Knowledge Economy Forum VIII, INSEAD, Fontainebleau, 28 April – 1 May The Impact of the Economic Crisis on Innovation – Evidence and Policy Responses Dirk Pilat Head, Structural Policy Division Directorate for Science, Technology and Industry dirk.pilat@oecd.org Moderating the size of the economic downturn, by injecting cash into the economy and thereby cushioning adverse employment effects; • Preventing the downturn from gathering momentum and thereby avoiding “tail risks”. In this case, a key factor is the timeliness of the stimulus, so that it is injected into the economy as quickly as possible and for a short duration; and • Supporting economic recovery while at the same time favouring structural policies that could potentially enhance long-term growth.

OECD work on the crisis and innovation – Two strategic initiatives Strategic Response to the Crisis, combining: Policies to resolve the crisis in the financial system Policies to foster sustainable, long-term growth OECD Innovation Strategy: Developing a coherent strategy for innovation to strengthen growth and help address social challenges Going beyond science, technology and R&D and adjusting to the changing nature of innovation preliminary results of an ongoing inventory of the content and aims of current stimulus packages, focusing on fostering long-term growth and innovation. Chile, Estonia, Israel, Russia and Slovenia Brazil, Indian, Indonesia, China and South Africa

We know that innovation will suffer in the downturn preliminary results of an ongoing inventory of the content and aims of current stimulus packages, focusing on fostering long-term growth and innovation. Chile, Estonia, Israel, Russia and Slovenia Brazil, Indian, Indonesia, China and South Africa

Investment in venture capital is already declining … preliminary results of an ongoing inventory of the content and aims of current stimulus packages, focusing on fostering long-term growth and innovation. Chile, Estonia, Israel, Russia and Slovenia Brazil, Indian, Indonesia, China and South Africa

.. as is investment in R&D and innovation Investment in R&D is falling in many firms: A sharp drop in R&D expenditure of certain large, public companies reported in the fourth quarter of 2008. A growing focus on development, instead of research. Though some firms are increasing investment. Small firms are even more affected: Financial constraints are more pressing Sharp increase in bankruptcies and insolvencies New innovative firms have difficulties in entering and exiting (e.g. through IPOs). preliminary results of an ongoing inventory of the content and aims of current stimulus packages, focusing on fostering long-term growth and innovation. Chile, Estonia, Israel, Russia and Slovenia Brazil, Indian, Indonesia, China and South Africa

The crisis has other impacts related to innovation Sharp declines in trade, affecting global innovation networks and increasing the risks of protectionism. Reduced incentives for environmental innovation: Consumers buy less expensive goods; firms find it more difficult to reap a price premium for new innovations Price conditions for environmental innovation (oil) have worsened The crisis has made underlying structural problems more apparent, e.g. in the car market It has spread beyond countries with weakened financial sectors – mainly to manufacturing. preliminary results of an ongoing inventory of the content and aims of current stimulus packages, focusing on fostering long-term growth and innovation. Chile, Estonia, Israel, Russia and Slovenia Brazil, Indian, Indonesia, China and South Africa

Government responses: Economic stimulus packages Unprecedented fiscal stimulus: mixtures of financial bail-outs, tax cuts and extra-budgetary spending Virtually all OECD countries have packages, some several, ranging from (2009/10): USD 500 million to 790 billion as share of GDP: 0.3% to 8% total of USD 1.5 trillion Non member economies: China USD 580 billion (13% of GDP) average OECD country carrying out a positive stimulus package their cumulated budget impact over the period 2008-10 amounts to 2¼ per cent of GDP, with the United States having the largest fiscal package at about 5½ per cent of 2008 GDP But four countries (Australia, Korea, New Zealand and the United States) have introduced fiscal packages amounting to 4% of 2008 GDP or more, the US package -- at about 5½ per cent of 2008 GDP -- being the largest. In contrast, a few countries (in particular Hungary, Iceland and Ireland) have drastically tightened their fiscal stance. There is an inverse correlation between the size of discretionary fiscal packages announced/implemented among OECD countries and the strength of so-called automatic stabilisers While a comparison of the absolute amounts of these stimulus packages is tempting, most plans await political ratification and implementation and thus their details are still changing. Second, the exact financial details and how the priorities are weighted in budgetary terms are usually still uncertain. new budgetary allocations whereas in many other cases the plans also propose to carry planned government spending forward (i.e. relabeling of planned expenditures). some governments do not frame the packages as emergency stimuli on purpose but rather as long-term strategy, also drawing on existing R&D and Innovation strategies or other existing strategic plans. Third comparing these plans in USD terms involves the use of current exchange rates or PPPs) Fourth, the size of these plans usually does not take into account automatic stabilisers which work as a tool to dampen fluctuations in real GDP Fifth, these figures do not take into account legislative or regulatory changes . As share of GDP: Korea, Poland, Australia, US, Hungary, Mexico More than GDP of spain – close to GDP of france For four countries (Australia, Korea,Spain and the United States), the fiscal package is estimated to amount to 4 per cent of 2008 GDP or more, with the US package – at about 5½ per cent of 2008 GDP – by far the largest

The size and composition of fiscal packages Cumulative impact of fiscal packages over the period 2008-2010 on fiscal balances as % of 2008 GDP Source: OECD Interim Economic Outlook 2009, 31 March 2009

Innovation and growth measures in the stimulus packages Improving infrastructure (e.g. roads, transit, broadband) Support for R&D and innovation Investment in human capital, education/training Green technologies and energy-efficiency Support for innovation and entrepreneurship (incl. support for SMEs, venture capital) We set these quite independently and still. Most countries announce that they are taking on above measures to emerge stronger from the crisis through sustainable investments in infrastructure, research and other means to secure competitiveness and a new foundation for growth in the future. In many cases the above components of economic stimulus packages are related. Additional financial measures in favour of science, R&D and research institutions will, e.g., yield impacts on infrastructure (including energy efficient-buildings), on education/training and human capital. It will also yield more medium-term impacts relevant to other policy objectives in the plans, e.g. scientific research results being used to bring about “smarter” infrastructure (e.g. intelligent transport systems) or greener technologies. Some R&D is green technology Some infrastructure is building schools, building research infrastructure, energy efficient buildings ------- segmentation does not work easily - short-term demand stimulus (AD out), long-term competitiveness Short term versus long-term Innovation versus normal --- too much long term in there?

As well as non-financial measures Simplification and speeding up of administrative procedures Making the public administration more efficient Industry-specific agreements or regulations to accompany additional spending & targets of stimulus plans, e.g. investment in next-generation networks, smart grids

Long-term goals and short-term actions Looking for double-dividend actions that can strengthen demand and support growth, e.g.: Well-designed investments in infrastructure Spending on training and active labour market policies Easing of entry restrictions to create new markets. Long term actions can: Increase the long-term credibility of government actions. Serve as an opportunity to accelerate structural changes and move to a more sustainable growth path The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

Some policy considerations Supporting R&D and innovation Investments in innovation can be of strategic importance for long-term growth: governments can cushion the impact of the crisis on private innovation expenditure (through support for R&D, public/private partnerships, etc.). Investment in research infrastructure may strengthen short-term demand and long-term growth Innovation (and policies) should be closer linked to economic and social needs (e.g. ageing, climate change, etc); this is where future opportunities and markets will be. The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

Financing for small and innovative firms Firms that are willing to take risks are essential for innovation - support for risk takers and small innovative firms remains important. The scope for government action includes: Policies to enhance cash flows, e.g. by shortening payment delays for public procurement (or changes to tax payments and export credits). Policies to enhance access to liquidity, e.g. by extension of loans and loan guarantees (or by mediation with banks). Strengthening the provision of private risk capital. Broader initiatives to strengthen the financial system. The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

Industrial renewal and business dynamics Governments are providing considerable support to firms and industries in need, sometimes indirectly: In assisting existing firms or industries, policy needs to avoid locking-in old economic structures and business models – give room to new firms and business models. Make support conditional on restructuring and rationalisation. Industrial support also risks fuelling protectionism. Clear exit strategies are needed: outlining the maximum duration of support and how it will be scaled back. The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

Environmental innovation The crisis has reduced incentives for environmental innovation, but delaying action may be costly. Crisis provides an opportunity to improve efficiency, some win-win options include: Removing subsidies on fossil-fuel based energy production and consumption. Cutting trade barriers on environment-friendly products. But most important is to establish a clear long-term signal to investors and the public about climate change. Environmental innovation offers new business opportunities and can generate new tax revenues. The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

Implementation Achieving a balance between the necessary speed of translating measures into action, ensuring accountability and avoiding waste of resources International coordination of stimulus packages With a growing role of government, the quality of government intervention is key: Evaluation of measures to ensure their impact and enhance accountability Coherency of the overall strategy to address the crisis The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

In sum The crisis offers new opportunities to undertake structural change and help shape the future of OECD economies The long run starts now. The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis

For further information OECD Strategic Response: http://www.oecd.org/dataoecd/33/57/42061463.pdf OECD Innovation Strategy: www.oecd.org/innovation/strategy Directorate for Science, Technology and Industry: www.oecd.org/sti The whole debate here is if you can do both at the same time? Digging hole and filling? Diverting attention from short-term? Procyclical? secure competitiveness and a new foundation for growth in the future emerge stronger from the crisis