Innovation policies to promote more inclusive growth: comments OECD-WB Conference on Challenges and policies for promoting inclusive growth 24-25 March 2011, Paris Sarquis J. B. Sarquis OECD Liaison Office, Brazilian Embassy
Comments on Teubal and Kruznetsov Object: endogenous innovation policy process Case study: Israel A theory of innovation policy practice based on judgment, experience and observations Descriptive model: 3-phase Evolutionary, but not continous / linear Real and complex context: information assimetry, moral hazard, scale, critical mass Policy (NO one-size fits all ): flexible, pragmatic, timedependent... trial-error search, experimentation, anticipatory thinking, adaptation and replacement 2
Israel is a extreme and unique case Starting point and/or history matter human capital international diffusion of ideas Case of study? International connections, linkages, finance (Diaspora) Some of these are exogenous, and go beyond context, shocks, policy, institutions and structural changes Contribute to the ability to start closer to frontier or to shorten distance faster Sustained and intense Governmental policies: R&D reaching 2.6% of GDP by end of phase 2, that is above OECD and close to US by 1992! 3
Inclusive growth and international imbalances R&D expenditure, % of GDP Source: World Bank Annual growth (1997 to 2006), % 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0-0.5-1 -1.5-2 ISR AUT AUS DNK KORFIN JPN DEU SWE CHE BRA USA FRA NLD 0 0.5 1 1.5 2 2.5 3 3.5 % of GDP, 1997 4
Endogenous process? Despite reference to a variety of indicators and policies, too much emphasis on VC as driving market force (Phase 3 culminates with intense VC activity) Government policies providing funds for innovation differs from those stimulating private finance sources Policies to assure the evolution of (mixed public-private) endogenous process; combination of policy and market forces in tandem with co-evolution of supply and demand of innvoation finance and human capital (vocational, higher education, training, learning by doing) Structural changes as much as productivity enhancement in an evolutionary way 5
Funding of innovation Finance capital accumulation R&D Growth market incentives R&D risky and long term project Intensive not only in non rival goods (ideas), but also in rival goods (physical and human capital), which can be in their turn also hard to finance Cumulative process combining tangible and intangible assets Uncertainty (and varieties expressed in financial markets) leads to a pause in investment, hiring and R&D, partially corresponding to unobserved negative productivity shocks (N. Bloom, 2007) 6
Funding of innovation Limits to VC as a solution to funding gap, especially in countries (developing, but also developed) where VC markets are underdeveloped (Hall and Lerner, 2009) missing (funding) gaps are found before, during or after Phase 3 Risks and constraints in the economy and financial markets impair innovation, and the financing of it in a magnified way, requiring quite high rates of return Financial market development to address financing of investment and innovation (public and private) 7
Inclusive growth? Micro / macro evidence: unconstrained investment countercyclical; as constraints tighten, investment more pro-cyclical and with less than proportional recovery during upturns after recessions; results magnified for more heavily reliance upon external finance and more financially underdeveloped economies (e.g. Aghion) LDCs, SME, segmented and/or some non-tradable sectors, sectors requiring segmented finance / illiquid markets 8
Inclusive growth? Private and social returns: getting right economic incentives and institutions (IPRs) is hard and complex in theory and in practice (political economy, competition); Public interest / involvement / action crucial at all stages Israel and other front-runners US and Europe in keeping and advancing technological frontiers Open economy industrial policy in Asia Uneven by definition, even without choosing winners! Diffusion domestically and internationally requires greater research 9
5 4 3 2 1 0 R&D / GDP, % (Source: OECD) 1981 1982 1983 2007 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 Brazil in international perspective US EU OECD Brazil China India Korea Mexico Japan Israel 10
Brazilian R&D Gradual expansion of R&D expenditure (as % of GDP) since the 1990s Such expansion closer to global trend, but not as accelerated as in China, Korea, Israel and other frontrunners Most R&D expenditures funded by the public sector: at the federal level, but also at state and local levels BERD increased faster in the last 10 years Most still by state controlled or public companies (e.g. Petrobrás, Eletrobrás, Embrapa) Concentration in recent years 11
Firms with R&D activities (%) 10.0 Firms with R&D activities (%) 10.0 8.0 8.0 6.0 6.0 4.0 4.0 R&D Internal R&D External R&D 2.0 2.0 0.0 0.0 2001-2003 2003-2005 2006-2008 2001-2003 2003-2005 2006-2008 R&D Internal R&D External R&D 12
BERD / Net Sales Revenue (%) 1 0.8 0.6 0.4 0.2 0 2001-2003 2003-2005 2006-2008 R&D Internal R&D External R&D 13
Business R&D Surveys (PINTEC, 2000/03/05/08) covering 106 thousand firms Foreign firms focus more on adoption/absorption Firms investing in R&D generate wage premiums of 23% Top innovative manufacturing sectors are high & medium tech: automotive, chemical and pharmaceutical, IT and communication equipment, machine and equipment, electronic components Top innovative services: software(58,2%), telecommunication (46,6%), other IT services (46,1%), 14
BERD: funding gap and market incentives Supply and demand of (sophisticated) skilled workers (vocational and higher education e.g. engineering) Trade openness, FDI, competition and regulation Tax credits ( Lei de Inovacao, 2004) : US$ 1 billion by 2010, with increasing benefits to SME Partnership between public and private institutions Long term finance for innovation (National Bank for Development / BNDES): about US$ 1 billion annually in 2008-2010 (high / mid-tech sectors) VC+PE+seeds supported by FINEP (program INOVAR): since 2000 about US$ 3 billion, 32 funds, over 80 startups Novo Mercado providing platform for IPOs for new firms and start-ups (e.g. Natura in cosmetics)