It's Industry Structure, Stupid

It’s Industry Structure, Stupid

Another interesting report has been published on the European Union’s 3% target (the objective of increasing R&D expenditure in the EU to 3% of GDP by 2010). Prepared by a team of European and Australian researchers, the report, entitled "Does Europe Perform Too Little Corporate R&D? Comparing EU and non-EU Corporate R&D Performance," uses a new firm-level database to examine the structural factors that underlie the persistent gap between the R&D intensities of the European Union, Japan, and the United States.

The report finds that large European firms invest about the same in R&D as their U.S. and Japanese competitors—in some cases more—when measured as a percentage of sales. The aggregate EU-U.S. gap, the study finds, results from a lack of medium-sized R&D-intensive firms in Europe and from the much smaller size of high-technology industries in the European economy. Information technology (IT) hardware and software firms accounted for 19% of the total sales of the U.S.-based firms in the database versus only 3.3% of sales among the European firms.

This report lends further credibility to claims that Europe’s lagging R&D intensity results from structural characteristics, not underinvestment in R&D by individual European firms. Hence, policies aimed at encouraging individual firms to invest more in R&D may not be as effective as efforts to stimulate structural change. The authors duly call for Europe to improve conditions for entrepreneurship and the growth of small, high-technology companies—a generally accepted proposition, even if some of the needed changes would entail difficult reforms in some European countries.

Rather than call for a more explicit attempts to shift Europe’s industry structure toward high-technology manufacturing, something “almost never discussed openly in Europe,” they call for a widening of the focus of innovation policy away from R&D inputs and toward a broader assessment of different innovation patterns that exist in different industry sectors. “The real issue,” they write “is not an idealised industrial structure, but how actual industrial structures perform in terms of macroeconomic stability, sustainability of growth, innovation, employment, productivity, income and wealth distribution, access to services, government budgetary performance, or external balances.”

Such calls recognize that innovation is not an end in itself, but a means to achieve other economic (and societal) objectives. They also reflect the notion that innovation is not driven by R&D alone. The service sector, which accounts for two-thirds of economic output in the OECD area, is dominated by nontechnological innovation: R&D plays a limited role in the financial services and business services sectors, both of which are highly innovative (according to recent innovation surveys), employ growing numbers of highly skilled workers, and contribute to growth across OECD economies economy. Rather than focus on R&D-intensive industries, greater benefits may lie in a broader set of knowledge-intensive industries and in the timely application of new knowledge to all industries so that they may become more competitive and generate improved economic results.

The report is a manuscript of the European Commission’s Joint Research Centre (IPTS). It was written by Petro Moncada-Paternò-Castello and Constantin Ciupagea (European Commission Joint Research Centre, Institute for Prospective Technological Studies (IPTS), Seville), Keith Smith (Australian Innovation Research Centre, University of Tazmania), Mike Tubbs (UK Department of Trade and Industry) and Alexander Tübke (IPTS).

Is Patenting Impeding Research?

Is Patenting Impeding Research?: Madrid Conference

A conference organized in Madrid by the Spanish Research Council, Spanish Patent and Trademark Office and OECD on May 18-19 examined the issue of research access to patented inventions. The conference addressed concerns that as more inventions are patented and as universities and government research laboratories become more engaged in patenting and commercializing inventions, research might be stifled by a lack of access to inventions or that researchers might avoid fields of research that are littered with patents.

Presentations, by economic and legal researchers, business executives and policy makers from Europe, Asia-Pacific, and the United States indicated that problems of research access are not widespread but could become more prevalent as innovation in multi-disciplinary fields (such as nanotechnology) bring together firms and researchers with different approaches to handling intellectual property rights and as the economic value of these fields grows. The current situation of benign neglect—in which researchers are often unaware of potential infringements and patent holders are reluctant to exert their patent rights—might not be an optimal or enduring solution. As summarized by Alison Brimelow, president-elect of the European Patent Office, "Not too many people get killed jaywalking, but is this the best way to cross the road?"

Concerns over research access appear to be more widespread in the United States than in Europe. This may reflect a greater tendency toward litigation in the United States, the lower level of patenting and commercialization in European universities and public research labs than in their U.S. counterparts, or greater clarity regarding research (or experimental use) exemptions in Europe. Most European countries have research exemptions written into their patent laws, and most explicitly limit the exemption to research "on" a patented invention (with the aim of better understanding or improving upon it) rather than research "with" the invention, which is of particular concern to firms that market tools for biotechnology research, for whom unlicensed research with their inventions results in a loss of revenue.

Accepted on both sides of the Atlantic (and the Pacific) was the notion that better information is needed about the effects of patenting on research. Surveys like that recently conducted by the American Association for the Advancement of Science can provide insight into differences across countries and scientific disciplines. Many speakers also emphasized that higher quality patents (e.g., those that meet a sufficient level of inventive step and with narrow claims) would engender greater respect of patent protection by researchers and be more effective than research exemptions in regulating behavior. As a number of countries are currently reviewing their patent laws with an eye toward reforming research exemptions, this issue will be with us for some time.

Conference materials, including a background paper are available on www.oecd.org/sti/ipr. A summary report is forthcoming.

How Are We Doing? Evaluating Innovation Policy

How Are We Doing? Evaluating Innovation Policy

With the rotating presidency of the European Union currently resting in Austria, the Austrian Platform for Research and Technology Policy Evaluation, Austrian Science Fund and Federal Ministry of Transport, Innovation and Technology, organised a high-level international conference on “New Frontiers in Evaluation” on April 24 and 25. The event drew some 250 government officials, academics and professional evaluators from Europe, North America and Asia, to discuss emerging needs for evaluating science and innovation policy and new tools for addressing them.

Evaluation seems to be gaining importance in many countries as they seek to improve the efficiency of government spending and increase public accountability. In the European Union, evaluation is also seen as a tool for helping countries identify and improve the policy instruments they need to meet the Barcelona target of raising R&D spending to 3% of GDP by 2010.

Irwin Feller, of the AAAS, echoed this theme in his keynote address, during which he encouraged the audience to see evaluation not simply as a retrospective exercise to determine the success of individual programs, but a prospective process to guide policy making. He called, in particular, for improved ex-ante evaluation to help policy makers select among competing research priorities and new techniques for evaluating multidisciplinary research, which can challenge long-standing peer review mechanisms. Luke Georghiou, of the University of Manchester, cautioned against under-evaluation and called for evaluators to measure more than the easily quantified effects of policy interventions, such as R&D spending, patents and sales, and to develop techniques for measuring changes in firm strategies or skills, economic benefits to consumers, and societal benefits. Under-evaluation may lead firms and governments to under-invest in R&D and innovation.

Parallel sessions revealed the state-of-the-art in topics as wide-ranging as portfolio evaluation, selection processes, peer review and systems innovation. Yet, it was agreed that much remains to be done. Ken Guy (Wise Guys, Ltd., UK) cited challenges caused by the expansion of stakeholders involved in innovation policy, the range of instruments used to stimulate innovation and challenges policy aims to address. Austria’s Dorothea Sturn warned of a growing disconnect among program managers, policy makers and evaluators. Nick Vonortas, of George Washington University, called on the evaluation community to be daring and experimental in developing new approaches. France’s Philippe Laredo foresaw a “comeback of evaluation” within academic circles as it seeks to improve evaluation techniques. Toward this end, Gerhard Kratky of the Austrian Science Fund (one of the co-organisers of the event) announced another conference on evaluation to be held in Vienna in May 2007, with the title “Rethinking the Impact of Scientific Research on Society and Industry.” This even will present another chance to check on progress in policy evaluation and its impact on policy.

Material from the “New Frontiers in Evaluation” is available online at www.fteval.au.

OECD studies link between innovation and economic growth

A recent report that has been attracting attention in Europe is one released last month by my own organisation (the OECD) entitled Going for Growth. This is the second in what is to become an annual series that compares the performance and policy settings of OECD countries in a broad set of domains that contribute to economic growth. This issue is of particular interest to the science and technology policy community because it extends the surveillance to innovation, reflecting a growing recognition that science, technology and innovation play an important role in driving economic growth. While this has been accepted in science and technology policy circles for some time, it has been slower to find acceptance in other economic policy domains in a number of countries.

This is certainly not the first time the OECD has studied the links between innovation and growth, but this work differs in that it takes a broad perspective that considers both innovation-specific policies (such as R&D funding and support for university-industry links) and more general economic policy related to competition, education, and financial and labor markets. The report shows that both types of policy are important to innovation performance and offers country-specific recommendations for improving policy. Recommendations for the European Union include introducing a “community patent” and making the patent system more accessible to small firms; increasing competition for research grants by making national grant competitions subject to European Community rules governing cross-border procurement (i.e., opening them to international competition from other EU countries); removing barriers to cross-border trade that limit the size of markets for innovative products and services; and giving greater priority in EU R&D funding to projects with greater economic spill-over. The report is likely to give impetus to reforms in a number of countries and to the development of indicators that can allow better comparisons of policy settings across OECD countries.

The report is available at www.oecd.org/growth/GoingForGrowth2006

The ongoing debate over increasing the innovative capacity of the European Union received further stimulus in late January, when an independent expert group chartered by the European Commission released its report, Creating an Innovative Europe. The 30-page report was prepared by a four-person team consisting of: Esko Aho, the former Prime Minister of Finland; Josef Cornu, former President and COO of Alcatel; Luke Georghiou, Associate Dean for Research at the University of Manchester, and Antoni Subirá, former Minister of Industry, Trade and Tourism in the Catalan government.

The report sees research and innovation as a “path to prosperity” that can help fend off the growing threat to the European way of life posed by increased global competition. The central recommendation of the report is to establish a Pact for Research and Innovation that will commit leaders from government, business and academia to create an environment that will encourage firms to invest more in R&D and innovation in Europe. It calls for improving market conditions via harmonization of regulatory regimes, standards-setting, public procurement to stimulate demand for innovative products and services, adoption of the Community Patent and establishing a culture that encourages innovation.

Such actions are central to the EU’s Lisbon and Barcelona objectives, which were established by European leaders in 2000 and 2002, respectively, aim to make Europe “the most competitive and dynamic knowledge-based economy in the world” (the Lisbon objective), in part by raising R&D spending in Europe to around 3% of GDP by 2010 (the Barcelona objective), two-thirds of which is to come from industry. This would represent a significant increase in EU R&D spending which stood at 1.8% of GDP in 2001, according to the OECD, due to lower levels of industry-financed R&D than in the United States and Japan. Many EU countries have established national objectives that would raise EU R&D spending to 2.6% of GDP by 2010 if achieved, but overall R&D spending has remained flat, leading the European Commission to relaunch the Lisbon agenda in late 2005, emphasizing knowledge and innovation as engines of growth and re-affirming the 3% target.

The “Creating an Innovative Europe” report views the 3% target not as an end in itself, but as an indicator that Europe has succeeded in implementing needed reforms. It sees a need, however, for improving government funding of R&D by ensuring that excellence is rewarded, creating critical mass in research capacity and recognizing that large and small firms play a symbiotic role in the “industrial ecology.” The report calls for further steps to improve mobility – of human resources (internationally as well as between the public and private sectors), of financing (to encourage venture capital), and of organizations and knowledge through use of technology platforms and regional clusters as means for organizing innovation.

While it is too early to tell what effect the report will have on the ongoing debate, its call to action should attract considerable attention. The report may be downloaded from http://europa.eu.int/.