Innovation: the transfer function of Science and Technology J.P.CONTZEN Instituto Superior Técnico...

Innovation: the transfer function of Science and Technology

J.P.CONTZENInstituto Superior Técnico

Lisbon, February 6th, 2004

INTRODUCTION

Introduction (1)

Innovation is a word that politicians and media like to use without understanding fully its meaning

Innovation is not an end product: it is a transformation process

“L’Innovation, c’est la rencontre d’une idée et d’un marché” (Anvar)

Introduction (2)

Innovation is only successful if you know what you wish to do with it; serendipidity is OK at basic research level; innovation requires governance

Innovation is not a single input, linear transfer function. The “Juke Box” concept does not apply

Innovation means managing complexity and risk at the same time. Not all factors are deterministic.

Introduction (3)

Due to the complexity of the transfer function, it is hard to measure its efficiency, even harder to determine its success: Type and intensity of inputs? Only R&D? Type and intensity of outputs? Only number

of patents? For which objectives? Economic growth, job

creation, poverty reduction, military power, better quality of life, knowledge of the Universe, sustainable development?

Introduction (4)

Over which time span? Time constants in the Input/Output function of the Innovation process and the subsequent application of innovation outputs can reach 10 years to 20 years in certain cases. Time is an important factor, often ignored

In many cases, confusion is created between input and output parameters of the total chain, data from the same year are used for comparison purposes ignoring time constants.

system optimization

system redesignimproved

environmentalefficiency

(factor)

functioninnovation

10+

5

2

5 10 20

time horizon (in years)

Source: D. P. Van Vuuren, B. J. Strengers, and H. J. M. De Vries, Long-term Perspectives on the World Metal Use: A Model-based Approach (Bilthoven: RIVM Report 461502 021, 1999).

Description of the Innovation Chain

Innovation at the core of a complex chain(1)

Innovation enables results of Knowledge Creation to be applied eventually in Society. This chain involves many parameters and contains feedback loops. Each component should be clearly identified.

KCINPUT

PARAMETERS

EXTERNALFACTORS

SYSTEMPARAMETERS

EXTERNALCONDITIONS

INNOVATIONOUTPUTS

OTHERINNOVATION

INPUTS

KC OUTPUT

SOCIETALDEMAND

SOCIETALDEMAND

KNOWLEDGECREATIONINT. or EXT.

INNOVATIONAPPLICATIONS

IN SOCIETYINT. or EXT.

Knowledge Creation (KC) (1)

Knowledge Creation could be internal (to your firm, your region, your country, your grouping of countries) or external (somebody else does it)

Input parameters for KC: Money Education People Infrastructures

Knowledge Creation (KC) (2)

Outputs of KC: R&D results

Shaping factors affecting the success of KC: Cultural,working and regulatory

environment Expression of a societal demand

The Innovation transfer function (1)

INNOVATION AS A TRANSFER FUNCTION

INPUTS Ik = ii,kxi,kk(c,c') OUTPUTS

SYSTEM PARAMETERS


Input parameters: Results from internal or external (spin-in)

sources of Knowledge Creation Money (distinct from R&D money- problem

in EU and ex-Soviet Union) People (not necessarily the R&D people) Infrastructures (incubators, technology

parks)


Output parameters for radical innovation: New products (digital cameras, cellular

phones, high speed trains, jet aircrafts) New processes (biopolymers, Fuel cell

energy conversion) New services (DHL/Fedex/UPS/etc, low-cost

airlines)


Output parameters for radical innovation (cont.): New systems (Software utilities, logistics

e.g. intermodality, Eco-restructuring “function innovation”, urban management)

New organizations (networks vs. matrix structures, Toyota just-in-time)The three latter outputs are more recent and bear a lot of promises for the future


Output parameters for incremental innovation: Improved products (cars) Improved processes (steel production,

electricity production) Improved services (ADSL on Internet) Improved systems (banking system) Improved organizations (University)


System parameters shaping the success of Innovation: Expression of a societal demand, internal or

external Availability of financial resources Regulatory environment Design capacity Creativity Entrepreneurship Networking capability for cross-fertilization

Resistance to Innovation (from Financial Times, December 5th, 2001)

Applications in Society (1)

Innovation outputs are not the ultimate end. They lead to applications in Society. These applications are either internal or external. They correspond to different societal demands: Economic growth: it is estimated that half

of this growth comes from innovation Job creation: not applicable if productivity is

the main aim Poverty reduction: issue of income

redistribution. Bangalore’s Silicon Valley does not benefit to Mumbai’s homeless.


Stronger Military Power: has always been a driving force for innovation. Essential for High Tech development after WW II, somewhat diminished importance since the 80’s

Better Quality of Life: health is main preoccupation. Care for the ageing population and increase in leisure opportunities are new features


Increased Knowledge of our Universe: Science leads to Innovation, Innovation is a key to the advancement of Science (High Energy Physics, Space Exploration, Deep Sea Exploration, Astronomy)


Achieving Sustainable Development: a recent objective that has already become a major driving force for innovation:

Pollution control (air, water, soil) Alternative energy sources, alternative fuels New industrial processes e.g. steel reduction Waste management, recycling, secondary raw

materials Risk management of catastrophic events

either natural or anthropogenic


The success in transforming Innovation outputs into Applications is not automatic. Excellent Innovation does not necessarily mean commercial success. It depends on internal and external factors.

Internal factors: Marketing capability Financial resources Pricing policy Risk taking Timing of introduction


External conditions, often uncontrolled and unforeseeable: Political events (Suez oil crisis and

Concorde) Change in exchange rates (Airbus 380 in $

zone) Accidents (Shuttle accident leading to new

US space policy) Public opinion (GMO’s)

Models for an Innovation Strategy

Innovation models (1)

Innovation is not a process that can be left to chance, counting only on the strength of the input (weakness of EU approach). To be successful, it requires a well-thought strategy corresponding to the specificity of the actor.


For establishing such strategy, various models, or their combination in different variants, should be considered.

These models differ essentially by three features: Knowledge Push or Societal Demand Pull Recourse to Internal or External KC outputs Internal or External markets as targets

KCINPUT

PARAMETERS

EXTERNALFACTORS

SYSTEMPARAMETERS

EXTERNALCONDITIONS

INNOVATIONOUTPUTS

OTHERINNOVATION

INPUTS

KC OUTPUT

SOCIETALDEMAND

SOCIETALDEMAND

KNOWLEDGECREATIONINT. or EXT.

INNOVATIONAPPLICATIONS

IN SOCIETYINT. or EXT.


This leads to 6 models of Innovation:1. Push – Int. – Int.2. Push – Int. – Ext.3. Pull – Int. – Int.4. Pull – Int. – Ext.5. Pull – Ext. – Int.6. Pull – Ext. – Ext.

In addition, one should not forget the special case of the non performance of the Innovation process!


Special case: No Innovation performed internally

The outputs of someone else’s Innovation are used to satisfy the demand or develop markets. Such case has different motivations: Many Less Developed Countries are below the level

at which Innovation can be performed, everything is imported and sometimes imposed to them. It maintains an hopeless level of under–development. Introducing a minimum of S&T and Innovation in LDC’s constitutes a great challenge for a balanced future of the planet.


Special case: No Innovation performed internally (cont.)

Many countries are adopting for enhancing job creation the policy of attracting the so-called “screwdriver factories”. They export high tech products developed and engineered elsewhere. The internal contribution to innovation is quasi zero. The basic requirement is a well-educated manpower and a favorable economic environment. China, Ireland were pioneers in this field.


Special case: No Innovation performed internally (cont.)

This also the case of SME’s with no Research and Development or even technical adaptation capability. Survival is possible if there is talent for recognizing outside sources that could fulfill internal needs.

Finally, globalization with the absorption of many national firms by giant multinationals limit these national firms to a production role, with R&D and Innovation moving to the centers of decision of the multinationals.


Model 1: KC Push. Internal KC base. Internal applications.

The model for the mightiest who detains a strong S&T capability and governs a large market capable of absorbing innovation outputs that have not been subject to a demand a priori. It requires a lot of entrepreneurship

The United States at national level, big corporations fall in this category (e.g. SONY or NTT: importance of Japanese market as a primer).


Model 1: KC Push. Internal KC base. Internal applications.

(cont.)

Could the European Union follow this model? The size of the market now exists but customers are more conservative (The first customers for the Airbus 380 were not Europeans). The S&T capability would be sufficient but the entrepreneurship spirit is less vivid.


Model 2: KC PushInternal KC base. External applications.

This model is valid for countries with a strong S&T potential but with little internal demand: typical cases are Israel, South Korea and in a way Russia. They surf on the wave of globalization.

This model could lead to very fragile situations due to the volatility of the markets. Keeping excellence at its highest level must be a constant preoccupation.


Model 2: KC PushInternal KC base. External applications.

(cont.)

At company level, especially in the European Union, it represents for many the obligatory approach for growing or simply surviving (e.g. STMicroelectronics or Airbus). It requires strong innovative outputs and aggressive marketing. It is subject unfortunately to random external forces.


Model 3: Demand PullInternal KC base. Internal applications.

The perfect example is in the military area for big nations. The military requirements are driving forces for Knowledge Creation and Innovation. The ex-Soviet Union and in some way still now the US with the Homeland Security program were and remain perfect examples of this model. It represents the easiest model to implement.


Model 3: Demand PullInternal KC base. Internal applications.

(cont.)

Sustainable Development applied locally constitutes a new application of such model. Urban management, waste management, mitigation of local pollutions could be a driving force for locally developed innovative outputs.

Most countries and regions with some S&T capability should seek to apply this model. It allows developments less dependent from outside events.


Model 4: Demand PullInternal KC base. External applications

Some countries or companies seek to respond to a demand generated elsewhere. This is the case of small countries like Finland and Sweden, of Taiwan in IT or the case of Russia or Armenia with no internal demand for the time being.


Model 5: Demand PullExternal KC base. Internal applications

All countries or companies having detected an internal demand should not hesitate, when their own KC base is insufficient, to innovate using an external KC base. This strategy is better than just importing ready-made innovation products.

The United Kingdom is fostering such strategy. Japan has done it for a long time.


Model 6: Demand PullExternal KC base. External applications

The country or company is essentially an Innovation processor relying on external KC and an external demand.

Such case is justified if favorable system parameters do exist. Brazil, notably with its aerospace industry should be considered in this case. IT in India is in the some way a similar case.


Model 6: Demand PullExternal KC base. External applications

For its success, it requires the existence of a sufficient internal KC base capable of absorbing adequately the external inputs.


These 6 models are not mutually exclusive and the combination of some of them corresponds probably to the best strategy. Specific conditions of the Innovation environment should dictate the choice.

Are they better models than others? Model 1 is probably reserved to a happy few. In general, demand pull models 3 to 6 are easier to implement


A push model such as 2 could nevertheless be extremely rewarding when developing niches of excellence. Innovative Breakthroughs do exist! The risk lies in the volatility of markets. IBM made a rather unfortunate experience when sticking to model 2.


What about Portugal?

Any mode except 1? A combination of model 3 (for sustainability

issues, for reinforcing own automobile industry), model 4 (developing niches of excellence) and model 5 (learning to import a outside KC base)?

Be very ambitious and develop model 2 (requires utmost excellence) as well as model 6 (requires a change in the environment for becoming competitive)?


What about Switzerland?

A superb educational system that does not prevent industrial stagnation if not decline. Where lies the problem?

Governance in the Innovation Process: the role of the different

actors

Governance - General (1)

Many actors are involved in the Innovation process. It is essential that they intervene at the right level. Innovation is essentially the responsibility of industry but the public sector has an important role to play.

Public policy in Innovation should aim at orienting the support to be given to the activity, not to dictate by decree what Innovation should be.


In the current stratification of the public power in different levels, the main issue is to determine the best level of governance and of partnership with industry


Subsidiarity should be the guiding principle for assigning the right level of intervention but it should not be forgotten that going to the lowest feasible level is not necessarily the most cost effective (e.g. municipal or regional technology parks that don’t reach the critical mass)


Four levels should be considered: International: e.g. WTO, UNIDO, UNDP, UNESCO,

OECD Transnational/Intergovernmental: e.g. European

Union, NAFTA, MERCOSUR, ASEAN National Regional and local

The role of these different levels differs according to the situation in the Innovation chain.

Governance – Knowledge Creation (1)

In the Knowledge Creation area: Providing the right education should be the

basic responsibility of nations and regions. For developing countries, international support is required .

For R&D, including the provision of relevant infrastructures, national actors and in some proportion transnational (EU) actors should be involved.

The regulatory framework for R&D should be EU/OECD responsibility for Europe


The support to the acquisition of external knowledge (spin-in) should be supported by national authorities, notably through the encouragement of Technological Watch agencies (the Japanese JETRO model). Academies and Professional Associations (the IEEE example) could play a role in this respect.


Industries wishing to acquire external knowledge should use tools such as technology awareness centers, technology exchanges, technology brokers with the support of regional or local authorities.

Governance –Innovation (1)

Innovation is a local phenomenon even if it will contribute ultimately to global goals and even if it involves outside cooperation.

Innovation does not benefit necessarily of the scale effect

International or EU intervention, after contributing to the maintenance of a strong knowledge base, should limit itself to the creation of a favorable administrative, regulatory, financial and fiscal environment.


The EU could also be at the origin of a specific demand that would trigger a new innovation process. Environment directives could play such a role; the same applies to the large infrastructures policy (Galileo)

Finally, European bodies such as the European Investment Bank (EIB) should financially assist with long term loans


National, regional and local authorities should be the major supporters of Innovation: Removing administrative barriers Providing financial and fiscal incentives

(not State aids!): state guarantee of loans, co-financing of incubators, co-financing of feasibility and market studies, special fund for prototypes


Promoting education in entrepreneurship Favoring cross- border cooperation Promoting technology parks (not too

many), incubators, spin-offs, etc. Developing modern IT infrastructures Support the creation of Collective Learning

Clusters, and of Idea Centers developing industrial roadmaps, identifying windows of opportunity

Governance - Market Application (1)

The intervention of the public authority should be solely limited to the assist mode. Under this category, using public procurement as a leverage is probably the most efficient: 15% of the EU total market is governed by public procurement

In addition, one could identify: Promoting export of innovative products Facilitating international industrial

partnerships, in parallel with national consolidation

Governance - Market Application (2)

Removing trade barriers (requires probably WTO or EU intervention)

Creating a favorable administrative and regulatory environment

Encouraging business angels and venture capitalists.

Governance –summary (1)

All the measures that have been described should be carefully calibrated in such a way that there is no unbalance in the public power’s intervention that might create asymmetry in the innovation system

Governance –summary (2)

In conclusion

As indicated in the introduction, Innovation is a complex process involving many factors and several internal stages

Analyzing the nature and impact of each of the factors should help in understanding the process and developing models for its development

Strong governance is required while at the same time avoiding the temptation of achieving Innovation by decree. The role of the different actors should be carefully calibrated.

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