Innovation, Democracy and Efficiency

Exploring the Innovation Puzzle within the European Union’s Regional Development Policies

Francesco Grillo, Raffaella Y. Nanetti

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137449658
• eBook ISBN: 9781137449665
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Endogenous growth theory has significantly impacted most of the developing and developed countries, shifting priorities of industrial policies towards innovation. In line with this trend, the European Union significantly increased its budgetary allocation for R&D. However, statistical data show a weak correlation between R&D expenditure and the acceleration of economic growth. Regional innovation policies display divergent returns according to different institutional conditions and policy choices.

Grillo and Nanetti attempt to understand the reasons that lie behind differences in performance. Their results show that better performing innovation strategies require the following factors: clear choices of locally congruent smart specialization; strong capacity of public investment to stimulate additional private investment; clear distribution of responsibilities for decision-making and independence of policy implementation from political interference; and problem solving partnerships amongst innovators, universities, and governments that pre-exist the programmes. These factors point to a relationship between democracy (defined as openness of policy-making) and innovation (as technology-enabled growth) which is explored throughout this book.

1

The Challenge of Innovation Policies

1.1 Introduction

In their works historians and social scientists analyse and compare man-made phenomena across time to arrive at logical and fact supported interpretations of the fundamental changes that may be underway within societies. This intellectual process facilitates our own understanding of such changes. An example would be the incremental diffusion of the Industrial Revolution (IR), which started in the second half of the 19th century and spread from the core countries of Europe and North America to southern Europe and across the world. This revolution was described and explained by its power to transform traditional societies and economies through the new mass production of goods processes, in contrast to the preceding period of land based wealth production (Sabel and Zeitlin, 1985; Handlin and Burchard, 1967; Toynbee, 1956). Economists, in particular, have focused their investigations on the transformative powers of the IR and on the growth it has generated by permitting countries to leverage their competitive advantages in terms of access to abundant natural resources and low cost labour.

In the 21st century the world is experiencing a new age of growth in production which is more heavily focused on innovation and mass specialization. In this age, the suggestion is that any territory can pursue and achieve growth. However, unlike the scientific management approach that informed the Industrial Revolution and required “few principal actors” and “many executors” (Hounshell, 1985; Taylor, 1911), the new frontier of innovation-led growth requires “many principal actors” in a sustained collective effort of mass specialization. Indeed, innovation is purported to be the contribution of “many principal actors” and relatively “fewer executors”, because computer processes have substituted large numbers of workers in the manufacturing and distribution of goods and services. The shape of the production pyramid that characterized the Industrial Revolution, with its large base and small pinnacle, has been and will continue to be reversed in coming decades, showing a contracting base and an expanding and pinnacle.

More recently, the most severe financial and economic crisis since the Great Depression enveloped the globe from 2008; first halting or slowing growth in the developed countries and, then, impacting heavily on the economies of countries that had more recently industrialized.¹ Developed countries are still feeling the combined shock of the prolonged recession and the spectre of losing their economic primacy to rapidly growing economic powerhouses in Asia and Latin America. In many developing countries, the vision of growing out of poverty has been made more distant due to the impact of the profound social disparities resulting from strong growth² driven by low labour costs. In developed countries more workers find themselves marginalized by accelerating competition from lower skilled jobs in developing countries, while higher skilled workers have either benefitted despite the recession or are benefitting disproportionally from the pickup.

Therefore, today there are two fundamental policy questions, each of which embodies a technical–economic dimension as much as a political–ethical dimension. Is the new frontier of innovation really a promise for all countries and their populations? And if it is, how should that promise be pursued? The two questions point out a challenge that confronts innovation policies; since many principal actors are required for innovation-driven processes, there is a need to organize and harmonize their engagement in ways that address the challenge. However, this demand is very new and the past cannot provide suitable answers. For example, when are multiple principal actors too many? Which configurations for the engagement of multiple principal actors are likely to succeed? Ultimately, is there a trade-off between efficiency to compete and produce wealth and the engagement of many? Worse, are these two fundamentals of democracy and efficiency mutually exclusive?

If this last were the case, the claim of a new frontier of prosperity achieved with innovation strategies and consequential policies would be limited to a few territories and, within those territories, to only some constituencies. The promise would not be achievable by all. Without the empirical evidence that supports or disproves this, we cannot accept the possibility that productive innovation policies are reserved for the few. Therefore, this work is an exploratory study that investigates the extent to which the claim of innovation-led growth for all territories may be valid. It is the first result produced by a research agenda, currently being carried out, to expand our work beyond exploration. The aim is to move towards achieving a consolidated body of empirical findings that address the policy issue of democracy-imbued and innovation-led, sustainable and smart growth. For the period 2000–2014, but with an empirical focus on the innovation policies financed by the European Union (EU) Structural Funds in the 2000–2006 period, this book offers its exploratory contribution by analysing the issue in a sample of EU territories that have achieved very different returns from investments in innovation.

Because of the choice of EU regions and sub-regions as units of analysis, this first exploration also stands at the crossroads of questions that have dominated European regional and national development agendas; among which are the following: is it worthwhile spending taxpayers’ money on innovation as a regional development tool? If so, when, in a region’s economic cycle, should the investment be made? Which institutional and organizational settings are appropriate to make efficient investments in innovation? However, our exploration also poses and addresses two questions on a more fundamental level: is participatory democracy a political approach conducive to the pursuit of sustainable economic growth through innovation-led development policies? If so, what is the balance between democracy and efficiency that needs to be constructed? In this exploratory study, democracy is defined as the territorial community’s institutional architecture and its participatory features that are aimed at the effective engagement in decision making of innovators as citizens. We defined efficiency as a community’s capacity to make the programmatic choices that increase the leveraging effect of both the projects implemented and the return on the innovation policy.

1.2 What innovation is, after all, and why a definition matters

In the 21st century innovation has become the policy priority that is pursued by the political economic strategies of countries at different stages of development and is supported by politicians of virtually all parties. But what can be counted as innovation?

In its general definition, Research & Development (R&D) is a proxy for innovation, so that the ratio of expenditure on R&D is considered a measure of the propensity of a region to innovate. For example, the EU Lisbon Strategy of 2000 selects this indicator as one of its most important quantitative targets for growth. Like other mainstream indicators that have been used, the strength of the R&D indicator lies in the fact that it can be measured, using a sufficiently long time series which can be adequately and geographically disaggregated. However, this proxy definition for innovation is general in character and has known shortcomings which have been critiqued (OECD, 1963 and 2002). Indeed, it should be considered that: innovation (as well as R&D) is not entirely about new technology; not all R&D produces innovation; and not all innovation is produced within an explicit knowledge-creation process, because some of the changes may occur by chance. More importantly, some investments by business, which fall outside the proper R&D policy domain, also produce innovation, such as in marketing, organization and design. Finally, innovation is also produced outside businesses and R&D centres; public administrations and civil society can produce significant transformations which positively affect people’s quality of life. It is therefore clear that large portions of investment in innovation are not captured by R&D. Good examples are the cases of innovation in small and medium enterprises (SMEs) that are difficult to detect from R&D indicators. These indicators significantly underestimate process innovation, because R&D is centred around product development, as well as innovations in the service and agriculture sectors, which together account for about four fifths of the world’s GDP.

A broader definition of innovation is offered by the European Commission’s Green Paper on Innovation (EC, 1995), in which innovation is defined as “the successful production, assimilation and exploitation of novelty in the economic or social sphere”. This definition captures a wider breadth of innovation, which includes new products and personal and social services produced in quantum leap changes. Moreover, there is also the recognition that innovation can be produced by “assimilation”, which means a process of adaptation, and by “exploitation”, which is the process of imitation.

Nonetheless, this definition has its own shortcomings. In the first place because of what it does not include. Its exclusive emphasis on “success” appears to signal the uneasiness of an institution like the EC in accepting destructive aspects of the innovation process. Innovation is not an add-on to the existing economic base. Rather, it requires changes to an economy’s dynamics and structure, which can be profound and complex in nature as they affect a society beyond its economy. Furthermore, innovation is not necessarily successful and, often, “success” comes from “failure” (Peters, 1988; Zider, 1998; Hardgadon and Sutter, 2000); and failure is valuable as long as it provides the option to learn (Drucker, 1998).

If the EC’s definition appears too simplistic with regard to the innovation process, a more comprehensive definition is that “innovation is not a linear, but an evolutionary, cumulative and feedback process which can only be realized in the cooperation and in the economic and social interaction of different actors, and as a result produces technological, organisational and social innovations” (Koschatzky, 2001:62). Therefore, innovation can either be about localized change (incremental, minor and guided) or structural change (radical, massive and unpredictable) (Boschma, 2006).

The definition we adopt in our exploration is of innovation as change that: is provided by the converging actions of a plurality of institutional and socio-economic actors; aims to produce diffused sustainable economic and social improvements; is connected to technology, or codified research, or organization changes; produces the relocation of resources from incumbents towards innovators.

1.3 Endogenous growth theory and its impact on regional development policies

Does economic theory support the performance of innovation policies across different territories? We turn our attention to the endogenous growth theory, which purports to offer both an explanation for the persistent differences in prosperity levels between countries and regions, and a prescription for closing the gap. The basic assumption underlying this theory of growth is that knowledge is not freely transferable across geographic areas, so that its accumulation in some places is determined by lasting differences in productivity and prosperity levels between territories. The policy consequence that derives from the endogenous growth theory is that the convergence of national and regional economies cannot happen spontaneously; rather, there is the need for the state to invest in knowledge related assets to close the prosperity gap in its less developed areas.

The impact of the endogenous growth theory has been profound in the EU. By the 21st century a new emphasis was placed on knowledge creation that translated into outcomes of innovation benefitting the economy. The Lisbon Strategy and its policy targets incorporated this focus in the 2000–2006 and the 2007–2013 budget periods and was reinforced by the competitiveness mandate of the Europe 2020 Strategy. Indeed, within the overall EU development strategy, the current 2014–2020 budgeting period has increased further the centrality of innovation and public expenditure on it. While the percentage budget share of the EU’s investments in R&D has grown sharply, even more dramatic has been the shift towards innovation expenditure in the Structural Funds’ budget which finances the EU Cohesion Policy and whose very purpose is to reduce differences in prosperity between EU regions. In the current programming period (2014–2020) approximately 160 billion euros of EU resources will be spent on projects in the broad category of innovation. This amount should roughly double as a result of the co-financing provided by member states and private firms.

In countries around the world, the rise of the endogenous growth theory has made innovation the main priority driving economic growth strategies at both national and regional levels. The percentage of GDP spent on R&D has increased in most advanced economies, for example, moving up in Japan from an already high 3.04% in 2000 to 3.4% in 2012. The percentage has also increased in more recently industrialized countries that are trying to develop new competitive advantages in technology as opposed to continuing to rely on lower labour costs. For example, over the same time period in China the percentage has increased from 0.9% to 2.0% and in South Korea by even more, from 2.3% to 4.4% (Eurostat, 2013). This trend of a widening endorsement of innovation raises an important twofold question that calls for an empirical answer. Is the confidence placed on innovation justified, and is it efficient to use investments in R&D as a tool of development policies?

1.4 Empirical evidence and the puzzle of innovation

Notwithstanding the large financial and strategic commitment to innovation, the validity of the expectations generated by the endogenous growth theory has rarely been questioned. The capacity of knowledge creation through innovation to increase the wealth of nations has been, and is being, taken for granted by most policy makers and the media. Political accountability – for economic impact predicted and measured during and after the implementation of programmes – is seldom required by policy analysts and even less so by the public. Yet, the comparison of R&D expenditure as a percentage of GDP and the growth rates of EU countries, for the period 1999–2013 (Figure 1.1) when R&D was a widely endorsed policy, seems to suggest results opposite to expectations generated by the new growth theory.

While the correlation is significant, the real finding is that there is a strong negative correlation of minus 0.54. This would seem to suggest that the countries that have grown more rapidly are the ones that have spent less on R&D. An explanation for these resu...

Table of contents

• Cover
• Title
• 1  The Challenge of Innovation Policies
• 2  Regional Case Studies and Institutional Settings
• 3  Innovation and the Puzzle of Devolution in the UK
• 4  Spain and Innovation as a Political Imperative
• 5  Conclusions: Innovation as a Political Project
• Notes
• Annex 1 Bibliography and Resources
• Index