Making the link between innovation & job creation

By Dirk Pilat

Why should countries care about innovation? In short, it accounts for at least 50% of a country's economic growth. Innovation is embodied in the fixed capital companies invest in — the machinery, equipment, buildings and structures. It is also in knowledge-based capital, those intangible investments such as software, data, R&D, firm-specific skills, organizational capital and branding. This is where more companies are starting to invest and it is this broader set of assets which are increasingly driving the economy forward.

The question then is, do we have the policy frameworks right for these new assets? Do we have the intellectual property rights systems in place which match the needs of the 21st century? Are we supporting private company investments with the right kind of public investments? Do we have the necessary broadband networks? Do we have the right policy for telecommunications to make it all work?

This also links to innovation policy and support for business R&D. Typically, countries have two main sets of instruments: indirect support, namely R&D tax credits, and direct support which includes grants and loans and sometimes public procurement. Canada relies quite heavily on R&D tax credits, as do countries like Korea, France and the Netherlands. In contrast, countries like Germany, Switzerland, Finland and Sweden focus more on direct support. Good examples of these are the UK's Catapult centres and Germany's Fraunhofer Institutes which leverage public research and build the links between the public research system and industry by putting public money on the table.

The OCED has become more critical of R&D tax credits over the past few years, based on recent work to better understand the mechanisms and support instruments that work best. Countries are spending more on this type of support. Recently Sweden and Finland introduced R&D tax credits because they felt they needed them to attract R&D from multinational firms. R&D tax credits tend to favour mainly large multinational firms, more so than young, innovative firms.

It's important to look again at R&D tax incentives — and I know this was done in Canada a few years ago with the Jenkins report (R$, October 31/11) — to ensure they do provide value for money and can also support some of the innovation happening in smaller firms.

Increasingly, we're also seeing that public research really matters. A lot of the OECD's analyses clearly show that investment in public research is an important driver for advancing knowledge, making connections to other countries and improving long-term productivity growth. Yet, at the moment, several countries are too focused on the short-term, trying to squeeze too much out of public research too quickly.

One of the key lessons we've learned is that policy issues are about balance and design. How do we get the balance in the system to ensure we don't focus on only one type of support instrument, while generating returns on government investments?

When we look at innovation policies across countries we also see a real lack of evaluation. We often do things because we've been doing them for a long time. We need to engage in more evaluation and comparison across countries to understand that what we're doing is the most sensible thing.

Young firms create jobs

The OECD recently looked at the importance of business dynamism to young firms in different countries. The results were surprising. A lot of new jobs that are being created across countries come from firms less than five years old.

Interestingly, we've always talked about small- and medium-sized enterprises (SMEs) as being the driver of job creation. Unfortunately that's not true. With older SMEs (more than five years old), job destruction — where jobs are being lost — is more common than job creation.

However, we do have a problem. In many countries, these younger firms don't scale enough, which means fewer new jobs. We're also finding that fewer new start-ups are being created.

What conclusions can we make? The first is the need for policies that encourage experimentation. We are in a period with a lot of technological change and a lot of new opportunities. As an entrepreneur, you don't necessarily know if your technology, your business model or your idea is going to fly. We need to give room for experimentation in the marketplace to test those ideas.

Foster experimentation

We see a number of problems which limit experimentation. For example, it is much easier to start a company than to fail a company and try again. As well, many countries have policies that favour the status quo and incumbents, rather than new firms. Helping young firms scale-up over time requires policies that support access to venture capital, networks and accelerators, and reduce trade barriers.

In short, we need broader policies that support innovation, rather than more narrow innovation policies. This requires a systems approach that looks at everything from investment frameworks and basic research to skills and regulations.

Finally, we have many innovation strategies across the OECD that have not been implemented. Where they have been implemented, too often they have not been evaluated. We don't know whether they are working or not. Fortunately, there's a lot of experience which we can draw on from across countries. The OCED is currently working on a new report that will examine innovation across countries and share what we have learned.

Dirk Pilat is deputy director, Directorate for Science, Technology and Innovation at the Organisation for Economic Co-operation and Development (OECD). The above is an edited transcript from his March 31 keynote address at the 14th annual RE$EARCH MONEY conference in Ottawa. His slides and other presentations can be found at: www.researchmoneyinc.com.