A related objective in some cases could be to ‘ create conditions for reduction of Government’s contribution to BS R&D/Innovation’.
Sufficient capability development will assure that this objective, in principle, could be attained.

D3-3: Functions to be Supported
Technology Transfer
Design
Engineering
Learning/Start Up in the utilization of new process equipment
Training of the labor force
Consultancy Services
R&D (Depending on country/context/sector etc, could be a ‘minority’ function in some cases [but not in others]. It never should be excluded from the set of possible fucntions to be supported).
A major issue is what fucntions to support and what not; and how are these defined empirically. There may be a need for an experimental stage; may have to utilize a ‘residual functional support’ item, and there may be’selected functions upgrade’ in the future.
The rate of subsidy may depend also on the function to be supported

D3-4: Budget and Instruments
Program implementation should aim to achieve fast a critical mass of firms.
They will then be able to sustain a significant learning/capability development process, thereby futher assuring growth of the ‘infant’ group of innovative firms.
This means a) having sufficient budgets initially; b) assuring sufficient program uptake initially; c) assuring sufficiently fast growth of budgets.
Trunkation of the process will generate significant Disenchantment with the Government and its effort to harness Innovation Policy for Growth (remember that the returns to the private sector are largely medium/long term; and related to that , there may be initially a relatively large number of failures). [If conditions do not hold it might be worthwhile to delay implementation till an improvement takes place]]

D3-5
There are strong advantages of having a subsidies-based program (tax concessions will not be effective with a large segment of the firms concerned, at least initially). This would be even more so if at least 1/3 of the subsidy could be given ‘upfront’
Grants may later be transformed into a ‘conditional grants’/’conditional loans’ scheme.
Loans would involve high transactions costs, and will diminish the desire to take risks and therefore a significant aspect of the learning process ( which is : “how to identify high risk/high return projects; and how to manage a reduction of risks and the exploitation of new opportunities”, etc)
Competitive Grants should not be considererd , at least initially, in an LDC context ( the high transactions costs would overburden those firms which pioneer making use of the program)

D3-6: Horizontal/Targeted
There are strong advantages of having an Horizontal/Neutral Scheme at the beginning
In some cases, when areas of critial importance and clear SCA exist at the ‘beginning’ and are known, the horizontal program could be complemented by a Targeted program directed to trigger emergence in the selected indusry/sector/technology, etc
Over time, a Horizontal Program may metamorphose into a series of targeted programs (if areas of SCA have been identified) + a ‘smaller’ or ‘residual’ Horizontal program (possibly at lower rates of subsidization).

D3-7: Implementation
‘ Demand’ for the program (and for Innovatioin by firms) will depend on the scope and strength of Learning, which, as mentioned before, will depend on the initial size of the program (and initial program uptake).
No less important, initial uptake will also depend on the ‘disposition, openness, ethos and capabilities’ of policy makers. Their flexibility and disposition to learn will determine whether a right ‘program design’ will eventually be achieved.
It will also enable them to change program configuration through time; as well as to link with program/policy follow ups

D3-8
The overarching objective of attaining ‘a cumulative process with positive feedback’ will depend on having successfully
triggered a collective ‘learning to innovate’ process;
b) linked with follow up programs (e.g targeted ones) and policies (e.g promoting private financial institutons specialized in innovation finance )

E. Further Work(beyond improvement of current draft)
Comment on Chile’s Incentives Programs
Some General Comments on the Innovation Council Documents
e.g it might be useful to introduce more explicitely the notion of System Failure (a S/E concept) and link it with the well known Government and Market Failures
Comments on Council of Innovation Priorities and Priority making (and Policy Targeting)
e.g links between Functional and Thematic Priorities; and the overall set of Priority Areas

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