Digital ecosystems and regional innovation systems as public goods for economic development

1. Digital ecosystems and regional innovation systems as public goods for economic development Olga Memedovic UNIDO, Private Sector Development Branch Brussels, 7 November 2007 o.memedovic@unido.org

2. Contemporary Globalization and its Drivers Advances in ICT; organizational innovations; internationally accepted product standards and business process protocols Liberal trade and investment regimes have created incentives for Modularization in all stages of a production value chain Outsourcing of the segmented activities to specialized producers in different locations around world ICT application in transport, supply chain management and logistics Functional reintegration of the geographically dispersed fragmented activities into new border-spanning business arrangements of global value chains (GVCs) and production networks; TNCs have a key role in organizing and coordinating these new business formation of global value chains and networks

3. Consumption, Disposal and Recycling Marketing and Sales Outbound Logistics Manufacturing Inbound Logistics Design and Product Development; R&D offshoring The effects: New concept of industry: from linear to interactive VC; Vertical specialization; No clear division between manufacturing and services; Offshoring and outsourcing in R&D: transition from an intra-firm knowledge base to an distributed intra-GVC/GPNs knowledge base Consumption /after sales Marketing and sales Manufacturing Design and product development; in house R&D Source: Memedovic, 2002, 2005, UNIDO

4. GPN1 GVCs and GPNs Keystone: BMW, Fiat, Reno GVC 1 Capital- intensive Manufact. Logistics' VC GPN2 GVC 2 Branding & marketing Keystone: : large buyers, retailers: Zara; H&M

5. Implications • Pressures for specialization and increased interdependences • Modularisation leads to commoditization of technological knowledge ⇨ the way out is innovation ⇨ the company concept changes into an continuous innovator ascompetition drivers change: from efficiency and effectiveness to continuous innovation and learning • Ideas and how to commercialise them become key resources for the knowledge-based economy • Technological advances in activities must co-evolve and complement each other for the the system to function as a whole ⇨ Many technologies are used to create a product • Intra-GVC knowledge flows takes place between industries and countries/regions with different degrees of R&D-intensity • Conceptualdistinction between high- and low-tech industries is weakened • Regional knowledge capabilities begin to determine business location: Countries compete based on their unique regional competitive advantages: GE in Bangalore, Microsoft in Beijin. • Tendency for coordination of production processes without ownership • Production coordination is achieved through shared vision • Innovation is becoming more expensive and complex⇨ Increasing demand for undertaking more complex tasks in production and in management and for higher rates of innovation and at lower prices ⇨shift to open innovation model

6. Closed innovation model Firms select desired technologies Firms perform R&D in-house Firms put technologies in products Product revenues fund additional R&D Globalisation (1): adjusting products to markets Open innovation model Strategic R&D – integral to business strategy Technology acquisition (licensing, corporate venturing, alliances) Externalisation of R&D (outsourcing, firms research institutes, university centres of excellence) Knowledge management & collective intelligence: central role of new ICT technologies Globalisation (2): tapping global talent pools Traditional corporate laboratories increasingly closed or downsized: companies offshore and outsource R&D functions (Pharmaceutical firms outsource 50% of their R&D) After Cooke, 2006

7. GVC + GPNs = Business Ecosystems (BE) • Spreading of GVC and GPNs suggests complex economic organizational forms ⇨ also described as ‘business ecosystems’ in the modern business thinking (ecosystem metaphor) • BE = a complex network of interdependent niches occupied by organizations that are open to all potential contributors and creative participant (Moore, 2005). • Leading firms (keystones ecology metaphor),occupying certain niche, coordinate co-evolution and integration of innovation across numerous contributors spread around different locations of the world; Their impact on the BE community (+/_) may be very strong and is also context (industry) specific. • Every agent in the space is facing continuous challenge to keep up with others in the BE co-evolution supported by keystones. Cooperation and competition is necessary for innovation and for creation of complementary capabilities. • Key policy challenge is understanding: • Structure and functioning of the specific BEs • Underlying mechanism of governance the BEs: concentration of power, barriers to participation, interactions and functional significance of keystones and other agents ⇔ • Importance of research and ICT for collecting and processing data for monitoring system functioning (benchmarking innovation achievements, pricing and margins, competitive corporate strategies, etc.)

8. Digital ecosystem (DE) • Self-organising system, providing a digital environment for networking among organizations (SMEs) in BE. It supports cooperation, knowledge sharing, and development of adaptive technologies and new business models. • Similarly to BE, DE can be context specific and can be tailored to the specific local needs. • DE tools allow concerned stakeholders to contribute their knowledge to achieve shared vision. • DE comprise: • Technical infrastructure: hardware devices • Services and formalized DE knowledge • Regulatory: laws and regulations, contracts, etc.

9. Key opportunities for internalisation of EU SMEs, arising from this setting • Fragmentation in production ⇒ new market niches for products and services in which SMEs can position themselves, utilizing their comparative advantages in achieving flexibility, innovativeness, personalized contacts and quality of products. • New opportunities for the international sourcing of specialized skills (scarce), which SMEs’ poses • SMEs can internationalize faster and cheaper through BE supported by DE • SMEs can participate in different BEs/DEs (regional/global), hence securing their growth • SMEs can follow on the strategy of the firms in the BEs and engage in outsourcing and offshoring • SMEs can learn and innovate in fast track manner through BE/DE

10. Key challenges for SMEs • More and more demanding markets • Increasing number of standards and requirements set by leading players in BEs • Lack of understanding of the upgrading challenge in the particular BEs in which they participate: understanding BE characteristics (structure, governance, geography). • Lack of awareness of their competitive strength • Insufficient access to information and training; limited managerial skills and financial resources • Inadequate support for technological innovation and learning • Lack of direct contacts with customers: How to avoid captivity in BEs? How to protect their IPRs? • How to reduce SME vulnerability and high mortality rate?

11. BE and DE as public goods • The emerging DBEinvolve different types of externalities (positive and negative). • From externalities the specific domain of public goods emerges: information, new knowledge and various kinds of innovations: organizational, institutional, commercial, social and legal are arising from coordination and co-evolutionary exchanges in the BE in interaction with DE • PG benefits can spread beyond the administratively defined borders, and can become regional or even GPGs. Their benefits can also be inter-generational, resulting in innovations that are of benefit for the future generations. • The BE and DE organizational forms can also be considered as PGs in that they facilitate collective provision of these PGs and these in turn reinforce collective action and leads to increasing return to scale (e.g.their value to any participatory agents increases as more innovative agents joinin).

12. BE and DE as public bads • Public bads result from negative externalities like environmental degradation; monopolistic behavior, knowledge asymmetries, captivity for industrial upgrading; or computer viruses, spamming, dissemination of undesirable materials (child pornography). • Key policy challenge is to understand the PG nature of BE and DE and to provide complementary PGs needed so that society can benefit from PGs and internalize externalities (reward positive and penalize negative). Complementary public goods: in the case of BE those are lows, regulations and their enforcement, and monitoring systems to be able to correct for public bads. • In the case of DE, those include provision of technical infrastructure, laws and regulations on norms and standards, and capacity building to process information.

13. Public Goods Asymmetric Information Public Goods Externalities FINANCIAL STABILITY Structural and Framework Factors – Incentive Systems GOVERNANCE Public/Private Governance Macroeconomic Policies RULE of LAW Political System Investment KNOWLEDGE /INFORMATION Microeconomic Policies And Rule of law Competition ENVIRONMENT Corrective action Collective Actions: INFRASTRUCTURE Institutional Support System Players Players Government S, T&E System Resources (Capital) PPP M a r k e t & M a r k e t Resources NGOs and market failures Market failures HUMAN Human capital PPP Innovation & Technical Change SOCIAL Social capital Quality growth Innovation and Productivity Productivity Quality growth Technical change Natural capital NATURAL Physical capital PHYSICAL Private sector Private sector (not for profit) Private sector (for profit) Government Barriers to entry Asymmetric Information Externalities

14. Public goods characteristics • They are non-excludable in their supply: there is no easy way of preventing someone from having access to their consumption ⇒ it is not easy to limit the supply of PG only to those who are willing to bear the costs of supplying them for society ⇒free riding: potential users may hide their preferences for the good and wait till they are supplied and then consume the good for free. • They offer non-rivalbenefits: consumption by one agent does not diminish the availability of the good’s benefit for others. ⇒ zero marginal costs of use ⇒ exclusion is inefficient ⇒ welfare is not maximized by exclusion • Externalities (positive/negative) • Agent actions have negative or positive consequences for others and these are not taken into account in the decision process that generates those effects and are uncompensated. • ( Samuelson, 1954)

15. Provision of Public Goods • Characteristics of PGs (non-excludable and non-rival) and externalities ⇨ There are no market incentives to make an optimal decisions ⇨ leaving their provision to the market means their undersupply ⇨ the logic of individual interests results in a socially less than optimum response ⇨ resources are not efficiently used and prospects for economic development are affected. • Collective action (planned effort by two or more agents to act together to achieve result desirable for all) becomes necessary to supply PGs, through coordination, cooperation or coercion. • When mutually beneficial goals are not sufficient to ensure the voluntary participation in a collective action (“collective action failure”), institutional innovation to facilitate strategic interactions conducive to cooperation among individual agents are called for. • At the country level, that response is directed through the available institutional framework, with the nation state at the center. At the supranational level, the response has to be initiated through various forms of institutional innovation and voluntary coordination and cooperation, generally among countries.

16. PGs Provision Principles • The subsidiarity principle = a match between the decision-making jurisdiction and the spillover range of the public good: a national PG should be provided by a national government, a supra-national regional PG by a supra national regional organization, and global PG should be supported by an international organization. • The subsidiarity principle may be counterproductive when there is : • Economies of scale in PG production or distribution. Then, it is more efficient to search for institutional solutions with a larger jurisdictional remit aiming to explore the advantages derived from increasing returns from scale. • Economies of scope, unit costs decrease as more public goods are provided • Economies of scale and scope suggest that it might be advisable for the institutional response to have a wider jurisdictional coverage

17. Global Local, regional and global impacts Regional Local Regional

18. Supra national EU level Instruments Formal coordination EU/ ECB System of Enforcement by Sanction: Stability & Growth Pact Voluntary coordination Lisbon strategy Guiding Rules: Luxemburg and Cardiff Process InstitutionalInnovationfor PG provision

19. Globalization and Regional Innovation Systems (RIS) • Globalization proceeds through BEs linking nodes of economic power, which tend to concentrate in certain regions or knowledge centers. • Region (administratively defined within a country) becomes the strategic level for innovations, technological learning and upgrading. • Increasing interdependencesbetween regions and nations ⇨it is important to maintain core competences/activities in the location/region and to upgrade this activity through RIS. • For acquiring technological competences interaction between local and global knowledge networks are also needed, and this is best achieved at the regional/cluster level. • Key challenge for the region becomes: How to deal with asymmetric knowledge capabilities and with imbalances between knowledge exploration and exploitation (commercialization)? EU Challenge: Is Europe becoming an exploration Platform for US? • For policy: RIS, learning regions, industrial cities and clusters can guide public policies to support firm upgrading, productivity and competitiveness and for achieving long-term, innovation-driven development strategies.

20. Framework conditions RIS/ SMEs/Clusters-BE linkages Role of multilateralism & regionalism/ bilateralism International public goods GVC Global Domain BE National Domain RIS:SMEs &Clusters RIS:SMEs &Clusters BE/DE National public goods Regional/local VC Role of public and private sector Business Environment Strategies, policies and programmes Memedovic, 2006,UNIDO

21. What is Regional Innovation System (RIS)? • RIS consists of inter-linkages and interdependence between three subsystems (Cooke, 2006; Boschma, 2004): • Knowledge Generation Sub-system: university leaders, research institutes, etc. • Knowledge Utilization Sub-systemor production system: SMEs/clusters • Intermediaries between a. and b.: knowledge transfer experts, innovation lawyers for patents & IPR; investors (venture capital); business service providers, local government agencies (development and innovation agencies); technology institutes

22. Regional Innovation System Knowledge application & exploitation subsystem - BE(SMEs/Clusters) SMEs/Clusters horizontal & vertical Customers Competitors Contractors Collaborators ICT Intermediaries:Knowledge transfer experts, innovation lawyers for patents & IPR; investors (venture capitalists); business service providers, local politicians; knowledge explorations and testing institutes Governance system: embedded structure Flows of resources: knowledge, finance & skills; Building trust and confidence in institutions and their reliability DE Technology Workforce Market mediating mediating mediating organizations organizations organizations Public research Educational organizations organizations ICT Knowledge generation & diffusion subsystem Memedovic after Cooke 2006, UNIDO

23. What is National Innovation System (NIS)? • National Innovation System is a system of interconnected organizations and institutions to create, store and transfer the knowledge, skills and artifacts which define new technology” (Cooke, 2005, 2006). • NIS has broader institutional scale and has primary focus on new technology but not on commercialization of new knowledge • NIS approach has been dominant in the past, now RIS is gaining in importance because of the impact of globalization processes on local innovation and learning.

24. How RIS emerge? • 1. Institutional RIS: top down model • basically regionalized NIS. European RIS tend to be more institutional (dependent on public intervention and funding). (e.g. Research linked to the needs of larger, state-owned firms in or beyond the region.) • 2. Entrepreneurial RIS: bottom-up interactive innovation model • generated and organized locally at town or district level. Financially supported and generated locally, from family, community, local credit agency. Some Nordic countries, US,etc. • 3. Network RIS model: hybrid model, combining elements of 1. and 2. • Most efficient RIS model: related variety of regional clusters supported by a regional supporting institutional infrastructure (Emilia-Romagna in Italy), Bavaria in Germany, Styria in Austria). • Institutional support comes from local/regional, national and supranational levels. Funding is guided by agreements among banks, gov. agencies and firms.

25. Innovation system dimension in RIS: Innovations are outcomes of a systemic relationships between various actors (a.b. & c.), underpinned by an regionally embedded governance structures, and supported by regulatory and institutional frameworks on the national level. • RIS acknowledges important role of: • institutions: shared values, norms, attitudes and practices that are necessary to ensure system coherence and that nurture the culture of innovation and processes of knowledge transfer. • cooperation, competition, coordination. • Successful RIS integrates innovations, knowledge entrepreneurship, and talent formation through purposive activity of society.

26. Role of Regional Governance • Key to RIS success is in : • Multi-level governance approach: from national to regionally embedded, with the purpose to facilitate interactive learning and innovation for commercialization of new knowledge and to coordinate policies. • At the national level various institutions have the coordination role between national, regional and local levels. Public like the National Innovation Agency, private like Industry Association or Chambers of Commerce. • At the regional level, there can be Regional Development Agencies, public organizations such as universities, polytechnics and representatives from industry associations and chambers of commerce • Role of local government in RIS is essentially in: • Supporting and augmenting the intra-linkages in the RIS and linkages with other RIS through interaction in BE (GVC/GPNs). • Facilitating inclusion of private and public sectors and others. • Stimulating collective learning through network building, collective entrepreneurship, utilizing of social capital advantages; regional financing and investment, labor market adjustment services, etc. ‘

27. RIS as Public Goods • In line with new economic growth theory, RIS rest basically upon the public goods provision knowledge, innovation, information, through collective action (public and private sector participation). • RIS: • Utilize existing social capital advantages and build networks • Stimulate collective learning through network building • Provide innovation support services (public and private or combined) • Integrate various financing means for start ups (multilevel public and private investments (venture capital) for seed funding. • Provide regional financing and labor market adjustment services ( talent and skill formation). • Encourage collective entrepreneurship • Provide necessary infrastructure (business incubator facilities, science parks, zones, ) • Coordinate policy through multilevel formal governance structure with a meso-governmental body having leading role. • Increases returns from agglomeration economies

28. Clusters and RIS: conceptual differences • Clusters and RIS can coexist in the same territory. RIS can host several clusters but cluster is not RIS. Cluster may have some kind of governance but this is more of informal character (e.g. cluster association, etc. ) • there is still lacking systemic explanation of • Relations between clusters and RIS in already established industries and how these are formed ? • What relations between clusters and RIS are needed to trigger the emergence of new industries (clusters)? • Asheim and Lars, 2005 • Recent research on SME policy and economic development points to the need for amore systemic approach and for a more pro-active SME and entrepreneurship innovation-based policy

29. Specialization vs Diversification? • Cluster literature: implies specialization • Specialization is risky for economic development: exposure to external sector- specific shock • ‘Jane Jacobs’ models (1969): benefits of diversity in urban and regional economies are driving forces of economic growth. • Many dynamic regions have a diverse portfolio of specializations (clusters): unrelated variety and/or related variety of industries. • Unrelated variety produces portfolio effect: important for risk spreading • Related variety of industries: important for knowledge spillover effects and innovation-driven growth

30. Constructing Regional Comparative Advantages • Based on the idea that • Modern economies progress based on inter-related sectoral relations and knowledge spillovers of 'related variety' of industries: there is swift adaptation of innovations to nearby related industries and 'absorptive capacity' of related sector management is high. • A key carrier of innovation is entrepreneurship, particularly 'knowledge entrepreneurship’. • A ‘related variety’ industry requires more than simply sector-specific policy support. • The policy challenge of this approach is in innovative policies to stimulate innovation, entrepreneurship and industrial related variety.

31. The co-existence of many intra-regional clusters with various knowledge bases and different relations to the RIS calls for more developed governance structures to secure a planned and systematic co-ordination between industry and knowledge creating and diffusing organisations. • Provision of RIS as a public good requires an innovation system of a ‘triple-helix’ character (including university/ industry / government platforms) .

32. Industry platform : exploring related variety of industries ICT Finance Biotech National & Regional Constructed Advantage Stakeholders platform: pursuing a planned and systematic cooperation and interaction between: Policy platform: Economy Infrastructure Skills what type? Analytical/symbolic/synthetic Universities Industry Government

33. Thank you for your attention o.memedovic@unido.org