This document discusses developing a path dependent model of the national innovation system for a small country. It aims to account for latecomer advantages and ensure sustainable economic development. It poses questions about how path dependency affects national innovation systems and how small countries can utilize latecomer advantages. The document proposes examining innovation capabilities, education, and public policy as they relate to the economic, education and political systems. It will develop concepts of the national innovation system and discuss applicability in different country groups. The theoretical perspective is that innovation and learning are socially embedded processes.

1. How to improve the national
innovation systems of the catching-up
economies ?
Urmas Varblane
University of Tartu

2. THE PATH DEPENDENT MODEL OF THE INNOVATION
SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN
THE CASE OF A SMALL COUNTRY
Aim - to develop the model and implementation
mechanisms of the national innovation
system for the small country, which accounts
for the path dependency, considers late-
comer advantage and ensures sustainable
economic development

3. THE PATH DEPENDENT MODEL OF THE INNOVATION
SYSTEM: DEVELOPMENT AND IMPLEMENTATION IN THE
CASE OF A SMALL COUNTRY
• Which characteristic features and problems of the national
innovation system are caused by the path dependency?
• Which should be the structure of the national innovation
system in order to account for path dependency?
• Which are the major advantages and disadvantages of
latecomers and how to utilise those advantages by the national
innovation system?
• How does the country size affect the formation and
development of national innovation system?
• Which implementation mechanisms are suitable for the path
dependent national innovation systems of small countries?

4. The framework of the research proposal

5. The implementation plan of the project –
subtopics, working groups
• NIS partly overlaps with the three systems:
economic-; education- and political system =>
Working groups:
• Innovation capabilities, its factors and development
in the economic system
• Human- and social capital: the role of education,
research and knowledge in the national innovation
system
• The role of the public policy and public sector in
the innovation system.
• Methodology: how to measure innovations and their
effects.

6. Structure of the presentation
• development of the concept of the national
innovation system, its elements and function
• applicability of national innovation system approach
in different groups of countries
• advantages and disadvantages of catching up
economies as latecomer economies
• major path dependency related problems in the
building up of the national innovation systems in
catching up economies
• Conclusion and recommendations for using
appropriate policy measures.

7. Theoretical perspective on innovation and learning:
as socially embedded (Lundvall, 2003)
– Innovation is a process that is:
• Cumulative
• Nonlinear
• Path dependent
• Context dependent
• Continuous
• Interactive – Firms do seldom innovate alone
– Innovation and learning
• You learn from what you do
• Innovation as joint production of innovation and competence
• Learning is a socially embedded process – social capital is
important

8. Development and diffusion of the concept NIS
• Historical roots (Friedrich List,1841) - ’national systems of
production’ - a wide set of national institutions including those
engaged in education and training as well as infrastructures such
as networks for the transport of people and commodities
• Freeman 1982 and Lundvall 1985 – National Innovation System
• innovation process should be treated in a systematic manner
- need for systemic approach, which integrates institutions to
create, store, and transfer the knowledge, skills and artefacts.
(OECD,1999
• understanding innovation as a complex interactive learning
process
• learning is important => key element in both the dynamics of
the system and as a key agent in binding the whole system
together.
• comparative - could not be an ideal NIS, which fits different nations with
their specific socio-economic, political and cultural background.

9. Definitions of NIS
• Innovation System - a system for generating and diffusing
new technologies - every country has such a system, even if it
is weak or low in capacity.
• C. Freeman (1987, p. 1) ‘the network of institutions in the
public and private sectors whose activities and interactions
initiate,import, modify and diffuse new technologies’.
• B.-A. Lundvall (1992, p. 12) narrow NIS ‘organisations and
institutions involved in searching and exploring – such as R&D
departments,technological institutes and universities’.
• broader NIS includes ‘all parts and aspects of the economic
structure and the institutional set-up affecting learning as well
as searching and exploring – the production system, the
marketing system and the system of finance present themselves
as sub-systems in which learning takes place’.

10. Definitions of NIS
• “The elements and relationships which interact in the
production, diffusion and use of new, and economically
useful, knowledge… and are either located within or
rooted inside the borders of a nation state” (Lundvall,
1992; p.12)
• “A set of institutions whose interactions determine the
innovative performance of national firms” (Nelson,
Rosenberg, 1993; p.5)
• “The national institutions, their incentive structures and
their competencies, that determine the rate and direction
of technological learning (or the volume and
composition of change-generating activities) in a
country” (Patel and Pavitt, 1994; p.12)

11. Definitions of NIS
• “That set of distinct institutions which jointly
and individually contribute to the development
and diffusion of new technologies and which
provides the framework within which
governments form and implement policies to
influence the innovation process. As such it is
a system of interconnected institutions to
create, store and transfer the knowledge, skills
and artefacts which define new technologies”
(Metcalfe, 1995;p.462-463)

12. Definitions of NIS
• C.Edquist (1997) - includes “all important economic,
social, political, organizational, institutional and other
factors that influence the development, diffusion and
use of innovations”
• Galli, Teubel (1997)- “a historically grown
subsystem of the national economy in which various
organizations and institutions interact and influence
each other in the carrying out of innovative activity”.
• NSI as the set of organizations, institutions, and
linkages for the generation,diffusion, and application
of scientific and technological knowledge operating
in a specific country .

13. Systemic approach to innovation
• According to Ingelstam (2002):
– 1. a system consists of two kinds of constituents: there are
firstly, some kinds of components and secondly, there are
relations among them. The components and relations
should form a coherent whole (which has properties
different from the properties of the constituents);
– 2. the system has a function – that is, it is performing or
achieving something;
• 3. it must be possible to discriminate between the
system and the rest of the world; that is, it must be
possible to identify the boundaries of the system. If
we, for example, want to make empirical studies of
specific systems, we must, of course, know their
extension.

14. Elements in the system of innovation
• Players or actors. Organizations : firms (normally
considered to be the most important organizations in
Sis), universities, venture capital organizations and
public agencies responsible for innovation policy
etc.
• Rules of the game. Institutions are “sets of common
habits, norms, routines, established practices, rules or
laws that regulate the relations and interactions
between individuals, groups and organizations,”
(Edquist & Johnson, 1997).

15. Figure 1: Indicative Issues, Actors and Activities
in a Simple Science, Technology and Innovation System
Social and Human
Capital
Universities
S&T Training
and Education
Absorptive Capacity
‘Follower’ firms;
Intermediate and End
Consumers and
Professional Users
Market for Goods
and Services
Research Capacity
Universities; Govt
Laboratories
Basic Scientific
Research
Technology and
Innovation Performance
‘Creative’ Firms
Applied RTD and
Product /Process
Development
Knowledge
Users
Knowledge
Creators
Public
Sector
Private
Sector
Nauwelaers, 2003

16. Edquist, 2001

17. A generic national innovation system (Arnold, E., Kuhlman, S, 2001,
RCN in the Norwegian Research and Innovation System. Available at www.technopolis-
group.com)

18. Boundaries of innovation systems – types of systems
• Spatially, sectorally,functionally=>
• National Innovation Systems (Freeman, 1987;
Lundvall, 1992; Nelson, 1993);
• Regional Innovation Systems (Camagni, 1991;
Cooke et al., 1997; Braczyk et al., 1998; Cooke,
2001; and Asheim & Isaksen, 2002);
• Sectoral innovation systems ( Breschi & Malerba,
1997, Malerba, 2004).
• “Technological innovation systems” (Carlsson,
1995; Carlsson & Stankiewicz, 1991)

19. Roots of the systemic approach to innovation
• evolutionary theory (Nelson & Winter, 1982).
• firms are a bundle of different capabilities and
resources (Eisenhardt & Martin, 2000; Grant, 1996;
Spender, 1996) which they use to maximize their
profit.
• knowledge is not only information, but also tacit
knowledge; it can be both general and specific and it
is always costly.
• Knowledge can be specific to the firm or to the
industry (Smith, 2000).
• The innovation process is interactive within the
firms and among the different actors in the innovation
system.

20. Activities in the system of innovation
(Chaminade, Edquist, 2005)
function of SIs is to pursue innovation processes: to
develop and diffuse innovations.
‘activities’ in SIs are those factors that influence the
development and diffusion of innovations. Four
approaches
1) innovation production process, looking at the
different activities needed to turn an idea into a new
product or process. Edquist, (2004), Furman, Porter et al., (2002)
2) knowledge production process - how knowledge is
created, transferred and exploited (emphasis on the
channels and mechanisms for knowledge
distribution). (David & Foray 1994; Johnson & Jacobsson, 2003;
innovation systems as learning systems (Lundvall, Johnson et al., 2002).

21. Activities in the system of innovation
(Chaminade, Edquist, 2005)
3) organizational performance - organizations as the
starting point, identifying the activities of the
different organizations that have an impact in the
innovation system (Borrás,2004).
4) innovation policy as a focal point => what activities
(and organizations) in the innovation system can be
stimulated by public intervention (OECD and other
international organizations)
criticism - it considers only those activities that can be directly
affected by public intervention

22. Chaminade, Edquist, 2005
• what is the division of labor between private and
public actors in the performance of each activity.
This will provide policymakers with a new perspective on:
a) what role they can play in stimulating different
activities in the system of innovation;
b) once the complex division of labor between public and
private actors has been unfolded, what could be the
appropriate instruments to do this;
c) how to identify future research needs.

23. Activities in the system of innovation
proposed by Chaminade, Edquist, 2005
I. Provision of knowledge inputs to the innovation
process
1. Provision of R&D - creating new knowledge, primarily in
engineering, medicine and the natural sciences.
2. Competence-building (provision of education and training,
creation of human capital, production and reproduction of
skills, individual learning) in the labor force to be used in
innovation and R&D activities.
II. Provision of markets – demand-side factors
3. Formation of new product markets.
4. Articulation of quality requirements emanating from the
demand side with regard to new products

24. The linear model of innovation is dead
Basic research gives
birth to an idea and
relevant new
knowledge
Applied research turns
the idea into something
practical
Industry development
of new products and
processes
The company brings
the new product to the
market
The old belief was that
industrial innovation was
predominantly the result of
ideas born in universities and
transformed by companies.
NIFU-STEP, 2005

25. Activities in the system of innovation
proposed by Chaminade, Edquist, 2005
III. Provision of constituents for IS
5. Creating and changing organizations for the
development of new fields of innovation (e.g.enhancing
entrepreneurship to create new firms and intrapreneurship to diversify existing
firms, creating new research organizations, policy agencies, etc.)
6. Provision (creation, change, abolition) of institutions
(e.g. IPR laws, tax laws, environment and safety regulations, R&D investment
routines, etc) - influencing innovating organizations and innovation
processes by providing incentives or obstacles to innovation.
7. Networking via markets and other mechanisms, incl.
interactive learning between organizations (potentially) involved in
the innovation processes. Integrating new knowledge elements developed in
different spheres of the SI and coming from outside with elements already
available in the innovating firms.

26. Activities in the system of innovation
proposed by Chaminade, Edquist, 2005
IV. Support services for innovation firms
8. Incubating activities (e.g. providing access to
facilities, administrative support, etc. for new
innovating efforts).
9. Financing of innovation processes and other
activities that can facilitate commercialization of
knowledge and its adoption.
10. Provision of consultancy services of relevance for
innovation processes, for example, technology
transfer, commercial information and legal advice.

27. Problems of the building the national innovation
system in catching-up economies
• National innovation system approach - proposed
based on the experiences of high income economies,
(strong accumulated knowledge base, stable and well
functioning market system, developed institutional and
infrastructure support of innovation activities).
• Catching-up economies are different: lower income
level, less accumulated knowledge, weaker
institutional support etc. plus
• Path-dependency => common command economy
past, which has influenced the whole logic of
building up their national innovation system

28. Problems of the building the national
innovation system in catching-up economies
• Catching-up economies own latecomer
advantages - extremely high dynamism=>
special requirements also to the innovation
system.
• Impossible automatically transplant the
national innovation system concept based on
the technology frontier countries from Western
Europe in the catching-up economies of
Eastern Europe.

29. Advantages and disadvantages of coming late
• Gerschenkron (1962) initial ideas ‘patterns of
industrialization’(imitation, scale economies, access to the
modern technology at lower costs; access to already established
markets etc.)
• Perez and Soete (1988) - potential disadvantages of latecomers -
showed that scale economies are industry-specific and
technology-specific.
• Bell and Pavitt (1997) not sufficient for the catching-up country
simply to install large plants with foreign technology – the
capacity to absorb the new technology into the human capital
stock is also critical.
• Active learning policies are needed to create “absorptive
capacity” defined as “the ability of a firm to recognise the value
of new, external information, assimilate it and apply it to
commercial ends” (Cohen, Levinthal 1990, p. 128

30. Advantages and disadvantages of coming late
Abramovitz (1994) accepted the potential for catch-up by
latecomers, but suggested that exploitation of the potential is
not an automatic process. He proposed that differences in
countries’ abilities to exploit this potential might be explained
with the help of two concepts: technological congruence and
social capability.
technological congruence - degree to which the leader and the
follower country are congruent in areas such as market size,
factor supply, etc.
social capability - capabilities that the developing countries have
to acquire in order to catch up, especially the improvement of
education and business infrastructure and more generally
technological capabilities (R&D facilities etc.).
Freeman (1999) added capacity to make institutional changes
(social capability for institutional change - to overcome
learning and technology divide(Arcena, Sutz,2003)

31. “Social capability” (M.Abramowitz)
(1986, pp. 387-390; 1994a, pp. 34-35; 1994b, p. 88):
not only individual skills (acquired through education) but
“collective capabilities” - what organizations in private and
public sector are able to do and how it is supported (or
hampered) by broader social and cultural factors.
Social capability
• technical competence (level of education),
• experience in the organization and management of large scale
enterprises
• financial institutions and markets capable of mobilizing capital
on a large scale
• honesty and trust
• the stability of government and its effectiveness in defining
(enforcing) rules and supporting economic growth.

32. Technological capability
(Chandler, 1977) “the scale and scope” paradigm
• focused on the economics of large, integrated companies and the
social, economic and organizational capabilities needed to
support and finance them.
Nonaka and Takeuchi (1995) - concept “the knowledge-creating
company”
• emphasis on exploration and exploitation of technology and
getting the organizational prerequisites for that right (Japanese
success stories).
Cohen and Levinthal (1990) absorptive capacities - “the ability of
a firm to recognize the value of new, external information,
assimilate it and apply it to commercial ends”
(Kim 1997, p. 4) “technological capability” - “the ability to make
effective use of technological knowledge in efforts to assimilate,
use, adapt and change existing technologies.”
• Kim - three aspects of it: innovation-, production- and
investment capability

33. Capabilities and development - an integrated framework
(Fagerberg, Shrolec, 2007)

34. National Technological Learning (Watkins, 2007)
S&T learning
capacity
S&T learning
opportunities
Knowledge
generation
capacity
Capital
imports
Inward
FDI
S&T co-
operation
+
Knowledge
absorption
capacity
Education
R&D
Licensing
Diaspora
and Expats
Internet
Export
Customers

35. ‘Tree’ of national technological learning
Slow
learning
Passive
FDI-
dependent
Creative-
cooperative
Aid
supported
Creative-
isolated
Autonomous
Active
FDI-
dependent
Time
Human capital
accumulation

36. Six models of national technological learning
(Watkins, 2007)
• Traditionalist slow learning,
• Passive FDI-dependent,
• Active FDI-dependent,
• Autonomous,
• Creative-isolated,
• Creative-cooperative.

37. Advantages and disadvantages of coming late
• Big gap in technology =>potential for a rapid catch-up=>a
wide diffusion process of innovations needed(UNIDO 2005).
• East Asian vs.Latin America =>the importance of the
technology diffusion management
• market-induced imitation and organizationally-induced
technology transfer.
• Matthews (1999) indicates that those are passive
• East Asia =>active model of the technology diffusion
management, which leveraged those innovations and quickly
turned into technological capabilities and competitive products
• Linkage – Leverage - Learning
• Instead of establishing typical R&D support institutions
suggested by the experience of high income economies, they
developed a whole network of institutions for technology
diffusion and also organisational capabilities management.

38. Favourable condition for the diffusion of modern
technology
Three major groups of factors allows faster technology
diffusion
1) Latecomer advantage
2) Openness to foreign trade and investments
3) Foreign direct investments support diffusion of
technologies in host countries
R.Perkins, E.Neuymayer (2005) controlled
on three technologies: continuous steel casting;
shuttleless textileweaving looms,digital telephone
mainlines
Results: First and second holds, third not

39. Favourable condition for the diffusion of
modern technology
Additional factors supporting faster technology diffusion
4) Geographical location of the country – diffusion is
geographically localised” (Globermann et al, 2000;Milner,
2003)
5) Level of education. Well educated workers are more likely
aware about the new technologies and bale to master them
profitable.(Caselli, Coleman, 2001)
6) Social system heterogeneity. Learning through social
interaction.New technologies spread more slowly in socially
mixed populations (Takada, 1991, Dekimpe et al, 1998)

40. How technologies spread?
• Technologies do not spread instantaneously – diffusion is a
long process
• Models disagree about the reasons behind it
• Epidemic models =>information (Griliches,1957). Some
firms contact earlier with technologies
• Firms heterogeneity (Ireland, Stoneman, 1986)
differ by organisational, environmental etc. variables
(firms capital stock, human capital, available credit)
=> economic returns on adoptation are different (Blackman
1999).
CONSEQUENTLY = countries with skilled labour, high
capital labour ratio, low interest rates are first adopters.
They could also better absorb potential losses from the
absorption of technology (Bell, pavitt, 1997; Todaro, 2000)

41. Why and how latecomer economies could diffuse
technology more rapidly
Key assumptions
1. Latecomers could take advantage of technological
advantage made by first-comer
Directly - FDI, technology purchases (importing,
licensing)
Indirectly – knowledge spillovers (imitation, reverse
engineering, transfer of know-how by movement of
employees etc.
They can obtain technology cheaper – not paying the
full costs of R&D=>leapfroging decades of
technological porgress (Teece, 2000)

42. Why and how latecomer economies could
diffuse technology more rapidly
2. Latecomers are able to diffuse new technology
across their economic structure faster due to
latecomer advantage
Two sources of latecomer advantage:
a) Level of capital stock. They need to install capacity
– may choose technologies. Less inertia in
technological change (Clark, Wrigley, 1999; Amiti
2001)
b) Learning investments and increasing net returns
to adoption over time (they can take advantage of
accumulated learning of frontrunners about using the
new technologies). (Dekimpe et al, 2000)

43. General Background of Industrial
Development of Taiwan

44. Export
Commodity
Profile
1960 1970 1990 1999
1980
HCI Product
Agricultural
Product
Light
Industry
Product
50%
Wig Automobile Semiconductor
Textile
2003
Semiconductor, Mobile
Phone, DTV, Display,
Automobile, Ship-building,
etc.
79.8
%
14.1
%
6.1%
KOREA - Changes in Export Commodity Profile:
From Light Industry to Heavy Industry
1.2 Economic Take-Off with Outward-looking
Development Strategy (5/5)

45. Example of building a National Innovation System:
Korea (1)
Original condition:
• Unbalanced industrial development
– Strong final assembly industry, but weak capital goods and
system integration industry
• Unbalanced National Innovation System
– Underdevelopment of university research system
– Dormant industry-academic cooperation
• Lack of infrastructures for creative innovation
– Lack of investment in basic science
– Weak protection of intellectual property rights
– Underdevelopment of venture financing and support system

46. From supply push
To demand pull
Promote balanced
National Innovation System
Sustain infrastructure for
creative innovation
 Vitalization of university research
 Networking among Industry, academia, govt
Korea (2): Innovation Strategy
 Sustained investment for
basic science (KIAS)
 Increased protection for
intellectual property rights
 Promotion of venture companies
 Mission-oriented governmental
R&D programs
 Technology targeting

47. Latecomer firms (Mathews, 2007, 2005, 2002)
• strategic goal - to catch up with the advanced firms and to
move as quickly as possible from imitation to innovation.
• able to exploit their late arrival to tap into advanced
technologies (do not replicate the entire previous technological
trajectory)
• bypassing some of the organizational inertia that holds back
their more established competitors.
• Linkage with the global value chains as suppliers.
• Through linkage latecomer firm could acquire from more
advanced firms knowledge, technology, and market access
• It is this capacity to secure more from a relationship than the
firm puts in, that we call leverage.
• linkage and leverage can be repeated over again until firm or
group of firms enhance their capabilities and become,
potentially, advanced players (industrial learning).

48. Latecomer firms (Mathews, 2007, 2005, 2002)
• The institutional innovations involved are all concerned with
the capture of technologies in timely fashion;
• the building of capabilities in these technologies, such as in
government-owned R&D institutes;
• the diffusion of these capabilities as rapidly as possible to
the private sector (e.g. through a sequence of targeted R&D
consortia).
• Mathews calls it as the national system of economic learning
• the process involved is the management of technological
diffusion, or technology diffusion management.
• Technology Leverage Institution (TLI) is needed (like
Taiwanese Industrial Technology Research Institute, ITRI)
• task of the TLI is to identify technologies of interest to a
developing country, fashion strategies for acquiring
technologies, adopting, adapting and diffusing them to the
firms in the country, where they can be used to build new
businesses and industrial sectors.

49. Technology Leverage Institution (TLI)
• not be engaging in fundamental scientific research.
• would be concerned strictly with identifying and
evaluating available technologies.
• provide shared R&D services for existing and
emerging industries in the developing country.
• Technologies already being used are subject to
testing to see how they can be improved;
• technologies used by rivals and competitors are
constructed and analyzed;
• potential technologies that could substitute for the
ones in use are being evaluated.

50. Overview Industrial Technology Research Institute
(ITRI)

53. Sources of early mover and latecomer advantages

54. Generic Technological Capability Development
Routes of Latecomer Firms (Poh-Kam Wong, 1999)
• "Reverse Value Chain" Strategy (from OEM to
ODM to OIM or OBM)
OEM (Original Equipment Manufacturing);Original Design Manufacturers (ODM)
(Original Idea Manufacturing OIM); (Own Brand Manufacturing (OBM)).
• “Reverse Product Life Cycle” Innovation Strategy
("Late-follower" to "Fastfollower")
• Process Capability Specialist Strategy
• Product Technology Pioneering Strategy
• Applications Pioneering Strategy

55. Generic Technological Capability Development Strategies of
Latecomer Firms from Late Industrializing Economies
(Poh-Kam Wong, 1999)

56. Key Technological Learning Processes for the Five Generic
Technological Capability Development Routes

57. Dominant Generic Technological Capability Development
Routes in National Innovation System Models of three NIE
(Poh-Kam Wong, 1999)

60. Innovation processes are path-dependent
• Evolutionary characteristics - we do not know
whether the potentially best or optimal path is being
exploited.
• The system never achieves equilibrium, and the
notion of optimality is irrelevant in an innovation
context. We cannot specify an ideal or optimal
innovation system
• Comparisons between an existing system and an ideal
or optimal system are not possible, instead
comparison with the other countries is available.
• Instead of market failure the term systemic problems
or systemic failures are used.

61. Systemic problems mentioned in the literature include
(Smith, 2000; Woolthuis, Lankhuizen et al., 2005):
• infrastructure provision and investment, including the physical
(IT, telecom, transport) and scientific infrastructure (universities, labs);
• transition problems – the difficulties that might arise when firms and
other actors face technological problems or changes in the prevailing
technological paradigms that exceed their current capabilities;
• lock-in problems, derived from the socio-technological inertia, that
might hamper the emergence and dissemination of more efficient
technologies;
• hard and soft institutional problems, linked to formal rules
(regulations, laws) or nonformal (such as social and political culture);
• network problems, derived from linkages too weak or too strong
(blindness to what happens outside the network) in the NIS;
• capability problems, linked to the transition problems, referring to the
limited capabilities of firms, specially SMEs, their capacity to adopt or
produce new technologies over time.

62. Development of the national innovation system in
countries with command economy past

63. Development of the NIS in the countries with
command economy past
• Movement from the one extreme – full state
dominated model to the extreme laissez faire of
model (subparts strongly isolated, role of the state
weaker than in the Western countries)
• Systemic change created huge instability in the
economy and society =>Being successful required a
lot of efforts and therefore attempt to be able to
solve problems individually (on the level of single
person, firm or academic institution) became
dominating.
• Competition was the key notion and cooperation
was seen as the threat to the individual success.

64. Path dependency problem
• inefficiencies and ineffectiveness of NIS’s may be partly
related to path dependence and lock-in situations (evolutionary
and historical economics - Niosi, 2002).
• In the case of the new EU member-state - path dependency of
the whole system of innovation.
• The change in 1980s was systemic, majority of the
components of the innovation system changed, but at different
speeds as some components were easier to change than others.
Misfit between components of NIS (Replacement of
fixed assets vs. introducing institutions guiding economic
transactions like trust)
• Subjective factors - policy makers do not want to face up to
this issue. Wishful thinking and neglect of path
dependency is very dangerous; the result is action
plans that are inadequate, and in any case not
implementable.

67. Path-dependency problems of building the national
innovation systems in the catching-up economies
• dominating role of the linear innovation model and
neglecting demand;
• confrontation between high and low tech industries;
• overvaluation of the role of foreign direct investments;
• lack of social capital and network failures;
• weak innovation diffusion system and low motivation to
learn.
• underestimation of the role of public sector in the
national innovation system;

68. Passive FDI-dependent learning
• passively relying on FDI to bring in new
technologies,
• low S&T learning capacity,
• no or weak government technological
strategy,
• limited opportunities for technological
learning,
• high risk of losing in economic competition
with poorer, lower-wage countries.

69. Active FDI-dependent learning
• relatively high S&T learning capacity,
• active government strategy aimed at
building national human capital and
accelerating national technological learning
from FDI,
• active targeting of the most beneficial FDI,
• much wider opportunities for technological
learning from FDI,
• lower risk of losing in economic competition
with lower-wage but lower-skill countries.

70. Weak innovation diffusion and low motivation to learn
• Success of the catching-up economies depends on the
capability and willingness of actors within NIS to
search for, adapt and utilise knowledge produced
outside those countries.
• In this process they need specific skills – to
understand the knowledge stock, and to be able to use
it and adapt it to create new knowledge.
• Nonaka (1991) has argued that learning about new
technologies requires significant levels of absorptive
capacity as a condition of being able to diffuse
technologies produced elsewhere.
• Knowledge needed to absorb new technologies is
often not available in codified form. Since effective
learning involves both tacit and formal components, a
key task is to capture and codify – to make
learning explicit.

71. Weak innovation diffusion and low motivation to learn
• Information about the innovations and technologies is neither
free nor widely available, particularly for small firms.
• The majority of firms in catch-up economies are small in terms
of the scope of management
• Mechanisms to raise awareness of the available innovations,
and the means of access to the relevant channels of
communication, need to be organised explicitly - to help firms
to identify which technologies they need, and thus avoid the
pitfall of inappropriate technologies.
• (Analysis of Estonian regional S&T intermediary system
revealed - intermediaries do offer services like technology
watch; collecting information on relevant existing technologies
and technological audit, but the employees of these
intermediaries are not competent enough. Usually the employees of
SMEs know much more about new technologies and production
possibilities existing in their area than intermediaries. Previous is mainly
problem in R&D intensive industries).

72. Weak innovation diffusion and low motivation to learn
• In latecomer economies with a command economy past, the
technology transfer problem is really a problem of learning
in enterprises and intermediaries. To increase the learning
capacity of the whole society.
• Rapid catch-up requires rapid learning.
• But learning is not automatic – there must be
motivation to enter the learning cycle. Overcoming
path dependency in thinking.
• Where catch-up is already proceeding rapidly (e.g. Baltics) the
lack of extra-organisational stimulus to change can become
a serious problem.
• As long as the existing business model continues to generate
steady, rapid growth, it is extremely difficult to persuade
the actors in the innovation system (not only firms, but also
policy-makers and non-market institutions) to enter into
the learning cycle in a serious manner.

73. Weak innovation diffusion and low motivation to
learn
• The latecomer advantages have created short-run
success, and this in itself has tended to result in very
low motivation to create learning capabilities.
• Firms often fail to learn because they are isolated and
lack support for key stages in the process, partly
because of elements of path dependency stemming
from the old planning system.
• Practical experience suggests that learning can be supported by
structures and procedures to facilitate the operation of the
learning cycle, and that this, indeed, is the mark of a properly
functioning innovation system.

75. Conclusions for the improvement of the NIS in
economies coming from systemic change
• Precondition - consider the path dependency problems:
a) Linear innovation model should be replaced with the
balanced interaction based approach
Innovation should not be equalised with R&D - understanding
that non-R&D dimensions of innovation are equally
important for catching up economies.
b) Discrimination of low tech industries allocating majority of
resources into creation of high tech sector is not appropriate
policy – instead funding of the use of high technologies in
traditional industries and services;
c) Support the development of the system of absorption and
diffusion of knowledge produced outside and inside of the
catching-up economies

76. Combining high technologies with traditional
industries and services
• Traditional
industries Services
ICT
Biotehnologies
It requires motivation from both side, adequate knowledge base needed
Instruments of innovation policy also play a role

77. Conclusions for the improvement of the NIS in
economies coming from systemic change
d) On firms level:
encourage motivation of firms to change;
support the process of building absorptive capacities of the
firms.
e) lack of managerial and organisational skills are very
important barriers of innovation (even more than better access
to modern technology) and should not be overlooked.
f) Integration of local firms into networks of foreign
investors should be supported. Selection must be used by
FDI policy in catching up economies
g) Technological path-dependency could be used not as a threat
but as an opportunity. Resistance to change is weak and offers an
opportunity to skip the whole generation of technology and introduce new
solutions.

78. The typology of services (Innovation in Services: Typology, case studies and policy implications)
• Problem solvers create value by solving specific and unique
problems for their customers. Low standardization. Suppliers
provide services that the clients are not able to produce themselves
(law firms, medical doctors, engineers, architects, and researchers)
• Producers of assisting services generate customer value by taking
over time consuming activities for firms and households that are
easy to standardize (Security services and cleaning services)
• Producers of distributive services - value through facilitation of
interaction between customers (e.g. selling goods and transporting
commodities, passengers and information). A large sub-group
operates predominantly through digital channels (telecom or
financial services. Due to the large scale and productivity effects
of operating in such channels split into digital and manual
distributive service providers.
• Producers of leisure services generate values by stimulating the
emotions, perceptions and spiritual experience of customers.
Highly heterogeneous. (sports, arts, entertainment, restaurant
services and media services).

79. Policy areas of importance to services
Innovation in Services: Typology, case studies and policy implications.
ECON Report, 2006, Norway

80. Tertiary graduates by field of study (2002)
Source: OECD (2004), Education at a Glance.

81. Source: OECD, Main Science and Technology Indicators database.

82. From science and technology policy to innovation
policy (NIFU-STEP, 2005)
• 1st generation: Science and technology policy
– Focus on research and especially research in universities and
laboratories
– Ministries of industry/economy (industry policy) and
research/education (science policy)
• 2nd generation: Innovation policy
– Focus on policy measures and institutions targeting the innovative
capabilities of firms
– Ministries of industry/economy and research/education
• 3rd generation: holistic innovation policy
– Focus on institutions and policy measures that directly or indirectly
influence the innovative capabilities of firms
– Most ministries

83. Now: A more complex understanding of innovation
• Innovation takes place in complex systems of
companies, knowledge institutions, financial
institutions and within a extensive regulatory, social
and cultural framework.
• Innovation is based on complex learning processes
involving a large number of persons, all with
different educational backgrounds and experiences.
• Innovation thrives on spillovers and unexpected
combinations of persons, existing knowledge and
technologies.
NIFU-STEP, 2005

84. The company centred model of the innovation system
Company
Suppliers
Customers
Policy
organisations
Research
institutions
Consultants
•Learning
•Networking
•Innovation
Financial
institutions
Regulatory framework Cultural environment
International setting Industrial system
NIFU-STEP, 2005

85. The basis for systemic innovation policies
(NIFU-STEP, 2005)
Traditional industrial
policies
Modern innovation policies
Knowledge as a “free”
commodity
Competence building as
learning processes
Focus on research Including a broad set of
innovation activities
(incl. development, incremental
improvements, design, branding,
marketing)
Focus on “high tech”
companies
Including “low tech” companies
and services
Focus on R&D institutions Company centred
Focus on knowledge diffusion Focus on absorptive capacities
and networking

86. A changing framework for innovation policy :
National System of Innovation (Nauwelaers, 2003)
 Increased awareness of the role of innovation as crucial
ingredient for economic development
 Interactive view of innovation: innovation differs from
R&D
 System-based approach to innovation, emphasis on
learning and diffusion / absorption of knowledge
 Mobility of tacit knowledge embedded in humans
becomes a key performance factor
 Glocalisation : localised nature of (tacit) knowledge
spillovers - importance of global connections

87. Policies for innovation systems
(Nauwelaers, 2003)
From “picking-the-winners” towards “addressing-weakest”
System performance is mainly determined by the weakest node
From “stocks” to “flows” as main focus of policy attention
Flows in the system need to be addressed in priority
From “raising resources” towards “promoting change”
Performance is affected by learning abilities of firms and others
From “best practice” towards “context-specific” solutions
Policies should be fine-tuned to specific system failures
From “standard” policy-making towards policy “learning process”
There is a need for more strategic intelligence in policy-making

88. Policy Conclusions (I)
• Effectiveness of innovation systems depends on balanced
combination of 3 capacities :
– creation of knowledge
– diffusion of knowledge
– absorption of knowledge
• Government’s role shifts from investor to facilitator -
promotion of public/private partnerships and interface
management
• Growing importance of framework conditions
– entrepreneurship
– competition rules
– labour market conditions
– social capital, ...

89. Policy Conclusions (II)
• Danger of fragmentation of innovation policy :
need for intra-government policy coordination
• Increasing role of regions for innovation : need for
vertical policy coordination
• More efficiency through “Policy packages” rather
than isolated instruments
• Need for more policy intelligence
– monitoring and evaluation of policies
– sound analyses of innovation systems
– « intelligent » benchmarking practices
– long term views
– inclusive policy design processes

90. The Impact of RTD
on Competitiveness
and Employment (IRCE),
EC, 2003
A Simple Taxonomy of
Science, Technology and
Innovation Policies

91. Social capital and the small country paradox
(slide from B.A.Lundvall)
• Small size (cf. The costs of respectively production and
reproduction of knowledge) and low tech specialisation
should be a serious handicap for small countries
and especially for Denmark but small countries
perform better than big ones in the new economy –
why?
• In ’the learning economy’ speedy adjustment,
learning and forgetting is rooted in social
relationships. Trust, loyalty and ease of
communication is easier to establish in culturally
homegeneous nations with shared responsibility for
the costs of change.

92. Export Structure by Technology Category
Producing “what” vs. producing “how”
Finland
Hi Tech
22%
M edium
Tech
30% Low Tech
1
0%
Resource
Based
38%