About Innovation Systems

We define Innovation in two levels. The strong definition is: Incorporating new technology, or combining existing technology in new ways, into a good or service which increases its productivity and thus the utility derived from its use or the savings made in its use. The weak definition includes the above and adds: Creating variants of an existing technology which do not change its functioning but which people perceive as increasing their quality of life directly (a pink iPhone) or through increasing choice. We focus on the 'strong definition' as fundamental to progress and use of the term innovation will refer to this definition unless explicitly stated otherwise. Systems which promote innovation exist at 3 levels: at the level of the individual, of the enterprise, and at the national level. They also need to be effective across several stages: fundamental research; applied basic research; product development; supply chain development; early startup; late startup/ venture capital; and take off/ IPO/ acquisition. In this endeavour there is a fundamental need to ensure a balance across government, enterprise and individual risk taking and rewards. Our discussion of innovation systems provides a context fro the more detailed, and broader, discussion of HDS and focuses on how economic systems deliver innovation. The discussion is largely derived from Mazzucato (2013) but the systems identified are generalized from her more discursive analysis of case studies. Component Levels of Innovation As stated above, Innovation happens at three levels of an economic system: the individual, the enterprise and the nation (although examples of supra-national collaborations on some elements are becoming more common). They will be discussed in turn. The Individual The individual, who gets the ideas is obviously central to the innovation process. But the capacity to innovate is dependant very much on the individuals creativity, motivation, opportunity to innovate and their diligence at it. Each of these is not just a function of the individual him- or herself. Creativity is learned families and schools either foster it or they dont. This is not to say that creative individuals will not overcome constraints on their creativity. Some will. But the less energy someone has to use in fighting the system the further they can get. How much further would Galileo have got if the church had not gotten in the way? That being said, he was encouraged, at least initially, by the same system which stifled him.

But societies which value originality have higher rates of patent filings. [check] And this comes back to values, of which we shall talk more in subsequent sections. Next, an individual must have motivation. This, contrary to western orthodoxy, need not be money. The Soviet Union kept pace with the best of Western technology using designers who were motivated by ideology and praise/ academic status. Again, this motivation may result from the individuals impulse for self actualization, but is also a function of their support from their family, from their broader network of peers and from the organizations for whom they work. The individual must also have the opportunity to innovate. An Indian farmer working 12 hours a day in a rice field for a subsistence wage is not going innovate. He can have the creativity and the motivation, but he will NOT have the opportunity. Opportunity goes beyond having time and energy, as technology progresses, ever more sophisticated education and tools are needed to investigate possibilities for new development in many areas. Finally, having all these, an individual who wants, as a primary goal, to earn enough money to go home and play the latest games on the latest equipment will not innovate. Innovation, to use the inevitable quote is 99 percent perspiration. If a person does not have the diligence, no innovation is forthcoming. Once again this is partly selfdetermined nature, but nurture by the family and schools the values instilled in a person provide some major part of the basis for such diligence. The Firm The culture of firms needs to foster creativity. Some firms are very structured in this. In 3M teams of individuals are encouraged to take time off to develop a new product using a Lead User Team model. In other firms people are allowed to compete for time and resources to undertake new projects. Motivation, either in terms of money or other rewards (see above) needs to be provided sometimes, just praise is enough. For innovation to be implemented, space needs to be made in the firms processes and supply chains. There are plenty of reasons why an innovation cant be implemented because the cost of change to our plant/suppliers/ customers etc will be too high. Sometimes, of course, this is true. But often the reaction is made without really thinking through all the options. Often, it is a matter of attitude and, thus, of values. The Government The governments role is to: foster the development of creative individuals; provide motivation to them to implement innovation projects, and to provide the infrastructure they need to implement such projects. Fostering creative individuals is something western democracies in the last century or so have been good at and have been reasonably good at since the beginning of the industrial revolution. Creative individuals were generally admired even if not agreed with. Creativity, provided it did no direct harm to others (the definition of which did NOT include criticism of belief or action) was generally held in high regard valued of itself. Such individuals were allowed the freedom to write what they wished within

broad limits, to consort with like minded people, and to raise resources for their activities, and they were given the protection against those that, for one reason or another, felt threatened by such creativity and wanted to stop it. This stance is based on values, but has a comprehensive system of legislation underpinning it. Motivating innovation has also been a strength of western democracies. Such mechanisms as patents, copyright, trademarks and royalties, protected by reasonably unbiased courts, provided the mechanisms through which an innovator could derive money from his or her innovation. Academic associations, in many cases at least partially funded, by the state, provided both a benchmark for achievement and praise when such achievement was acknowledged. Neither system was perfect and both have been compromised by changes in both the economy and technology, but they worked reasonably well. Finally, the state provided the infrastructure for ever broader participation in innovation. Education at state-funded schools and universities, imbued with values which fostered creativity institutionalized in national curricula, was rolled out to ever more children at ever higher levels. The state funded basic research, and the communications infrastructure (written and physical) needed for innovation. The state also enforced competition policy to prevent incumbents preventing the entry of innovators into a market. All of these things worked imperfectly, but work they did to produce an exponential increase in quality of life since the industrial revolution. Stages of Innovation In order that an innovation is implemented that is, products incorporating the innovation are available for purchase to a potentially viable market (viability in terms of potential demand as defined by affordability and the size of the market) innovations, as discussed in Mazzucato (2013),1 they must pass through several different stages. These stages are not necessarily sequential, basic research, for example, may occur long before the innovation is implemented, and be directed at shedding light on a completely unrelated problem to the problem that the innovation finally solves. Nevertheless, all stages are present to underpin an innovation. They are described briefly below. Fundamental research commercial viability a fuzzy, distant vision at best; Applied basic research conducted with a relatively clear purpose to develop a viable product; Product development conducted to develop a product for a given market. Supply chain development structuring supplier incentives to produce the required inputs for the product at the scale required this may include (as DARPA has done) providing incentives for universities to produce more of the right type of engineer; Early startup assistance funding and business development support; Late strartup often funded by local banks and VCs

Mazzucato, M, 2013, The Entrepreneurial State, Anthem, London and New York.

Take off/ IPO/ Acquisition increasingly the objective of an entrepreneur is to have their company purchased by a larger one.

Government involvement generally decreases at least as a percentage of total amount spent through these stages, but plays a vital role right up to the last two steps. Innovations role in the economy Innovation applies at two levels in the current state of the world economy. Developing and emerging countries can use technology developed elsewhere, incorporate it in manufacturing and other industries and reap the benefits of the higher productivity PROVIDED they allow their economies to restructure around this technology. India, for example, continues to prevent, with ruinous subsidies, the restructuring of its rural sector, condemning the rural poor to continued misery. China is being highly proactive in encouraging the movement of the rural poor to higher productivity urban employment. Innovators in these economies need to adapt existing technology to the circumstances of their economies, but they do not have to reinvent the base technology itself. This not to say that the other level of innovation, based on cutting edge technology, driving forward the production frontier,2 does not occur in developing and emerging economies. Increasingly it does, encouraged by the adaptation process discussed above. For example, the cheap, portable 3nethra ophthalmoscope from India can be operated by someone with little expertise and is about one-third to one-quarter the price of a comparable high-end device in a developed country. What then are the key elements to reinforcing innovation in a time when it is needed to address the huge challenges that face the species?3 A part of the challenge facing humanity is the consequences of changing technology and the impact this is having on our economies and markets. In particular, these consequences are both positive and negative for innovation. The challenge is to accentuate the former while minimizing the latter. The figure below shows the potential disruptive technologies, generalised from a number of sources but in particular Tapscott and Williams (2012)4 as they relate to the economic functions performed by the four classes of asset holders. These impacts will have serious implications for innovation systems.

The contour of maximum production that can be produced given a societys asset stock. See Edgewoth. 3 What these are, and their consequences, will be examined further in a subsequent section. 4 Tapscott D. and Williams A.D., 2012 Macrowikinomics, Portfolio/ Penguin, London.
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Synthesising Mazzuccato and Tapscott and Williams, 21st Century innovation requires: more Collaboration both in basic research and in development increased start up support both early stage and initial commercialisation increased public-private partnerships both in research and in development and the infrastructure to support these

all with a major role for the public sector Some of these disruptive technologies have a positive impact on innovation: internet and others keep collaboration costs low education and retraining costs could potentially fall, and reach a great many more people, due to web-based delivery certain skilled research and development tasks will be performed more cheaply by robots, AIs and 3D printing using new materials and processes

web-enabled crowd-sourcing for funding may help in the stages of innovation from product development onwards.

Other trends are not supportive: The rise of the (affordable) robots and AIs will reduce opportunities for noncreative work and put pressure on wages. Even the Economist is dubious that the number of jobs created will be more than those lost in this round of technological change. A reduction in the proportion of workers means lower income tax take and higher welfare payments (even in the US where they are negligible) meaning less money for innovation support (education, research and infrastructure). Network effects of companies using electronic means of service or distribution (think decentralized 3D printers) will further reduce less skilled jobs (and taxes), and the multi-national nature of these winner-take-almost-all business, Google and Apple this means you, means that national tax takes are reduced, again reducing budges for innovation support.

Thus while the positive trends may reduce the per-unit costs of just about everything, the number of people and companies paying for the government support to just about everything will reduce and consequently the burden on those paying has the potential to increase. The adverse impacts can, with some grit, be tackled. Recovering the full cost of transport and other infrastructure which are the basis of globalised production, plus the advent of 3D printing for production, will encourage enterprises to decentralize and locate near markets, increasing employment. This, plus a switch to more use of value added/ sales taxes and Tobin taxes can increase tax take in a given jurisdiction and across jurisdictions. Global taxation is a key issue for the G20 in 2014.5 Selling Innovation But innovation doesnt happen if the individuals doing the creating are not motivated and enabled, primarily by their peers and their employers, if governments do not protect creators from those who would impose anti-innovation values, if patents and copyright are cynically abused by enterprises (with the complicity of governments), if those in the finance sector are too greedy and/or cynical to support innovators, and if government officers are not appropriately motivated to supply the needed support and to raise the funding to pay for that support. Many of these trends are worryingly apparent in or societies today. While the issue of values will be discussed in much more depth later, there is an obvious need for a new ethos, an advancer ethos for want of a better description. For there is one thing certain, with 9 billion humans on the planet, there is no going back. We are

See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes ,

http://www.oecd.org/tax/transparency/

already well into the anthropocene6 and innovation is needed for our survival as a species.

Age of human dominance of the planet could end very badly unless we figure out how to provide the quality of life people expect within the bounds of said planet (and its near neighbours).
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