World Economic Forum 0 A tentative framework for discussion Manuel Trajtenberg Prof. of Economics, Tel Aviv University and Head of the National Economic Council, Israel Stanford, September 3, 2008

World Economic Forum 1 The Innovation “Heat-Map” 1. Tracing innovation as it unfolds  Need a comprehensive view of innovation, and good proxies – new data.  Means different things in different places, e.g. in the developing world. 2. Try to predict where innovation is likely to unfold  Much more ambitious!  Identify what are the key factors for innovation to emerge as sustained force of change.

World Economic Forum 2 Tracing innovation as it unfolds: 1. Commonly used measures 1. R&D as good proxy, but:  R&D only formal input for innovation, narrow view.  Much process innovation not the result of purposive R&D  Particularly innovation in services, from financial services to retail trade. Very important: see burst in productivity in the US after 1995.

World Economic Forum 3 Tracing innovation: 2. Patents as proxy - shortcomings Recent explosion in patenting: not necessarily concomitant growth in innovation, but patenting as strategy, expanding scope of patentability Great deal of innovation in processes and services not patentable Patent counts not enough, need qualitative measure of patents, such as citations counts, claims, etc. Limitations of patents as indicative of IP regime, and of appropriability - much more to incentives than that!

World Economic Forum 4 Innovation and growth: a broader perspective 1. Cumulative effect of widely distributed small improvements, highly significant for economic growth. 2. But also “big” innovations: “General Purpose Technologies” (GPTs) as “engines of growth”, e.g. electricity, ICTs, Biotech?  GPTs spread over wide range of applications, prompting them to innovate as well  Innovation in adopting sectors prompts further advances in the GPT itself, feeding a positive, self-sustained loop. How to trace both the “small’ and the “big” innovations? How to capture interdependencies?

World Economic Forum 5 a broader perspective – sum up  Expand definition and scope of innovation  Go beyond traditional measures  In so doing, increase awareness of potential for innovation in non-manufacturing sectors and service sectors in particular  In countries below the S&T frontier: innovation as “new to the firm”, “new to the country”, may be as important.

World Economic Forum 6 II. Where is innovation likely to unfold? (i) Traditional factors, 1. S&T infrastructure and skills 2. Availability of capital, risk taking 3. Supportive Gov policies and regulatory environment 4. Access to global markets, (ii) “Soft” factors

World Economic Forum 7 Where is innovation likely to unfold? (ii) the “soft” factors 1. Factors stimulating and facilitating innovation  Competitive, dynamic environment; globalization as key  Prices as accurate signals of all-inclusive econ values & future scarcities (see water, energy, climate change)  Malleability & flexibility of institutions  Social norms: rapid change as key norm, ability of society to absorb change in a non-disruptive way. 2. Creative talent, entrepreneurial spirit  Not just “nerds”, but curiosity, can-do-it attitude  Importance of role models, appealing challenges  Demographics, aging.

World Economic Forum 8 The big tension – take I: Localization vs. globalization Why localization?  Agglomeration effects, localization of knowledge spillovers: powerful centripetal force - clusters.  Innovation as recombination of ideas, need geographical proximity, immediacy But gains from globalization,  Global parceling out of widely distributed comparative advantages  Also in S&T

World Economic Forum 9 The big tension – take II: pooling vs. mobility Why pooling? ….. of innovative resources across firms, sectors, countries  increasing S&T complexity  cross-disciplinary nature of frontier S&I  increasing specialization of researchers. But increased mobility …. of scientists and inventors,  1/3 of patenting inventors move across firms  Both localization and globalization require mobility  Advantages to S&TI “hubs”

World Economic Forum 10 Thanks a lot Lets go innovate…