Innovation policy: the Cinderella of the current debate?

The immediacy and scale of the interrelated public finance and financial system crises have naturally – and rightly -generated the vast bulk of comment and economically informed analysis to date. I wondered whether this reflects an implicit collective judgement that the third part of the government’s soi-disant strategy, namely that related to the role of innovation securing long term economic progress is at best uncontroversial or at worst irrelevant? I seem to recall most reviews of the government’s “Smart Economy” policy document evidencing general scepticism and disappointment that this focus for policy action was, to put it mildly, misplaced in the eye of the fiscal and financial storms by then well underway.

I would argue the need for more critical analysis to be focussed on this area—understandably more so if and when we’re a little surer we’re not going bankrupt tomorrow, and/or have to ritually abase ourselves before the IMF—but nevertheless at some stage.

My concern is that the policy machine keeps working, explicitly rationalising more government expenditure and significant institutional policy shifts (without much apparent economic oversight), by ritually linking of such policies to economic growth.

For example, Science Foundation Ireland today announced the allocation of €24m in respect of five new “Strategic Research Clusters”. There’s a broad debate to be had here, but one wonders whether this (by now unremarkable type of initiative) prompts the question for example whether innovation policy here, is or could become, merely a Trojan horse for old-style ‘picking winners’ industrial policy, particularly at a time when there are no apparent limits to the scale and scope of government intervention which in other contexts is now deemed acceptable.

Much more specifically, is there any concern that the renewed emphasis on commercialisability (and thus at least partial private capture) of outcomes of publicly funded research on the part of the policy makers is in unacknowledged tension with the original public good rationales for the ramping up of publicly funded R&D?

I was prompted in part to raise this kite by Nicholas Craft’s VOX post of July 2008 on ‘learning to love creative destruction’ which concludes in part:

Politicians find it attractive to wax lyrical in support of the “knowledge economy” and rush to adopt targets for R&D spending and participation in tertiary education. This “happy clappy” approach to addressing Europe’s productivity growth shortfall keeps them in the comfort zone. More progress would be made if the dark side of productivity improvement implied by creative destruction – exit of established producers and re-deployment of labour – were accepted and facilitated.

12 thoughts on “Innovation policy: the Cinderella of the current debate?”

  1. You’re right to raise the issue Aidan. Though it’s news to me that there is a “renewed emphasis on commercialisability”. I suspect any shifting emphasis towards private sector involvement is less about private capture of the gains (Nordhaus reminds us that just 2.2% of the value created by innovations go to the innovators), and more about sharing the cost/risk.

    As it is, we’re not doing too bad in relation to innovation practices – if you believe the measures. A US report on innovation published today ranks Ireland 13th out of 40 countries/regions surveyed: comfortably above the EU15 average:
    http://www.itif.org/index.php?id=226

    But I’m with Amar Bhide who says we have fetishised the entrepreneur and innovator due to our infatuation with Schumpeter’s Creative Destruction metaphor: http://www.econtalk.org/archives/2009/02/bhide_on_outsou.html

    Instead he points to the insights of Hayek: innovation isn’t a function of governments picking winners, rather it is a function of buyers/consumers in the marketplace determining what is a ‘successful’ innovation or not. So we should let a thousand innovations bloom – knowing that we the consumers will reap 97.8% of the gains.

  2. Aidan raises a number of important points. I agree that Irish economists need to be having a serious debate about these issues. I know the questions are complicated and answering them is often hindered by problems with data availability. But, as of right now, my sense is that public policy in a crucial area is being set with essentially no input from economists. I’d love to see something like an afternoon session organised on this issue, even if the purpose was just to review existing literature.

    At my own university (and I assume all the others) debates are being had about how to calibrate our pitch for PRTLI research funds to fit with “The Smart Economy” agenda. Funnily, however, economists don’t feature in these discussions. (Perhaps an input from smart economists isn’t necessary to have a Smart Economy!) This omission, however, may partly be due to the lack of engagement to date by Irish economists on these issues.

  3. Innovation needs also to mean innovation in delivery of public health and education services and also innovations in the way we deliver social benefits. This is as prominent in the pages of modern economics journals as discussions about building entrepeneurship or even rescuing ailing banking systems but less prominent in the discussion of innovation in Ireland.

    Some major gains could be made here at relatively low cost if there was a shift in emphasis toward rigorous policy making with defined cutoff points for trial policies. For example, the potential benefits from well delivered chronic illness management programmes are extremely high as are those from better delivered early child services. All of this is mentioned in places in the SMART Economy document and the SSTI but the clear focus of innovation policy in Ireland is on the development of large scale clusters aimed at creating critical mass in key scientific areas backed up by a university system creating a larger number of doctoral and post-doctoral researchers in science and engineering. Less attention is being given to simple things like how best to discharge a patient from a hospital or what programmes might redress deficits in third-level entry ability in mathematics and we need to start putting numbers on the benefits of improving these things. A SMART economy document focusing on development of human and health capital through innovative service delivery would be a worthwhile counterpart to the discussion of more traditional “innovation” areas. One problem with involving economists in these areas is that many policy-makers think economics is about simply adding up monetary costs and benefits whereas many of the real benefits in innovative public policy are subjective in nature such as patient quality of life. These can be monetised but this is more complex and often such benefits are effectively ignored.

    For examples of modern economists doing very strong work on innovations in public policy, see the recent Economist article that profiles people like Roland Fryer and Esther Duflo and the work that they have been doing in education and development.

    http://www.economist.com/finance/displaystory.cfm?story_id=12851150

  4. I hopei I will not be seen as hijacking the thread for a discussion of the Irish psyche (and I hope at lease someone thinks it is relevant).

    I have been in the innovation business, and I will tell you this. We do not seem to be a country that readily embraces change and new products or new ways of doing things. We do tend to be conservative as a nation. That could be why there is the stereotype of the Irish person being successful once they leave Ireland. Conservatism is not necessarily always a bad thing, but it is important to look beyond the rhetoric to what is really going on.

    When I say change, I don’t mean the same thing as being flexible. We have gained a lot in flexibility, or maybe we have always been flexible. But change is a different, more difficult thing, at least for us.

    Sometimes we come up with grand plans for innovation which are just not realisable. But innovation is something you do. It isn’t innovation to talk about things that could be different.

    So what I am say is that to innovate requires a state of mind and we need to think about how we develop that state of mind.

  5. Good point Antoin, and a key one. I joked with a client recently that ‘innovation and entrepreneurship is what you do when you run out of alternatives’. I think that’s how a lot of Irish people look at it: we’d rather buy land and flip houses than actually invent and sell stuff. Though that might have changed recently …

    Here’s a good report I’ve just come across from the EIU showing that innovation is like retailing – it’s all about location, location, location: http://www.finfacts.ie/irishfinancenews/article_1016047.shtml

  6. Part of our problem in the past 30 years has been our success in attracting FDI. We have relied on foreign companies to create our employment but overall these companies appear to have about a 10 year life span. Many do get involved in R&D but there is no guarantee that will benefit us in terms of employment. When decisions are made to retrench we are powerless.

    We need to encourage home grown world industries.

    I have always had a great admiration for the Danes. They are a small country too with a big powerful neighbour and yet they have developed some worldclass industries. Did you know they are the second largest exporters of pigmeat (after the US). Why – they branded Danish Bacon.
    They also have shipping, lego, furniture assembly, Bang & Olufsen, those funny little biscuits and of course Carlsberg.

    I was involved in DIY retail for 13 years and we bought flatpack furniture assembled in Denmark. The company is one of the largest suppliers to Ikea. They import all the raw materials but they have developed a really innovative assembly line. It weighs the items as they go along and the system will know if there is a screw missing! They also made sure the instructions were understandable by getting school children to assemble the products. The product was a bit more expensive but made up for it by the quality.

    We do have some excellent brands – Baileys Irish Cream is innovation at its best, using high quality Irish ingredients to develop a new brand that is now known around the world. We need to develop more.

    We have the people, we have the educational structures, we have entrepreneurs. They just need to be nurtured.

  7. It seems to me that often the policies adopted to further the development of the ‘knowledge economy’ are in direct contradiction.

    One example of this is that the aim (referred to by Liam) of increasing the number of doctoral and post-doc scientists is probably hampered by the aim (referred to in Nick Crafts’ quote) of increasing third-level participation. I doubt if many academics here would disagree that standards are falling, and this is partly (but not, I think, entirely) because of the changing ability distribution of our students; this can mean that the brighter students are less challenged and less ready for good doctoral work.

    Another example is that the dumbing down of Maths at Leaving Cert level in an effort to make it more ‘accessible’ to students means that they increasingly have limited ability to think logically, Maths being the one subject that everyone takes that nurtures this ability. This has an effect on the quality of students in many disciplines, including our own, but particularly in Science and Engineering. Entrepreneurs are disproportionately drawn from engineers, so any policy that reduces students’ ability to get through an Engineering degree should be of national concern.

    (But perhaps my views on students’ ability to think logically are coloured by the fact that I just finished grading first semester exams.)

  8. Innovation policy in Ireland has been captured by the science community. Even the word has now become associated with Science and Technology – when it is essentially a business concept. There can be no innovation without a market. The science-push approach of Irish policy is certainly at odds with how most innovation occurs and I agree with Aidan Kane about the ‘picking winners’ issue.

    A post on the Cork Economics blog http://www.corkeconomics.com/?p=26 talks to this issue.

    Gerard O’Neill says we have fetished the innovator and entrepreneur – but I don’t agree. We have fetished the scientific/technological innovator and completely ignored innovation non-technological innovation. (I even think the distinction between innovation and entrepreneurship is a redundant and unhelpful one.) Schumpeter says in his his famous definition of innovation that new products/sevices and processes ‘need by no means be technolgical’.

    We need to recognise that Irish innovation policy is now just a high-risk €2bn gamble.

  9. Incentives for Research & Development
    Ireland is promoting itself as a knowledge economy and the Government needs to create initiatives to increase the number of Phd and doctoral students within Irish universities. With several high profiled international companies and indeed the United States and other countries committing themselves to increase the amount spent on research and development, I believe the Government needs to implement incentives not only for companies to locate in Ireland and carry out this research but also for indigenous companies to take up research and development. Tax incentives for companies who allow employees to work part-time (50%) whilst studying for a research masters or Phd should be introduced. Incentives should ensure it does not cost a company any more to hire two part time employees or indeed release 1 employee part time and take on another part time than it would to hire 1 full time employee. Incentives need to be introduced to get people who have experience in the work force to go back to college to carry out this research. Such incentives could include a 100% income tax break for people working part time and carrying out research. The overall net difference to the exchequer would be minimal and would reduce unemployment whilst increasing research and development. The Government could also take a small percentage of any research produced.

  10. Thanks for all for comments: a lot to digest here, even so far, so I hope we’ll have a continuing discussion in this spirit.

    @Gerard: thanks especially for the link to ITIF http://www.itif.org/index.php?id=226 – what I found especially interesting was that this report is partly by way of response to a RAND publication very critical of recurrent dire warnings of the loss of US scientific and technological competitiveness i.e. that at

    http://www.rand.org/pubs/monographs/MG674/

    A debate at this level is long overdue in Ireland (while acknowledging of course that some sterling efforts have been made by scholars in Cork and in Dublin especially to flag related concerns).

    You rightly point to Bhide as a key international thinker in this area, and while I’d have to read him more deeply on creative destruction I do think his emphasis, re-inforced by others here, on the demand side (venturesome consumption) rather than on merely science-push supply policies is acutely relevant to Ireland and to Europe.

    @Karl: thanks also: and indeed the evolving PRTLI criteria are an exemplar of some of the tendencies I mention (herein for example is the greater emphasis on commercialisation and technology transfer I referred to in passing). I would argue this last policy priority might well be explicable less in terms of a coherent assessment of public and private benefits from R&D, but more in terms of the political economy need for policy participants to provide quantitative indicators of performance (oh beloved metrics) to funders, and ultimately the government. A workshop on scoping out this area for those interested would be a superb event I think and would undoubtedly bring together much work underway which I at any rate have missed.

    @Liam thanks also for these thoughts and the follow up reference: am particular taken with the example of policy innovation and experiments typically under-regarded in this discourse.

    @Antoin: I think you’re flagging a complex area here also: I’d probably be reluctant to point to national psyches as explanatory factors per se, and indeed the example you mention of the Irish abroad might indicate that we need to foucs not so much on some innate degree of innovativeness but on the institutional structures we have created here, which have often distorted and diverted such energies, while those in many countries abroad have created more positive entrepreneurial architectures.

    @Aedin; the area of third-level participation and more broadly again, the ‘skills needs’ agenda is probably the more glaring example of where contributions from economists are badly needed, as an antidote to what I think is often a fairly unreflective urge to plan market outcomes. Are some of the exercises conducted here
    http://www.forfas.ie/publication/search.jsp?src=EGFSN
    not predicated on a fairly static and static view of labour markets, for example?

    @Declan: thanks particularly for the link to the Cork economics blog and the related content there, which very clearly sets out some of the ground here.

    Sorry to other commenters that I have no detailed response right now (time flies..), but I’m sure this discussion will take a number of directions over time.

  11. Cheers Aidan. One last link – this time to a succinct summary by Bhidé of his own thinking for McKinsey: http://www.mckinseyquarterly.com/Where_innovation_creates_value_2304 (might need free registration)

    One quote to give you a flavour:

    “Techno-nationalists and techno-fetishists oversimplify innovation by equating it with discoveries announced in scientific journals and with patents for cutting-edge technologies developed in university or commercial research labs. Since they rarely distinguish between the different levels and kinds of know-how, they ignore the contributions of the other players—contributions that don’t generate publications or patents.

    They oversimplify globalization as well—for example, by assuming that high-level ideas and know-how rarely if ever cross national borders and that only the final products made with it are traded. Actually, ideas and technologies move from country to country quite easily, but much final output, especially in the service sector, does not. The findings of science are available—for the price of learned books and journals—to any country that can use them. Advanced technology, by contrast, does have commercial value because it can be patented, but patent owners generally don’t charge higher fees to foreigners. In the early 1950s, what was then a tiny Japanese company called Sony was among the first licensors of Bell Labs’ transistor patent, for $50,000.

    In a world where breakthroughs travel easily, their national origins are fundamentally unimportant.”

    I hasten to add I’m not accusing anyone party to this debate of being either a techno-nationalist or techno-fetishist!

  12. For an insight into the public sources of innovation within the US economy there is an excellent report available at:

    http://www.itif.org/files/Where_do_innovations_come_from.pdf

    The level of public funding that the most successful innovative firms receive in the US runs well above the level received by Irish firms – different size economies, to be sure, but the firms are competing in the same international markets. The infrastructure of higher education and federal labs in the US is far more developed and turns out to be very important in the success of innovative firms.

    I don’t see that increasing PhD student numbers and overall participation rates is necessarily contradictory. After all, we have presumably been losing plenty of talented potential PhD students due to class differences in educational participation over the years. The problem arises I think from the poor resourcing – we don’t have the staff and time to dedicate to top level graduate work and do intensive undergraduate education. So the Irish system is tending towards credit accumulation at the graduate level and further mass information delivery at the undergraduate level. While student exams and essays are often depressing to read, it’s not all their fault – could be partly to do with the structures in which they are being ‘educated’.

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