The importance of innovation for sustainable growth and employment Luc Soete UNU-MERIT, University of Maastricht Presentation for the Belgian Central Economic Council conference “Towards a more innovative economy”, Brussels, 18 th September 2006.

Outline Unsustainable nature of economic growth and employment of not based on technological change in rich, ageing economies Changing nature of knowledge accumulation and its policy implications. Application to Belgium (3% Report): –Belgian diagnosis (Vandecandelaere, Delhausse) –European diagnosis (Aho) Some broader issues –Incentives for private, individual investment in knowledge –Re-inventing Europe’s social model

1. Need for a renewed emphasis on innovation “Euro” needs more than ever a Lisbon agenda to deliver welfare and employment –Still lots of needs unfulfilled with EU citizens –Large parts of EU population in search of meaningful work Need for major redeployment of activities with more value added –EU’s productivity gains lagging closely linked to industrial and services structure of member countries –Difficulties in new markets emerging (rules, regulations) Unsustainable development –Not just from an environmental perspective but also –Social care and health wise (ageing, pensions)

EU internal dynamics: It’s growth stupid… Lisbon anno 2006: lack of internal growth dynamics in Europe is particularly striking –Apparently “sound” macro-economic policies but… –Little growth incentives with respect to enhancing structural reform –Holds for common agricultural policy, regional social cohesion policy but also RD and innovation support policies Without growth enhancing policies, the “non-active” nature of knowledge activities will be exacerbated: –Implications for human knowledge capital: emigration of S&E –Lagging public investments in knowledge –Outsourcing of private knowledge activities And remember: the EU has 70,000 PhDs a year, the US 40,000…

The current framework (anno 2006/7) Since Lisbon 2000: –A lot of reforms taking place in each MS (Mr& Mrs Lisbon) –Coordination through OMC by lack of anything better –Areas of easy reform, areas of difficult reform –At EU level very slow progress (service directive, CAP, EU patent) In the meantime… external pressures on EU continue to increase –Global competition (BRIC) sometimes unfair (non- democratic, environmentally unsustainable, social exploitation (very different from US and OECD world) –Claim on natural resources (energy, raw materials) with negative terms of trade for EU –Shortage of knowledge workers (demographics outside EU compared to inside EU)

2. On the changing nature of technological progress Traditional R&D-based technological progress: –Clear agreed-upon criteria, and ability to evaluate –Ability to hold in place, replicate, imitate –Cumulative process: learn from natural and deliberate experiments New IT-based technological progress: –Flexibility, hence difficulty in establishing replication –Changing external environments over time, sector, space, difficulty to evaluate –Crucial role of users in R&D process itself (von Hippel) and hence a much larger role for entrepreneurial “creative destruction” based innovation

A major change in the role of “understanding” progress “Codified” parts easy, difficult though to appropriate efficiency improvements, leak quickly away… Organizational tacit part much more difficult, imitation never complete IT “productivity paradox” is ultimately not a paradox. Rather rule: in most IT-intensive sectors (education, health, mobility, safety, business) efficiency improvements remain complex “stories” to be told ex post US success story in IT productivity is not necessarily sustainable; newcomers might relatively quickly outperform Learning is much more difficult, much more trial and error. Difficulty of unlearning (Lundvall)

3. The Belgian case Diagnosis well known by now… Recommendations of 3% group focused on what could be considered from a “national systems of innovation” perspective to be the “missing links” –Need for a major public effort in Belgium’s research infrastructure: “Lisbonisation” of budget –Higher and more efficient tax incentives for R&D investments and R&D employment –Strengthening the diffusion of knowledge –Develop and foster the research status/career of S&E –Towards a BRA

4. But there is more a) need for new incentives for knowledge investment Core European problem is one of private investment in knowledge, in particular in tacit knowledge Reliance on public funds was justified in the continental and Northern European countries from the perspective of equal access and consistent with progressive income taxation However, over the 90’s the tax burden has been significantly reduced for both businesses and high income citizens While “free” access to public knowledge has remained resulting ultimately in increasing inequality and ultimately the crowding out of private knowledge investment

Public knowledge investment

Private knowledge investment

HE as a % of GDP

b) re-inventing Europe’s social model(s) The old Lisbon consensus was to become “the most dynamic and competitive region in the world, while maintaining/activating Europe’s social model”… the real question was to some extent not asked: “what is the link between innovation, entrepreneurship and the working of labour market institutions? “ The European Social Model (as typified by the German one) is an ideal industrial social model with strong incentives for firms to invest in internal learning and upgrading of their work force, dual learning systems guaranteeing continuous improvement But might well appear inappropriate in dealing with the needs for more flexibility and dynamism as highlighted above What is the appropriate social model for knowledge workers?

towards a more segmented social model? Need to recognize the duality in work as in: –“labour”, I.e. a physical or mental wearing out activity as labour economists ultimately justify wages (a disutility) –“pleasure” I.e. providing self-satisfaction in recognition, self-realisation, creativity, etc. Employment security, shorter working time are primarily social quality achievements for the first sort of work, less for the second. The extension of rights from the first to second group appears: –Inappropriate, work involves positive externalities –Behind lack of dynamism of knowledge workers in Europe –Undermines the sustainability of the social model Need for a segmented social model recognizing fundamental differences in work

Conclusions: role of innovation for welfare in Belgium and the EU Witness today a shift towards a more demand driven view of technology. Need to recognize the link with other demand elements in the economy (functioning of markets, place within the supply chain, consumers preferences, locational specifities, etc.) Leads to emphasis on “systemic” aspects of the innovation system: policies shifting from specific issues towards systemic aspects (from best to worse practice) while recognizing international country specialisation pattern leading one to try to improve matching between supply and demand Endogenous growth policies recognizing role of innovation across countries at all levels of development with different policy accents: –For high income countries policy challenge one of sustainability of Schumpeterian dynamism –For emerging economies policy challenge one of the design of “backing winners” innovation policies –For developing countries challenge one of designing pro-poor innovation policies, BoP

And the rest of the world… Has the notion of a geographically determined technological competitiveness not become an outdated policy obsession? E.g. shouldn’t one completely open up the ERA? –Obvious in the case of science and the use of large scientific equipment and fundamental research but also –In applied research and diffusion: Importance of world wide standards for European consumer welfare in many areas: agriculture, health, safety, environment, energy, transport and logistics, etc. Relevance of problems in other rich countries, emerging economies, but also developing countries for local EU applied R&D and innovation Link towards new innovation paradigm