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Innovation and Productivity: Using Bright Ideas to Work Smarter - TPRP 08/05

The concept of a national innovation system

The concept of a ‘national system of innovation’ is useful for identifying strengths and weaknesses in how knowledge is created, disseminated and commercialised in an economy

Much current public policy analysis of innovation is informed by a body of work that uses the concept of the ‘national system of innovation’ of a country. This concept is a useful complement to market-failure analysis. The emphasis is on the non-linear character of innovation, and how it happens within a system of interconnected organisations, firms and people - both public and private - in which feedback loops, complementarities and cumulative causation are features.

Studying New Zealand’s national system of innovation can help to identify strengths and weaknesses across a range of aspects. It can indicate how the institutional infrastructure that forms the national innovation system influences the production, accumulation and diffusion of knowledge. It can uncover opportunities for beneficial changes in the roles and interactions of the government, research organisations, entrepreneurs and firms. The concept is useful in bringing out the key role of firms in the successful commercialisation of knowledge.

Smith (2006) notes the typical characteristics of innovation processes as:

  • non-linear, in that research-business links are most effective when they exhibit strong feedback loops;
  • pervasive, since innovation typically occurs right across the economy, in low-tech as well as high-tech areas, and so policies should support both developments;
  • involves specialisation, as firms invest in capabilities and intangible assets that support innovation. The resource commitments involved are risky and exhibit path dependence;
  • cumulative, with learning over time and the accumulation of knowledge and skills by firms leading to patterns of industrial specialisation, but also with resources being locked into particular technologies and associated infrastructures; and
  • collaborative, in that, for innovating effectively, firms require interactions with the science system and within industry clusters over long periods.

Smith then defines the main functional processes of an innovation system. He argues that successful innovation systems are characterized by institutional arrangements (which may differ significantly across countries) that take care of five broad problems:

  • identification of innovation opportunities – innovation opportunities are rarely obvious and often represent a complex interplay between government, businesses, financial systems and research infrastructures. Exploiting opportunities is not usually an automatic market process but something an innovation system may handle well or badly;
  • the creation and distribution of knowledge capabilities – this is much broader than R&D, it includes non-R&D inputs to innovation and the distribution of knowledge via relationships, intermediaries, people mobility, and education and skills;
  • business finance and development – commercial success depends on far more than a good idea. Ability to develop and finance a business rests on complementary assets such as management capability, a conducive financial system, logistical and marketing capabilities, including the ability to operate internationally;
  • risk and uncertainty management – risk and uncertainty are inherent in innovation. A basic problem is the mismatch between the shorter time horizon of profit-seeking firms and their investors, and the longer time horizon of most research endeavours. The system needs mechanisms to bridge this important gap; and
  • infrastructure provision – much innovation is infrastructure dependent, either physical infrastructure (e.g. a broadband network) or knowledge infrastructure (e.g. a university system). Infrastructures are typically expensive both to create and operate and they pose problems whether these are undertaken by the private or the public sector. Knowledge infrastructures perform increasingly important functions with respect to innovation – they create knowledge, they store and maintain knowledge, they help create new enterprises, and they support innovation-related problem solving.

Using this framework, Smith concludes that:

  • Given the systemic nature of innovation, coordination failures and means of overcoming them are important. System failures might occur in the joint use of infrastructure, the transmission of knowledge, or in the disruption caused by new technologies. Coordination can occur by institutionalising a market to perform the needed function, or the use of an administrative process.
  • New Zealand is not unlike other small, open, economies (eg, Finland, Norway, Denmark, and Canada) that have based their development paths on “the sustained development of both upstream and downstream linkages” from their low or medium tech resource-based industries. The implication is that New Zealand should leverage off its equivalent industries and support the process of technological upgrading. He notes that in Scandinavian economies the emergence of linkages and “development blocks” did not just happen, but was organised.
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