1. Should Chile have an innovation strategy? Alexander Galetovic CEA-DII Universidad de Chile

2. What do we mean by “innovation strategy”? 1.Clever and well-informed people doing policy, figuring out what needs to be done, or... 2....a bunch of consultants and interest groups seeking rents and subsidies

3. Of course we mean 1!

4. A few things one needs to be aware of “Clever and well informed people doing policy, figuring out what needs to be done” are in short supply Hence “clever and well informed people doing policy, figuring out what needs to be done” have a high opportunity cost

5. What’s the high opportunity cost? Labor market reform Instututional improvement (regulated sectors, budgetary institutions, etc. etc. etc.) Removal of distortions (banking, electricity distribution, transport, Being well prepared to confront interest groups Improving and abandoning many things that the state is doing badly today

6. Doing the right thing is hard VCs in the United States reject 990 of 1,000. They succeed in one of the 10 they finance.

7. Wrong reasons to justify an innovation strategy

8. Avoid wrong cliches “There is no innovation in Chile” Patents are the wrong indicator R&D spending is probably misleading There is a lot of innovation going on; one only needs to go out and talk with those who do (Ronnie Fischer did, by the way)

9. Avoid wrong cliches “Natural resources are not advanced” Just go out and see a winery! U.S. Growth was based in the explotation of natural resources Natural resources are knowledge-intensive We can earn rents!

10. Avoid wrong cliches “To grow fast you need to invest in advanced sectors” Sectors where productivity grows fastest in the world are not necesarily those where relative prices will move in your favor You want to take advantage of rents! There is something called international trade Productivity growth is valuable in any sector

11. Avoid wrong cliches “Appropriability problems are pervasive and prima facie justify a technology policy” Patents are really important only in a few sectors (drugs and chemicals, simple machinery) Patents are the least effective means of appropriation (complementary manufacturing; complementary sales/service; lead time; secrecy) There are many market-based strategies that firms use to make money out of IP

12. The onus is on the advocates of an innovation strategy

13. Don’t tell me that “we’re going to play like Michael Jordan” (... wouldn’t it be nice to be developed?) Don’t tell me “we should be able to walk and chew gum” (a perhaps clever but upon reflection silly metaphor when it comes to economic policy)

14. What do advocates have to show?

15. What needs to be proven You tell me what “technology policy” really means: objectives, means to reach them, how you gonna do it (tell me the details!) You show me that the price system is worse than economists&bureaucrats to guide resource allocation

16. What needs to be proven... 3.You show me that technology policy is more cost effective than “standard” micropolicies (competition in banking, costs of starting up a business, the burden of regulation on small firms, labor-market reform, etc. etc. etc.) 4.You show me that you can’t do significantly better with all the money that you already spend

17. What needs to be proven... 5.You tell me who are the “clever and well- informed people” who will do technology policy and what’s their opportunity cost (I want to know names!) 6.You show me the design of the institution and practices that will keep consultants and interest groups at bay (with the laws and constitution we now have!)

18. What needs to be proven 7.You show me how you will solve the selection problem (99% of projects are bad; one in ten fail)

19. To conclude

20. Policy conclusion An innovation strategy is not prima facie desirable or sensible Such policies have failed the world over time and again Hence, prove it before the President announces the policy and commits money to it