1 Institutions, Innovations, and Growth Tugrul Temel Agricultural Economics and Rural Policy Group, Wageningen University School of Economics, Inholland University The Netherlands July 2004, Sophia University, Tokyo

2 Plan of Presentation Research agenda Case study

3 RESEARCH AGENDA Issue Conceptual framework Systems approach A grand network of networks Network performance indicators in growth models Develop hypotheses to address the issue

4 Issue Why in some economies did a process of technological innovation create new wealth and economic growth, while in some other economies the process remained unaffected?

5 Conceptual Framework Innovation system (IS) – a set of agents that jointly/individually contribute to the generation, diffusion, and use of improved or new knowledge and that directly/indirectly influence the process of technological change Institutions (IPR, PPP) impact the performance of IS and hence the process of technological change – K=K(IPR, PPP) : Institutional change affects the organization of K – T=T(K(IPR, PPP)) : Technological change and growth are endogenous to IS where technology (T), variable (R), intellectual property rights (IPR), public-private partnerships (PPP), knowledge generation, diffusion, application (K)

6 Systems Approach A system – is a grand network of networks – has a goal and optimizes it subject to system constraints An individual network – optimizes its own objective subject to network-specific constraints – objectives of individual networks agree with the system goal – constraints of individual networks agree with the constraints of the grand network The grand network is greater than the sum of individual networks. – The grand network must have one new property, which individual networks cannot support individually. For instance, the spatial arrangement and size structure of individual trees in a forest will create different habitats for wildlife species.

7 A Grand Innovation Network Institutions affect network linkages Learning through interactions of networks promotes innovations Innovations yield growth Interface EconomicPolicySocial A Grand Innovation Network

8 Linkages in a Grand Network P PEPSPI EP E ESEI SPSE S SI IPIEIS I

9 Innovation Network Institutions affect patterns of knowledge flow Knowledge generation Knowledge diffusion Knowledge application Knowledge financing Knowledge regulation

10 Network Performance Performance measured by improvement in the grand network goal

11 Hypotheses Development Describe the cause-effect structure of individual networks Develop hypotheses using this structure Contribution of individual networks to the grand network goal

12 Exogenous Growth Model The Solow-Swan model – K and L inputs Emphasize the role of capital accumulation Growth compatible with exogenous labor- augmenting technical progress Growth is unexplained (the Solow residual or TFP) Assumptions: productivity level and the rate of technical change are the same across nations, empirically not verifiable

13 Endogenous Growth Models Economics of ideas associated with increasing returns and imperfect competition (high fixed cost and low marginal cost) Relax the assumption of diminishing returns to capital Technological progress endogenous to the model Romer (1986) – R&D gives rise externalities that affect the stock of knowledge available to firms Production by firm-specific variables (like R&D) and a technology index (learning by doing) which is a function of knowledge stock available to firms. Public-good characteristics of knowledge generating activities, ie, R&D R&D based endogenous growth models model innovation (the accumulation and diffusion of technological knowledge) as the driving force of growth. Ideas are generated by R&D investment of firms

14 Evolutionary Growth Models Model technological advancement as a disequilibrium process involving ex-ante uncertainty, path-dependency, long adjustment processes. Emphasize on strategic firm-specific capabilities rather than just investment in human capital and R&D – R&D, managerial skills, collective learning, social capital, networking, cooperation with universities, property rights The specific capabilities are dynamic being the result of strategic decisions Take into account the institutional framework – strengthen institutions As capacities are difficult to measure at the aggregate level, it is also difficult to use this approach to measure growth

15 CASE STUDY Agricultural Innovation System  Policy units [P]  Research & extension organizations [R]  Agricultural banks [B]  Farmers & their organizations [F]  Input suppliers [I]  Marketing firms [M]  Processing firms [Pr]  Consultancy firms [C]  NGOs, Donors, Int’l organizations [X]

16 Analysis of AIS Introduce a graph-theoretic method to assess organizational linkages in a system Apply the method to examine the agricultural innovation system of Azerbaijan. i.Map organizational links in the innovation system ii.Describe the structure of the system (identify leverage points, dominant, and subordinate organizations) iii.Suggest ways to improve the workings of the system

17 Data and Methodology Data collected by structured interviews A systems methodology is adopted because i.interaction is essential to diffuse knowledge ii.learning takes place everywhere in society Seven graph theoretical concepts are used to identify cause-effect pathways in the system Who and where to use the method i.to assess the impact of alternative interaction pathways on the system goal ii.to identify the constraints of and opportunities for the system to be effective

18 Mapping organizational links Linkage Matrix described by three types of linkages: formal (f), informal (i), and mixed (m) four levels of linkage strengths: strong (s), medium (m), weak (w), none (n), and five groups of linkage mechanisms: planning and review, program activities, resource use, information, & training.

19 Linkage Matrix

20 Mapping organizational links Not fully identified, i.e. of a total of 72 relations, only 45 are identified, Density: 0.63 (= 45/72) Flexible: of 45 relations, 25 formal, 11 informal, 9 mixed All relations are formal and weak ( fw ) between the public components, while relations are mixed and mostly medium between the private components Informal relations are common between the public and the private components X has relations with all the components in the AIS

21 Describing the structure Linkage Matrix: assign 0.3 to a weak, 0.6 to a medium, and 1 to a strong relation and denote the resulting matrix as S [Scaled] Define the C-E coordinates implied by S [Scaled] and scatter plot them in Figure 1 D is dominant (i.e source of influence), R is highly interactive with the rest of the system, and is followed by X, I, and F. P is subordinate (i.e., sink of influence)

22 S[ Scaled ]

23 Cause-effect Diagram

24 Describing the structure and developing hypotheses Use only those linkages established through 5 types of linkage mechanisms and denote the resulting matrix as S [Mechanism] Define the C-E coordinates of S [Mechanism] and scatter plot them in Figure 2 D remains to be dominant, which is followed by I. X is the most interactive, followed by F. P remains to be the most subordinate component

25 Key conclusions 1.The public component is under construction. lacking sectoral priorities, clear organizational mandates and objectives, qualified human resources, physical and financial resources, and motivation to initiate interactions with the private sector. 2.The private component is attracted to activities of international organizations. 3.The public and private components are isolated and have limited basis for interaction.

26 Future research 1. Analysis of cases in which rare but influential interactions take place between the organizations 2. The systems approach should be reformulated as a mathematical model to allow testing of specific hypotheses.