Learning Innovation Systems from Small Developed Nations 178.0
Hypothesis on systems of innovation for emerging markets from Denmark, Israel and New Zealand
Filipinos, in general, are America-centered especially in learning about new things.
In one sense, this is correct as America leads the world in many technologies.
In another, it is not appropriate because there can be no bigger disparities than between America and the Philippines in terms of scale, level of development, maturity of institutions, and the like.
To a large extent, we are better off in learning, especially about innovation systems, from small, developed nations. In this post, I posit that these three countries can be Denmark, New Zealand and Israel.
(Update on March 23, 2010: You may click on emerging markets innovationat the navigation line above for a summary of my views.)
National Innovation Systems (NIS). In an earlier post Philippines as Emerging Market on January 11, I used the image above to draw a composite model of Professor Bengt Ake Lundvall’s NIS concept and Professor Christian Christensen’s insight of disruptive innovation from emerging markets.
Professor Lundvall’s NIS model says that national innovation comes from the learning taken from the continuous interaction between the science and technology infrastructure (STI) and competence-building from doing-using-interacting (DUI) including experience from industry.
Innovations from emerging markets, developed as mash-ups on applied innovations, can be disruptive in the classical Christensen sense because they are simplified because targeted at buyers from the bottom of the pyramid with low purchasing power.
In relation to the big developed countries, the three small, developed countries – Denmark, Israel, and New Zealand, have developed niche strategies that are not necessarily at the leading edge of technology but more tailored to local needs but, like innovations from emerging markets, tend to be disruptive as well.
Learning from Denmark. In another paper by Professor Lundvall shown at right, the lesson from Denmark – that is different from the dominant American ideology enunciated by the like of D North and F Fukuyama – is that “the kind of ‘social capital’ that lies behind the dynamic efficiency of the [Danish] economy emanates from the security offered by the welfare state.”
“The Danish society is based on a high degree of trust among the citizens. This makes transactions less costly and interactive learning more efficient.”
In Preparing for the 21st Century (1994), Paul Kennedy says that successful countries are those whose are able to work together and, at the same time are able to internally develop the appropriate and leading edge technology.
From Professor Lundvall, a high level of trust among its culturally homogeneous population together with appropriate technology in the recent past (Denmark has stepped up a notched on science) to facilitate learning by working together is the key insight for the Philippines to develop as an NIS.
This is why, in my post on the debate by Presidential candidates, I put among the screens that my final choice will be one who is capable of transforming Philippine governance to one based more on trust and less on checks-and-balance through real leadership.
Learning from Israel. From my experience in implementing change, it is important to create a sense of urgency or better still highlight a real crisis, confronting the organization to get the team to move as one.
In the case of Israel, the threat of war and Hebrews final goal of preserving a homeland for their people (to prevent another diaspora) is a real crisis that focuses the mind.
Given its small size, the whole of Israel, with the longest distance from north to south at 300 kilometers, is one industrial cluster that, with one focus, was able, in early days, to develop an industry to support their defense efforts.
The small size of the country including a small population dictated an innovation strategy focused on flexibility and multi-use in weapons and human resources. This flexibility facilitates learning because organizations are very flat and interactions very efficient.
The book, Start-up Nation, is of latter days and tells the story of an ambitious project to create a smart electric grid that will allow conversion of all cars to electric and of smart engineers who lead the world in development of microprocessor technologies (through Intel).
The focus from the war effort led to efforts, early on, to identify smart young people and provide them the best education and training for specialist though flexible technical knowhow.
For the Philippines, the learning is to simulate small size through the judicious use of industry clusters. We do have a problem with a sense of urgency.
In a sense, President Marcos’s strategy to export the unempowered has created a safety valve that allowed the Banyan column, Uncrowning Gloria, of The Economist (2/11/10) to highlight insightfully that the OFW strategy provides a “cop-out for politicians” and “keep their snouts in the trough rather than address the national good.”
We do need a new leader who is able to identify and address the national good urgently to innovate, and create total factor productivity, the country out of poverty.
Learning from New Zealand. I lived in New Zealand from 2001-2002. It is the only country I know where all political parties embrace globalization. The reason is practical; New Zealand is a small country, with a population of 4 million people, that needs the global market to sell into for its products.
In recent years, it was in fact the Labour Party that initiated bilateral free trade agreements with key trading partners before it became fashionable.
The lesson for the Philippines is in the way the Kiwis support their biggest industry, dairy. They do not do it with fiscal incentives at all.
As far as I know, the only support is funding for dairy research agencies and the excellent dairy departments in Universities. Again, this may be practical. There is no way they can compete as country for money to fight subsidies given in Europe and America for dairy farmers.
In our economic history, fiscal incentives created the dual economy by separating the export from local economy as per Cororaton’s TFP paper. Eventually, this made local industry uncompetitive because unlearning and un-innovative and lead to its decimation when China industry grew.
As I have noted elsewhere in SYNTHESiST, the farmers instead work very hard and adopt and adapt the latest technology for productivity and survival. Fonterra, the largest dairy cooperative in the world, is able to manage efficiently despite its one member per member governance to coordinate the efforts of 96% of Kiwi farmers to compete in the world, uncoddled and without subsidies.
A Hypothesis for Grounded Theory. In keeping with Kathleen Eisenhardt, it may be possible to mine the three cases above to develop further into a theory of innovation for emerging markets. This will be the subject of a succeeding post in the near future.
I concede that much of the failure of the economic subsectors to modernize is due primarily to cultural failures which lead to the disincentivization of organizational learning. As you said, the lack of a system of “trust” and a sense of “urgency” prevents the transition to modernity.
Prof. Randy David has good articles on this, wherein he expounded how the lack of delineation between social subsystems such as the family, religion, and politics, leads to overburdening and inefficient functioning of each subsystem. For example, political dynasties, as the family subsystem overstepping the boundaries of the political subsystem, leads to the ineffective functioning of the latter. You can view it here:
http://mlq3.tumblr.com/post/357716614/randy-david-on-the-socio-political-landscape-in-2010
But on this, I am leaning to classical (as opposed to the new) institutional economics for a solution, insofar as I argue that these social subsystems can only be properly demarcated and separated from each other via social institutions, and that these institutions must be deliberately designed and will not evolve independently from a vacuum.
So the question is relegated to, what institutions do we design, from scratch if need be? What institutions do we need to fix?
For technology, Christopher Freeman has an answer. If Freeman is to be a guide, the task then of the Philippine state is to create a “national system of innovation… the networks of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies”. Thus, institutions must pave the way to the creation of an environment where coordinated innovation is possible amongst the most important private and public actors, organizations and institutions that take part or influence R&D and innovation in the country.
The question then becomes, who among these actors are in a best position to lead the creation of such a national system? Is it the public, or the private, sector? It seems that the cases you expounded (Israel, New Zealand, Denmark) deemphasizes the role of the public sector. On this, I would differ in opinion.
To elaborate my point, we look again at Freeman who said that the creation of a national system of innovation is accompanied by the creation of a “new technological system” defined by Freeman as a “constellation of innovations which are technically and economically interrelated” – citing as example the “cluster of (inter-related) innovations that gained force from the 1930s onwards in petrochemicals, synthetic materials and plastics machinery”.
On this, we have to ask, is the private sector up to the task of creating such “constellation of innovations”, each of which needs the other in order to thrive? Can the private sector, operating on the rules of the free market, evolve such a system?
I say, that only through deliberate and intelligent design by the public sector, through the government, can such constellation of innovations be set up as fast as possible. This was the case in South Korea, Japan, and Taiwan (electronics), and even Cuba (biomedical technology).
Economist Ha-Joon Chang would agree. Chang argued that if anything is, industry fails because market actors underestimate long-term gains of particular activities, and are not adequate to the task of coordinating large interdependent decisions necessary for accelerated and sustainable growth, which failure to do so can result to wastage due to irreversible duplicative investments and overcapacity.
Thus, my conclusion is, the state must intervene in order to support multiple technological industries in order to build the constellation of innovations necessary for a national innovation system. Among others, this will need employing the classic infant industry protection as an economic strategy.
Just to note, there are those who would want to emphasize the reverse relationship. Venezuelan intellectual Carlota Perez for example, believes in technological systems emerges out of innovation, after which new forms of social organization and economic (capital) structure that is custom-fit to the new technological system will emerge. Perez uses the terms “new techno-economic paradigms” for these new ways to manage and organize economic life.
I say, that the relationship is reciprocal: the state creates institutions to allow innovations, and then innovations reengineer institutions and thus the state.
All for now. I do wish technology books will also be discussed sa Book Reading sessions natin.:-)
James
Hi James,
Ha Joon Chang is so statist and predictable that I do not read him anymore.
Lundvall who was a younger partner of Freeman in researching that classic 1984 study at SPRU, Sussex U, updates the theory and says that actual conditions in each country dictate the final formula of NIS for that country.
I commented on that book (IFIAS 6) here: http://synthesistblog.com/technical-change-and-economic-theory-a-great-book-find-in-september-113-0/ and here: http://synthesistblog.com/innovation-as-intensive-learning-and-emulating-the-east-asian-nies-103-0/.
Among economists, Lundvall has to concede this point because the methodology they used in deriving the conclusions were inductive logic that implies no conclusion in theory can be derived.
Other scholars using this method like Elinor Ostrom actually warn about using grounded theory derived in this manner as a metaphor for policy.
The inductive nature of the methodology of evolutionary economics is still a problem.
For myself, I did not come into evolutionary economics starting from an ideological standpoint but rather because I am an engineer and believe that even economies can be built. While I am left of center on the purpose of economics (ie equity in opportunity) I am right of center on the means to attain so (i.e. small government, strong countervailing institutions, but enlightened leadership) to get the nation where it ought to be. In this sense, I am optimistic about people and mistrustful of government based on observed history.
Anent to previous reply,
The arrival of the information age made a big difference in Lundvall’s view because intensive learning became more critical for innovation. His later studies in the 1990s highlighted the need for interaction and for a ‘learning economy.’ In this post-industrial context, centralized control will not yield the best results in national innovation systems. Freedom to experiment and path create to mash-ups or technology enabled systems like micro-finance is the way to go. Leapfrogging on path dependent ways that centralized control will recommend (our government signed in 2009 agreement with Taiwan along this lines) will not work because it puts as on a follower strategy versus the developed countries and other emerging countries already ahead of us like China, Korea and Taiwan. We have winners that should be our launching pad. We must use our brains to path create from them toward areas we can control.