Making innovation work

Innovation imperativeDirk Pilat, Deputy Director, OECD Directorate for Science, Technology and Innovation

Today, innovation is central to advanced and emerging economies alike; in many OECD countries, firms invest as much in the knowledge-based assets that drive innovation, such as software, databases, research and development, firm-specific skills and organisational capital, as they do in physical capital, such as machinery, equipment or buildings. The use of information and communication technologies has become universal in only a few decades and new applications, for citizens and businesses alike, emerge daily. But while innovation is all around us, its impact on growth and wellbeing is not always very clear. Moreover, there are growing concerns about the disruptive power of innovation, notably its impact on jobs. Ensuring that innovation contributes to growth, jobs and greater wellbeing therefore remains a challenge, as does the application of innovation to policy challenges as diverse as climate change, health or the delivery of public sector services.

The new OECD report The Innovation Imperative – Contributing to Productivity, Growth and Well-being draws on work on innovation across the OECD and argues that policy makers can do better in marshalling the power of innovation. While firms make the bulk of the investments that drive innovation, government action is key to making innovation work for growth and wellbeing. Policy makers need to foster a sound environment for innovation across the economy; invest in the foundations for innovation, such as research, skills and knowledge infrastructure; help in overcoming critical barriers to innovation; and ensure that innovation ultimately contributes to growth and greater well-being.

One of the difficulties to making innovation work is that it relies on a mix of policies for innovation that go considerably beyond research and innovation alone. The precise mix will depend on the national and institutional context of each country, the level of economic and social development, and the prevailing barriers to innovation. It will also need to be adapted to the specific challenges of different sectors and policy areas, whether public or private, e.g. agriculture, energy, health, education or the public sector. A number of policy areas are particularly important across all of these:

Effective skills strategies: Innovation should ultimately contribute to increasing people’s well-being. It also rests on people that have the knowledge and skills to generate new ideas and technologies, bring them to the market, and implement them in the workplace, and that have the skills to adapt to structural changes across society. However, the OECD Survey of Adult Skills shows that two out of three workers do not have the skills to succeed in a technology-rich environment. A broad and inclusive education and skills strategy is therefore essential.

Development of a sound, open and competitive business environment that encourages investment in technology and in knowledge-based capital, that enables innovative firms to experiment with new ideas, technologies and business models, and that helps successful firms to grow and reach scale. However, policy – ranging from R&D tax credits to environmental regulations – too often favours incumbents, which reduces experimentation, delays the exit of less productive firms, and slows the reallocation of resources from less to more innovative firms. It also delays the introduction of breakthrough innovations in the economy, which is particularly problematic for areas in need of radical change, such as energy. Moreover, it tends to limit job creation: young firms account for over 40% of all new jobs in OECD economies and could probably create even more given the right policy framework.

Sustained public investment in an efficient system of knowledge creation and diffusion. Public investment in research is essential for innovation; most of the key technologies in use today, including the Internet and genomics, have their roots in public research. While such investment has held up reasonably well during the crisis, it is now declining in many OECD countries as these engage in fiscal consolidation and focus more on short-term benefits. As the world faces long-term challenges like climate change and ageing, now is not the time for policies for innovation to be driven solely by short-term benefits.

More balanced support for business innovation: OECD governments have increased their emphasis on R&D tax incentives in recent years, and these now amount to almost 40 billion USD across the OECD. Such incentives often do not meet the needs of young, innovative firms and risk amplifying cross-border tax planning by multinational firms. Better design can help, but governments also need to strengthen support through competitive and transparent grants as a complement to tax incentives. These are more suited to the needs of young innovative firms, can foster cooperation across the innovation system, and can be directed towards areas were government support can have the highest impact.

Increased access and participation in the digital economy. Digital technologies offer a large potential for innovation, growth and greater well-being and can affect also every part of economy and society. However, policy action is needed to preserve the open Internet, address privacy and security concerns, and ensure access and competition. Digitally enabled innovation also requires new infrastructure such as broadband, spectrum and new Internet addresses.

Sound governance and implementation, including a commitment to learning from experience. The impact of policies for innovation depends heavily on their governance and implementation, including the trust in government action and the commitment to learn from experience. Policies for innovation operate in a complex, global, dynamic and uncertain environment, where government action will not always get it right. A commitment to monitoring and evaluation of policies, and to learning from experience and adjusting policies over time, can help ensure that government action is efficient and reaches its objectives at the least possible cost.

Clearly, there is no magic bullet to strengthen innovation performance. However, concentrating policies on these areas for action will help governments in fostering more innovative, productive and prosperous societies, help increase well-being, and strengthen the global economy in the process.

Useful links

Data Driven Innovation: Big Data for Growth and Well-Being

OECD Science, Technology and Industry Outlook 2014

OECD Reviews of Innovation Policy offer a comprehensive assessment of the innovation system of individual OECD member and partner countries, focusing on the role of government. They provide concrete recommendations on how to improve policies which impact on innovation performance, including R&D policies. Each review identifies good practices from which other countries can learn.

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