Dirk 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.
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.
Forum 2015, Investing in the Future: People, Planet, Prosperity will take place in Paris on 2-3 June. It will be organised around five themes: Investment; Inclusive growth; Innovation; the New Climate Economy; and Sustainable Development Goals
45 million people are unemployed in the OECD, which increases the risk of poverty, ill health, and the levels of inequality within our societies.
This legacy of the crisis is undermining the confidence and trust of citizens in everything from governments to markets, businesses and institutions at large.
The Forum will discuss how to promote access to more and better quality jobs, but also how governments, universities, business and civil society can address growing inequality by expanding access to education.
What skills will be needed to make people more resilient and entrepreneurial? And how to promote the exchange of knowledge between people, universities and business that leads both to innovation and more inclusive growth models.
The Forum will also reflect on actions aimed at reducing the gender gap and enhancing the role of women in economies and societies at large, in the context of the celebration of the 20th anniversary of the Beijing Declaration and the G20 commitment to reduce the gender gap in workforce participation by 25 % by 2025.
New technologies and business models are essential to help achieve a NEW CLIMATE ECONOMY, which combines strong economic growth while minimising impacts on the environment.
This will be an important issue in the run up to the COP 21 negotiations in Paris and discussion will be informed by the joint OECD, International Energy Agency (IEA), Nuclear Energy Agency (NEA) and International Transport Forum (ITF) work on aligning policies for the transition to a low carbon economy.
The Forum will be an opportunity to reflect on the importance of a coordinated approach to: mobilise infrastructure investment; rethink taxation and urban development; address resource scarcity and the food-water-energy nexus.
Cities will play a key role in this new economy. Cities already generate around 80% of global economic output, and use around 70% of global energy. 54 % of the world’s population lives in cities today, and this figure is expected to increase to 70% by 2050
The Forum will explore the importance of INVESTMENT in placing economies on sustainable growth paths; addressing inequalities; fostering innovation; helping the transition towards low-carbon economies; and financing the Sustainable Development Goals (SDGs).
Investment is still lagging compared to pre-crisis levels, dampening demand and constraining potential growth. Breaking this vicious cycle is a priority to restore dynamism to our economies and create jobs.
Read more on investment
Ongoing innovation in ICT, renewable energy, nanotech, telemedicine, biotechnology, Big Data and the “Internet of Everything” is offering promising solutions in areas such as health, ageing, climate change, food security and represents an increasingly significant source of future economic growth.
The update of the OECD Innovation Strategy will feed into Forum debates with particular emphasis on governments’ ability to meet social and environmental challenges by creating an enabling environment fostering innovation.
Better Life Index
The OECD will present the 2015 Better Life Index update, incorporating new data and communicating what has been learned from almost 90 000 user responses received since 2011. The Index will be available in seven languages: English, French, Spanish, German, Italian, Portuguese, and Russian.
A complimentary site, highlighting Italian well-being priorities will be launched in conjunction with Expo Milan 2015 in English and Italian.
Today’s post is from Darcy Allen, Research Fellow at Melbourne-based free market think tank The Institute of Public Affairs, and recent author of a new report – “The sharing economy: how over-regulation could destroy an economic revolution”.
The ‘sharing economy’ has emerged because new technologies such as the internet have drastically reduced transaction costs.
Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.
Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions. These businesses make money by taking a fee for facilitating the trade.
Why has the sharing economy emerged? The underlying reason is transaction costs – the costs of coordinating an exchange. This includes the discovery, bargaining, and policing costs of exchange.
As these costs fall it becomes more feasible for consumers and producers to transact. Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience. Hence the emergence of the ‘sharing economy’.
These companies do not sell the ‘resources’ mentioned above. Rather, they sell the software, the matching algorithms, and the reputation of their business. This package provides a service where private parties can discover, bargain and police their own transactions.
Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange: more sustainable use of scare resources by utilising idle capacity; often lower costs for consumers because of decentralised transactions; the ability to customise the details of the exchange; and flexible employment opportunities particularly for the unemployed.
But the future of these benefits is all but smooth sailing. The debate involves regulators, governments and incumbent industries. This is expected with any disruptive innovation. Incumbent industries scramble to protect their valuable position using the political process.
The underlying question of these debates is not really over whether the sharing economy has economic benefits. The question is over who is more effective at regulating emerging markets – governments or civil society?
A recent report by the Melbourne-based free market think tank the Institute of Public Affairs, The sharing economy: how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.
Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.
To be sure, these debates over government imposed control and evolving self-regulation will continue. But it is not sufficient to approach each issue on a case-by-case basis; decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.
This post provides three such design principles.
Regulation should not be by default; it should be the second alternative if bottom-up governance fails.
Regulators must avoid hasty regulation. Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry. Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.
Some may recognise this as Adam Thierer’s idea of Permissionless Innovation. Governments too often follow a ‘precautionary principle’ – that is, regulating against the possibility of hypothetical harm. This locks entrepreneurs into rigid rules that stifle innovative activity.
The sharing economy has a large potential for self-governance. This is an alternative to government control. It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.
These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures. It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.
Moving away from occupational licensing as a signal of quality.
Occupational licensing is government deciding who can supply what services in the market. Licensing is often justified on the basis that it signals quality and safety for consumers.
This is all well and good, but occupational licensing also has costs. It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.
The sharing economy has created significant tension around occupational licensing. This is because private parties can now easily provide services – like transport and accommodation – through unconventional and decentralised markets.
The solution is to encourage alternative approaches such as professional certification to signify quality. Certification does not legally prevent individuals from providing certain services; it allows the market to decide. The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.
We must encourage the sharing economy to create, test and refine their own certification bodies. For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile. These need to be embraced.
Make regulation technology-neutral to avoid entrenching industry structure.
Technology-specific regulation only survives the test of time when there is little innovation. Yet traditional industry structures are continually being displaced. Creative destruction is a good thing.
However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.
Many sharing economy regulatory contests come down to questions such as ‘what is a taxi?’ or ‘what is a bank?’ As industries shift and innovate, these definitions blur. But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.
If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.
Can you have your green cake and eat it too? Environmental policies as an ingredient for economic growth
Today’s post is by Maroussia Klep of the OECD Environment Directorate
In today’s hard times, policy-makers can find it difficult to sell their environmental policies. To many, these policies represent a burden on the economy. They might secure the well-being of our grandchildren, sceptics argue, but risk preventing the growth we badly need today.
In this context, recent OECD findings provide renewed optimism. As revealed by thorough economic assessments, well-designed green policies not only secure long-term wellbeing, but can uphold current productivity levels too. In other words, it is possible to increase the economic pie and make it greener at the same time.
As ecological concerns gained momentum in the last decades, many studies have attempted to identify the impacts of environmental policies on the economy, with varying conclusions. In the United States for instance, scholars tried to relate the economic slowdown in the 1970s to the introduction of such policies; but their results were largely inconclusive. On the opposite side, economist Michael Porter suggested in a 1991 article that stringent policies could actually increase competitiveness: “strict environmental regulations do not inevitably hinder competitive advantage against rivals”, says Porter, “indeed, they often enhance it.”
In a report published this month, OECD splits the difference. The in-depth empirical analysis across OECD countries in the last twenty years revealed that well-designed green policies can sustain current levels of productivity growth.
When new policies are put in place, the more productive and technologically advanced firms are usually those able to reap the most benefits. They have indeed the firepower to seize market opportunities and rapidly adopt new technologies. Besides, once technological improvements are realized in an industry, the positive economic effects will often spread out across industries and countries via integrated production chains. According to OECD, these positive outcomes can be further encouraged if environmental policies offer flexibility for compliance, a reason to favour market-based instruments (such as taxes) over rigid regulations and standards.
In parallel, the less productive and technologically advanced firms may require more investment in order to comply with regulations, and may even have to drop out of the market if they are unable to adapt to changing conditions. In a competitive market, such entry and exit should lead to a swift reallocation of capital and sustain overall industry productivity.
It is therefore essential for policy-makers to support market competition. In particular, the design of environmental policies should as far as possible guarantee a level-playing field among competitors.
This brings us back to our recipe: which are the key ingredients for a “growing green cake”?
First and foremost, OECD argues, legislators shall ensure that the burdens imposed on competition by new policies are minimised and do not inhibit the entry of new and potentially cleaner firms and technologies. As highlighted in the report, countries such as Canada, New Zealand and Israel could further reduce the high administrative costs imposed on new entrants and facilitate access to environmental licences. In the same vein, instruments that favour incumbents, such as subsidies based on past performance, may put young firms at a disadvantage and impede market entry.
But the report also provides encouraging examples. In many countries, green policies and economic wellbeing go already hand in hand. The Netherlands, Switzerland and Austria, for instance, have implemented relatively stringent environmental policies that remain competition-friendly. For this, they have set measures to facilitate market access for new entrants, minimize red-tape and provide fair and equal conditions to all market players. These successful case studies can inspire policy-makers in OECD countries and beyond when designing green policies or revising existing ones.
Of course, the priority of environmental policies is to secure long-term sustainability. However, if the right conditions are put in place, greening the economy while upholding today’s growth trends could become a piece of cake.
The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? by Ambec et al. in the Review of Environmental Economics and Policy
Today’s post is by Hannah Kitchen, Policy Analyst in the Observatory of Public Sector Innovation (OPSI), of the OECD Public Governance and Territorial Development Directorate.
Last week over three hundred people from the public, private and civil society sectors descended on the OECD in Paris. Why? To discuss an innovative public sector. For some of you that might sound like an oxymoron, but over two days stereotypes were left at the door as participants shared stories and learnt about innovation in the public sector.
The conference on Innovating the Public Sector: from Ideas to Impact showcased the public sector at its best. Innovators from around the world stood on stage to give short, dynamic talks about what they were doing at home. There were talks about evidence and innovation in the United States; about police using social media in Iceland; and one about reducing visa applications in Turkey to three minutes online.
Participants also rolled up their sleeves to experiment with innovative approaches for policy making. They tried out design for public services, by mapping their own journey to the OECD and considering how it could be improved. They heard from policy makers from Chile to the United Kingdom, who shared their stories about how they are using innovation labs to build experimental, practical spaces to trial new ways of working and share what works.
Despite all this enthusiasm, the overwhelming consensus was that innovation in the public sector is still no easy feat. It’s difficult to get support from above, it’s difficult to have the time and space to come up with innovative solutions, it’s difficult to find the resources for unproven approaches, and it’s difficult rally others.
Over the past couple of years the OECD has been working with countries to develop the Observatory of Public Sector Innovation, to help them make the most of innovation. The Observatory puts the experiences of innovators from across the world at everyone’s finger tips. Want to know how the Icelandic police actually made social media work for them; or a Finnish hospital used service design to develop a better, more user friendly hospital? The Observatory contains hundreds of examples from across the OECD about how public services are developing more effective, innovative services.
It shows how countries are innovating across the whole policy making process. They are opening up policy making, so that a broader range of actors can shape policies. One way that they are doing this is by making the most of technological developments. Austria for example, is designing new strategies by crowdsourcing comments, advice and ideas from the public demonstrating how governments can involve a wider range of perspectives to source innovative ideas.
The Observatory also demonstrates that innovation is as much about the journey as the results at the end. That means rethinking how to design new services and embracing experimental approaches, prototyping, and trial and error. Public organisations need more agility, more testing and more experimenting on a small scale before investing large sums to roll out a new policy or service. In the United Kingdom for example, the use of randomised control trials is providing real evidence on the results of policy interventions on a small scale, providing a clear evidence base for action. In Australia, the Concept Lab allows the government to trial and fully evaluate potential improvements to services for families, the unemployed, care givers and parents under actual workplace conditions prior to wider roll-out.
Perhaps most importantly, the Observatory also highlights how innovation is resulting in better solutions for citizens, by responding to citizens’ needs, moving the services to them. In France, unoccupied rooms in housing are being used so that the elderly can share flats with others, at once reducing their social isolation and making use of existing underexploited resources. In Sweden, parents can now access information about their child benefits directly from their phone through an app, which also includes up-to-date information for all citizens on their old age pensions.
The Observatory is also an innovation in itself. It was built with an agile, staged approach. Users in countries were involved throughout, testing and retesting prototypes to ensure that it delivers on user needs and to enhance the user experience. More importantly it is a direct interface with innovators themselves – from local schools and hospitals to central government offices – anyone working in the public sector with a story to tell about innovation can use the Observatory to reach an international audience. Through its interactive features users can make their views heard by voting in regular polls, discuss with other users to learn about their experiences, ask questions, and even create their own groups for collaborative projects.
It is just at the beginning of its story. Over the coming months and years we hope that many more people across the public service and beyond will use the Observatory to interact with others and share their examples of innovation.
Have a glimpse of Observatory by watching this video:
Today’s post is from Andrew Wyckoff, head of the Directorate for Science, Technology and Industry (STI) at the OECD. It follows the post by the World Bank’s Gerardo Corrochano about the Innovation Policy Platform on Friday, and is co-published here by the World Bank.
Do you know what FedEx, the well-known overnight shipping company, and Dell Computers, a multinational technology company, have in common? Both firms’ core business ideas were developed by young student entrepreneurs. There are many other stories out there illustrating that universities and other public research institutions (PRIs) are a major source of innovations.
In searching for new routes to growth policy makers around the globe invest high hopes in public research. A premium is being placed on the contributions of public research to the creation of new knowledge capital. The way universities and PRIs operate is also changing including notably the mechanisms and terms on which universities and PRIs are engaging with business and society. We also see that innovation is becoming more open and collaborative and that knowledge circulates more quickly and freely than ever. This inevitably has impacts on the commercialisation of public research.
Recent work we conducted at the OECD on this topic demonstrates the importance of channels other than patents for the commercialisation of public research. The idea that research results reach the private sector in the form of patents, licenses and spin-offs based on patents no longer corresponds to reality. The commercialisation of public research through these channels has shown a general slowdown since the late 2000s. While patenting remains important, universities and PRIs are emphasizing other ways to commercialise their research, notably collaborative research, student entrepreneurship and faculty mobility, contract research and consulting.
Policy makers need to respond to the latest trends with new ways to support public-private knowledge exchange. Facilitating greater access to publicly funded research and data is critical. Moreover, new strategies to link teaching, research and commercialisation, such as student mentoring, can provide the new generation of students with the necessary skills to take their knowledge to markets.
Most importantly, policy makers have to take a strategic view of the intellectual assets generated by public research and demonstrate how these can contribute best to their national innovation system. The Innovation Policy Platform is a valuable tool to help policy makers reach this objective. The Platform helps policy learn how innovation systems operate, identify good practices, and apply effective solutions. The technology transfer and commercialisation, the universities and public research institutes and the intellectual property rights modules of the IPP discuss the critical factors that arise in debates about the commercialisation of public research. The platform also provides information on different countries’ policies in this domain. This information is based on the OECD Science, Technology and Industry Outlook questionnaire.
The IPP is a joint OECD-World Bank initiative, and as such seeks to facilitate knowledge exchange and collaboration across countries and regions on innovation policy. The current site is still a beta version. We plan to introduce collaborative features to more actively support the design and implementation of policies.
For the IPP to reach its potential, we rely on your experiences and feedback. I join Gerardo Corrochano by saying that we look forward to developing the IPP with you.