THE CONTEXT FOR INNOVATION POLICIES AND STRATEGIES after the financial frenzy of the 1990s Carlota Perez Presentation at the Fourth European Forum for Innovative enterprises Stuttgart-Karlsruhe, December 2004

After the collapse of the NASDAQ Venture capital funds are less plentiful and more cautious WILL THE “GOOD TIMES” OF FINANCIAL FRENZY COME BACK SOON?

PERHAPS HISTORY CAN PROVIDE SOME LESSONS ? ? WHERE CAN WE FIND USEFUL CRITERIA TO JUDGE The answer to that question is essential for policies and strategies dealing with innovation Which of the two situations is “exceptional”: The 1990s or now?

RESEARCH ON TECHNOLOGICAL REVOLUTIONS REVEALS A RECURRENT LONG-TERM DYNAMIC SYSTEMIC SPECIFICITY REGULAR SEQUENCES Successive revolutions every years Economic success for the whole years of each technological revolution: which defines best competitive practice DEPENDS ON A UNIQUE AND SPECIFIC TECHNO-ECONOMIC PARADIGM A financial bubble collapses at about mid-diffusion A diffusion sequence of 8-12 year phases (with a marked change in business climate)

Each brings a different world of opportunities for innovation and has a similar pattern of propagation FIVE TECHNOLOGICAL REVOLUTIONS IN 200 YEARS The ‘Industrial Revolution’ Age of Steam and Railways Age of Steel, Electricity and Heavy Engineering 1875 Age of Oil, the Automobile and Mass Production 1908 Age of Information and Telecommunications 1971 Age of Biotechnology, Nanotechnology and Bioelectronics? 20??

A new shared common sense among engineers, entrepreneurs, financiers (and consumers!) A general leap in productivity A powerful cluster of new products and processes and new infrastructural networks NEW FIRMS AND INDUSTRIES BECOME ENGINES OF WORLD GROWTH REJUVENATION AND MODERNISATION OF THE WHOLE ECONOMY New all-purpose technologies, new organisational principles, different business models and low-cost facilitating infrastructure NEW DYNAMIC INDUSTRIES A NEW TECHNO-ECONOMIC PARADIGM DOUBLE NATURE OF EACH TECHNOLOGICAL REVOLUTION

Source: Based on Nelson and Winter, Dosi, Wolf, Abernathy and Utterback, Arthur, etc. THE LIFE TRAJECTORY OF A TECHNOLOGICAL REVOLUTION AND ITS TECHNO-ECONOMIC PARADIGM Deployment of potential Time AN EPIDEMIC PATTERN OF DIFFUSION FROM IRRUPTION TO MATURITY Techno-economic paradigm defined Initial radical innovations MATURITY IRRUPTION Previous revolution exhausted and declining Next revolution in gestation years In theory…

THE DIFFUSION PROCESS IS BROKEN IN TWO Time DEPLOYMENT PERIOD Second years In practice… because of the way society assimilates a revolution INSTALLATION PERIOD First years INSTABILITY AND UNCERTAINTY TURNING POINT TURBULENT “CREATIVE DESTRUCTION” GOLDEN AGE OFGROWTH GOLDEN AGE OF GROWTH FULL FLOURISHING OF THE TRIUMPHANT PARADIGM and gestation of the next ESTABLISHMENT OF THE NEW PARADIGM modernizing the old Emergence of the new Decline of the old Expansion of new and “renewed” economy We are here

This mode of propagation CREATES DIFFERENT FINANCIAL CONTEXTS FOR INNOVATION Time DEPLOYMENT PERIOD Second years INSTALLATION PERIOD First years FINANCE FINANCE increasingly available for: increasingly available for: Risk and experimentation with innovationRisk and experimentation with innovation Modernization of any activityModernization of any activity “Casino” speculation“Casino” speculation Intense innovation ending in BIG FINANCIAL BUBBLE and collapse Post bubble recession (sometimes depression) FINANCE UNCERTAIN Post bubble recession (sometimes depression) FINANCE UNCERTAIN TURNING POINT A time to act INSTITUTIONAL RECOMPOSITION FINANCE Cautious and risk-averse, Wanting more guarantees and/or more control Level of innovation will depend on the efficacy of the INSTITUTIONAL FRAMEWORK

... EXCITE financial capital and ATTRACT all available money towards the technological revolution The MASSIVE DELUSION makes many unprofitable projects appear viable… The MASSIVE DELUSION makes many unprofitable projects appear viable… The amazing SUCCESSES of the new entrepreneurs… Spectacular profits The special conditions for FINANCIAL FRENZY in the Installation Period of a technological revolution …attracting even more funds and preparing the inevitable collapse!!! Excess demand in the stock market ends up leading to ASSET INFLATION Excess demand in the stock market ends up leading to ASSET INFLATION and growing capital gains

…and that’s how bubbles grow and crash every time! To the INTERNET MANIA of the Information Technology Revolution Mar1987Mar1988Mar1989Mar1990Mar1991Mar1992Mar1993Mar1994Mar1995Mar1996Mar1997Mar1998Mar1999Mar2000Mar2001 0,0 500, , , , , , , , , ,0 NASDAQ INDEX From the CANAL MANIA of the Industrial Revolution The NASDAQ Bubble USA 1987–2001 Acts for Joint-Stock Companies Britain 1760–1804

DEPLOYMENT PERIOD Irruption Maturity INSTALLATION PERIOD the five revolutions in parallel FrenzySynergy 1893– – – –?? 1793–97 INSTABILITYRECESSIONRECOMPOSITION Golden Age ? The post-war Golden Age The Belle Époque (Europe) The Progressive Era (USA) The Victorian Boom The great British leap Internet mania The Roaring Twenties New frontier bubbles Railway mania Canal maniaBubbleCOLLAPSECOLLAPSE But history also shows that EACH MAJOR TECHNOLOGY BUBBLE IS FOLLOWED BY A GOLDEN AGE

This means that, as in previous cases, the VC plethora of the 1990s is NOT likely to come back soon, but… …as in previous cases, the next 20 to 30 years can be a Golden Age WHAT DETERMINES THE ADEQUACY? It will all depend on the adequacy of the institutional framework established at this Turning Point ? ?

Different conditions for competitiveness Different guidelines in its innovative logic A different common sense EACH TECHNOLOGICAL REVOLUTION IS UNIQUE: A SPECIFIC TECHNO-ECONOMIC PARADIGM with different enabling requirements A SPECIFIC TECHNO-ECONOMIC PARADIGM with different enabling requirements

How was technical change facilitated in THE MASS PRODUCTION PARADIGM? Major long-term research Deep distinction between custom and mass production Spaced innovation Big and lumpy investment DIFFERENT CRITERIA FOR R&D AND BUSINESS INVESTMENT The Main characteristics Self funded corporate R&D departments State funding of research in government government university and university and private laboratories private laboratories (often driven by military requirements) Special treatment of SMEs The basic arrangements Those institutions fuelled innovation adequately in the Post-WWII “Golden Age”

THE NEXT “GOLDEN AGE” in the European Union will be the competitive Knowledge Society set out in the LISBON AGENDA IT WILL HAVE TO BE ACTIVELY AND CONSCIOUSLY PURSUED with adequate policies and strategies But… innovation funding will not rush in “by itself”

Importance of intangible capital and value added Major role of innovating SMEs Interlinked research and innovation Capacity for custom-made high-tech products Continuous improvement Global network innovation and adaptation Technical and product change as the competitive routines What is specific about innovation in the FLEXIBLE PRODUCTION ICT PARADIGM of the Globalized Knowledge Society? of the Globalized Knowledge Society? Venture capital must become part of the “normal” cycle Venture capital must become part of the “normal” cycle INVESTMENT IS NOW INSEPARABLE FROM INNOVATION

NEED FOR BOLD INSTITUTIONAL INNOVATION Private, public and mixed AND EFFECTIVE MECHANISMS for reducing risk and enabling technical change What role for banks and the financial sector?What role for banks and the financial sector? What stage(s) will venture capital firms cover?What stage(s) will venture capital firms cover? What role for global firms (innovating inside the network and with suppliers or clients)?What role for global firms (innovating inside the network and with suppliers or clients)? What role for State funding?What role for State funding? How to handle both quick-return (ICT) projects and long-term, high-risk ones (biotech)How to handle both quick-return (ICT) projects and long-term, high-risk ones (biotech) How to deal with intangible value and “collateral”?How to deal with intangible value and “collateral”? How to acknowledge the value of “human capital”?How to acknowledge the value of “human capital”? A dynamic Knowledge Society will require AN ADEQUATE LEGAL FRAMEWORK

NOW IS THE TIME TO ACT The public policies and private strategies adopted at this Turning Point The better all the actors understand the circumstances the more adequate will be the response WILL DEFINE THE CONDITIONS FOR INNOVATION, GROWTH AND COMPETITIVENESS FOR THE NEXT TWO OR THREE DECADES