Regulation and innovation René Kemp UNU-MERIT Presentation at 2 nd meeting of Ad Hoc group on Innovation and Human Resources to assist the High Level group on the Competitiveness of the European Chemicals Industry Oct 29, 2007 in Brussels

What is innovation? According to the Oslo Manual (OECD 2005), innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practice Innovation is about novelty, about doing something qualitatively new or different

The OECD guidelines make a distinction between –Product innovation –Process innovation –Marketing innovation –Organisational innovation Important distinction between –Improvement innovation –Radical innovation –System innovation (new technology systems) More on innovation

Objectives for innovation in the EU Chemical Industry Source: results from CIS-3 reported in Ren (2005)

The innovation systems perspective Innovation occurs in a context that shapes the processes of innovation and outcomes from these processes. No firm or researcher can innovate on its own: while individuals certainly can invent, only whole social systems can innovate… (McElroy)

Source: Hansen et al. (2002, p. 47) Source: Hansen et al. (2002)

Source: OECD

Regulation State intervention in private spheres of activity to realize public purposes

Direct effects of regulation Costs of compliance Delays in market introduction of new products Creation of new innovations (example of CFC substitutes)

Indirect effects Creation of first-mover advantages for environmentally improved products/processes induced by environmental regulation; Creation of entry barriers for newcomers Development of new competences and knowledge constitute a source of competitive advantage in the future. Relocation of industry activities to countries with less strict environmental laws Increased trust of public in the efficacy and safety of products

Two issues of understanding Regulation acts as a filter and focussing device for innovation. It specifies what is required in terms of product or process performance. Some regulations are innovation-friendly, others are not.

Innovation-friendly regulation Focus on outcomes, not technologies Enact strict rather than lax regulation Employ phase-in periods Use market incentives Make the regulatory process more stable and predictable Develop regulations in sync with other countries or slightly ahead of them Require industry participation in setting standards from the beginning Develop strong technical capabilities among regulators Source: Porter

Innovation-friendly policy styles are Based on dialogue and consensus; Calculable, reliable and has continuity; Decisive, proactive and ambitious; Open and flexible with regard to individual cases Management and knowledge oriented (Mind: these are hypotheses and not really backed by empirical research) Source: Janicke et al

Questions singled out for discussion Does the current regulatory system provide the necessary orientation and stability for innovation in the chemicals industry? Do we have the right consultation, assessment and consultation processes to prepare the necessary decisions in a timely and efficient manner?

The CFC phase out was well-managed: policy gave business time to develop and adopt alternatives What about the regulatory framework for emerging technologies such as biotechnology and nanotechnology?

A quote If nothing specific is done to manage nanotechnology s possible adverse effects, a range of undesirable developments could emerge.The public potentially would be left unprotected, the government would struggle to apply existing laws to a technology for which they were not designed, and industry would be exposed to the possibility of public backlash, loss of markets, and potential financial liabilities A key commercial issue is trust Source: Davies, Resources for the Future

European attitudes to biotechnology

About trust Trust is about to be seen by others as trustworthy A quote from Monsanto We didn't understand that when it comes to a serious public concern, that the more you stand to make a profit in the marketplace, the less credibility you have in the marketplace of ideas. When we tried to explain the benefits, the science and the safety, we did not understand that our tone - our very approach - was seen as arrogant. We were still in the trust me" mode when the expectation was "show me.

Who does the public trust?

A few statements Regulation helps to create trust but it is not enough A cooperative approach with policy appears best A commitment to innovation for sustainable development helps to attract young researchers and gain government funds (it may not enough though to sell new products)