The Role of Technology and Technology-based Firms in Economic Development

The Role of Technology and Technology-‐based Firms in Economic

Development Alex COAD, Alasdair REID 11th September 2012

AtlanEc Quay, Glasgow

Contents

•  Technology and innovaEon – How does technology lead to growth? – HGFs and innovaEon – Barriers to innovaEon and growth at the firm-‐level

•  ScoNsh case – Does R&D drive growth – a high-‐tech myth ? – Entrepreneurial dynamics and high-‐growth firms

•  Rethinking InnovaEon and Enterprise Policy in Scotland

9/09/12 2 Coad & Reid 2012 for Sco1sh Enterprise

What is technology?

•  “Technology is the uElisaEon of natural phenomena and regulariEes for human purposes” Mokyr (2008)

•  OECD FrascaE manual: scienEfic, technological, organizaEonal, financial, and commercial acEviEes

•  ‘Hidden innovaEon’ that is not reflected in tradiEonal indicators (e.g. oil & energy sector)


Technology

•  Defined broadly to capture not only the equipment, sodware or instruments used to produce a good or service but also the (tacit) knowledge, techniques, organisaEonal methods, etc. used to design, develop and market the products and services by businesses (and indeed the public and not for profit sector), in co-‐operaEon with other actors in the innovaEon system


How does technology contribute to growth ?

•  From neoclassical growth theory… – Output depends on available labour and capital, technology is ‘exogenous’ to the system

–  But implies long-‐run stable growth and convergence over Eme – not up held by facts

•  … to endogenous growth theory –  Key role of private sector R&D drives technological progress;

– Appropriate government policies (market failure) can permanently raise growth rates;

–  But again, limited empirical support (although beier than NGT)


Entrepreneurship -‐ the missing link ?

•  Schumpeterian models imply a key role for entrepreneurial dynamics in explaining growth

•  A higher rate of firm turnover leads to higher growth: –  a process of creaEve destrucEon generates entry of new innovators and exit of former innovators.

•  Introduces concept of the global technological fronEer and disEnguishes between a ‘fronEer innovaEon’ and ‘imitaEon’ innovaEon.

 ‘Innova;on frequencies’, strongly influenced by entrepreneurial dynamics, determine a country’s growth path.


Policy implicaEons

•  1) InnovaEon policy will be ineffecEve if the condiEons for innovaEon-‐based growth are not met:   compeEEon policy favouring entrepreneurial dynamics   investment in higher (and lifelong) educaEon   credit and labour markets that foster structural

adjustment   a counter-‐cyclical fiscal policy (Mr Osborne take note…).

•  2) the policies (and insEtuEons) that favour imitaEon are not the same as those that favour leading-‐edge innovaEon.


Policy based only on market failure raEonale will not be effecEve

•  System failures more important: –  Capability failures (company level)

•  Boost know-‐how and availability of skilled people in companies – foster innovaEon management to enhance ‘absorpEve capacity’

–  InsEtuEonal failures •  Think ‘Freakonomics’ and apply to incenEve systems in main players of innovaEon system – financial, academic, etc.

–  Network failures •  Not enough to ‘fix’ university-‐industry Ees. InnovaEon surveys underline that inter-‐company links are more important.

–  Framework failures •  AienEve to regulatory, cultural, etc impediments to the success of otherwise


Does theory match real life ? A review of the evidence

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Does R&D lead to growth ? Yes…

•  OpEmal R&D investment is at least two to four Emes actual investment (Jones and Williams, 1998) ;

•  Business expenditure on R&D (BERD) is significantly posiEvely correlated with producEvity growth (OECD)

–  Effect largest in countries that are intensive in business R&D, and

– With lower share of defence-‐related government funding.

•  Irish evidence suggests that domesEc firms improved TFP faster as a result of the increased R&D by FDI firms. –  Suggest need to develop strategies to absorb industrial learning in the

local economy.


But, evidence confirms that R&D alone is not enough

•  The Swedish paradox: –  high and above average R&D expenditure and below average growth;

–  But, if Swedes see good opportuniEes to start a business, very few actually do, and those who do have modest growth aspiraEons.

•  The Norwegian puzzle: – High growth and wealth levels but ranks modestly internaEonally for innovaEon and business R&D

– Hidden innovaEon (e.g. in oil & gas) and industrial structure one element in explaining puzzle.


R&D-‐growth paradox seems to be ‘disease’ affecEng high-‐growth sectors •  Fast growing sectors prone to decreasing returns to R&D; which slow-‐growth sectors do not experience (Ejermo et al, 2011)

•  Effect of iniEal R&D on high-‐tech firm growth is through increasing levels of inter-‐firm alliances in first post-‐entry years – exploitaEon of external knowledge is key.

 So R&D maiers for a limited but important set of new-‐high-‐tech and high growth firms...


But R&D is also a factor boosEng technological competence of all firms •  Firms with low technological competence enhancing capabiliEes follow a convergent declining growth paiern

•  “The success of high-‐tech industries and their impact on produc4vity depends on the extent to which they are adopted by other, lower-‐tech industries.” (BIS, 2011)

 Need to focus on business skills that enhance technological competence and absorpEve capacity.


‘Sod skills are increasingly complementary to technical skills and vital for successful

innovaEon’ (BIS, 2011)


So does entrepreneurship alone drive growth and innovaEon ?

•  No…. (Sanandaji 2010)


It might seem self evident….

•  But we need high-‐quality entrepreneurship –  Industry experience –  InnovaEve idea (not just another fish & chip shop) –  Efficient start-‐up size

•  Yet policy makers sEll set targets such as: –  ‘increase the number of firms/per capita’ or ‘create any old new firm’, •  Carl Schramm, hailed by The Economist as the "evangelist of entrepreneurship”: "As a naEon, we should seek to have… a million new business start-‐ups every year (nearly twice present levels)."

–  ignoring evidence on link between scale, producEvity and innovaEon.


HGFs play a disproporEonate role

•  4% of firms create 50% of the jobs (Storey, 1994)

•  HGFs have an impact on subsequent industry growth (Bos & Stam, 2011)

•  HGFs play a complementary role on labour markets, recruiEng ‘outsiders’ (Coad et al 2011)


Can we pick out HGFs ex ante?

•  Firm growth is essenEally a random walk

•  Very difficult to predict which firms will grow

•  Perhaps idenEfy which firms will NOT grow –  founder’s educaEon, sector, venture capital investment, patents, business plan, start-‐up size, etc

–  Loiery winners vs loiery losers (had a try but did not ‘win’), vs those that don’t even buy a Ecket (no hope of a ‘win’)

•  In sum: HGF policy risks being a blunt instrument.


Reality check 1: HGFs ≠ high-‐tech

•  In theoreEcal discourse, entrepreneurship is synonymous with: –  InnovaEon (e.g. Dennis, 2011) –  High growth (e.g. Henreksson, 2005)

•  Anecdotes focus on high-‐tech HGFs: –  Apple, Microsod, Google, Genentech, etc

•  However, empirical evidence does not support idea that HGFs are more common in high-‐tech sectors –  Survey by Henrekson and Johansson (2010):

•  “Gazelles exist in all industries. They seem not to be overrepresented in high-‐technology industries, but there is some evidence that they are overrepresented in services.”

–  If anything, HGFs are under-‐represented in high-‐tech sectors (Mason and Brown, 2012)


Reality check 2: USOs ≠ HGFs

•  Need for a reality check in terms of expectaEons: –  Reid et al (2011): it takes about 90 million dollars on average of research spending to generate one spin off from the top 200 US universiEes. EsEmated figure is similar for the UK's top universiEes.

– Wennberg et al (2011): Corporate vs University SOs •  “CSOs outnumber USOs 14 to 1” •  “the vast outnumbering of CSOs compared to USOs in combinaEon with the performance advantages of CSOs calls into quesEon the dominance of public policy singling out and supporEng USOs.”

•  “an important imperaEve to assist USOs is building viable teams that have the requisite commercial experience to succeed.”


So we need to look for other pointers towards growth potenEal…

•  “Across a wide range of countries and industries, exporters have been shown to be larger, more producEve, more skill-‐ and capital-‐intensive, and to pay higher wages than non-‐exporEng firms. Furthermore, these differences exist even before expor;ng begins.” Bernard et al (2007, p105)


…focus policy support on ‘growth trigger points’…

•  EffecEve intervenEons at growth ‘trigger points’? (cf Brown and Mawson 2012) – Hiring first employee = doubling in size! – First steps in export markets – Opening a new plant in a new region – New product introducEon


…and explore more objecEvely barriers to growth and innovaEon

•  Studies tend to focus on ‘subjecEvely-‐perceived’ barriers

•  Not all firms deserve finance, not all R&D projects should be pursued

•  Not all barriers should be removed (e.g. ‘intense compeEEon’)

•  Some barriers should be heeded (e.g. lack of skilled employees, recruitment of staff, bureaucracy, finding partners & collaborators)

•  Others less so (e.g. too much compeEEon, inefficient size, lack of demand)

•  Main reported barrier to innovaEon is cost-‐related


Exploring the ScoNsh conundrum

A ScoNsh Conundrum ?

•  We suggest Scotland is a mix of : –  the Swedish case with a strong higher educaEon research sector and weak entrepreneurship but without the home-‐grown mulEnaEonal industrial ‘powerhouses’ which drive Swedish innovaEon;

– & the Norwegian case where innovaEon is under-‐esEmated due to industrial structure and the specific types of non-‐technological or ‘resource based’ innovaEon occurring in the economy.


Business R&D and economic growth


Does ‘technology’ contribute to growth in the ScoNsh economy ?

•  1) Scotland’s ‘world beaEng’ academic research appears to count for liile: – Spin-‐offs have a marginal direct, short-‐term impact (TargeEng InnovaEon, 2008)

– Knowledge transfer : there is a posiEve impact of HEI-‐firm links on producEvity, but ScoNsh firms that source knowledge from HEIs do worse than their counterparts in other UK regions, while foreign-‐owned subsidiaries in Scotland do much beier (Harris et al, 2012)



•  2) Penny for penny of science spend, Scotland outperforms neighbouring Nordic countries in terms of scienEfic impact, but this is not being turned into technological leadership – High-‐tech patenEng trends declining over last decade (similar to rest of UK)

– No noEceable growth in patenEng in any high-‐tech field !



•  3) Linear model – basic research translates into new innovaEons and economic growth, right?.. –  Partly true, but very

complex and unpredictable, there are fricEons, boilenecks, interacEons and feedbacks, huge Eme lags involved (decades), hard for a small country to appropriate all commercial benefits from its basic research, etc…


So what about business R&D and growth ?

•  Evidence suggests that over last decade: – Absolute growth in ScoNsh BERD driven by ‘other sectors’ (oil & gas…) and by ScoNsh owned firms!

– No growth in high-‐tech sector BERD ! – No growth in R&D intensity of high-‐tech sectors ! – High-‐tech sectors have experienced posiEve GVA growth but declining employment.


ScoNsh business R&D has been growing


And ScoNsh owned firms are closing the ‘R&D gap’


But growth in BERD is not coming from the high-‐tech sectors…


…which have a declining R&D intensity


However, high-‐tech sectors do contribute to ScoNsh growth


But not employment


So is there ‘hidden innovaEon’ in the ScoNsh economy ?

•  Industrial structure is more important explanaEon than class-‐size (Turnbull & Richmond, 2011) –  TradiEonal manufacturing innovaEon performance above UK average,

wholesale & retail perform below –  Scotland has smaller % of former and higher percentage of laier. –  InnovaEon investment more widespread than R&D staEsEcs suggest.

•  But type of innovaEon is equally an explanaEon: –  ScoNsh firms innovate much more than UK average through bought-‐in

technology and training, much less in markeEng and internal R&D. –  ScoNsh Internal R&D -‐ key condiEon for knowledge absorpEon -‐ is ¾

of UK average. •  Need to expand base of ScoNsh SMEs undertaking internal R&D

(Roper, 2006, Harris et al, 2011).


If overall entrepreneurial drive in Scotland is low (Levie, 2009)…


…are HGFs driving ScoNsh growth ?

•  HGFs are indeed present… –  “the single most striking observaEon [is] the heterogeneous nature of HGFs” (Mason and Brown 2010)

–  Found in all sectors –  Based around Scotland’s main ciEes – Most are private firms, many foreign-‐owned

•  …if high growth is not a characterisEc of a sub-‐set of firms but rather a ‘state’ that firms experience. –  Then policy support needs to be constantly ‘on its toes’ to be ‘dancing with the right partner’.


Rethinking InnovaEon and Enterprise Policy in Scotland


Summing up

•  BoosEng R&D intensity of an economy is a necessary but not sufficient condiEon for growth

•  Enhancing ‘absorpEve capacity’ – ‘imitaEon innovaEon’ and (non-‐technological) innovaEon -‐ in a broader range of firms is necessary

•  Similarly, a high entrepreneurial propensity does not guarantee growth.

•  Firms in a transitory ‘high-‐growth’ state are key to growth and ‘creaEve destrucEon’ leading to structural change.


What does our work imply for ScoNsh business/innovaEon policy ?

 Scotland does face a ‘technology deficit’:  Even accounEng for industrial structure and hidden innovaEon, the R&D intensity of the economy is too low to increase compeEEveness.

 Need to think of HGFs and high-‐tech firms as different categories (with a small overlap)  Both types of firms play an important role – the former boost employment and GVA growth in the short term, the laier foster structural change and producEvity growth over the longer-‐run.


RedirecEng policy to the trigger points of innovaEon based growth

•  Redirect support for technology development towards business-‐business collaboraEve projects targeted at ‘emerging clusters’ rather than ‘individual innovaEon events’ in the ‘usual suspects’: –  84% of Smart and R&D awards concentrated on just three sectors over last three years (SE data, June 2012).

•  Broaden the efforts to idenEfy and support (account management, etc.) high-‐growth companies across Scotland and across all sectors –  58% of SE account managed high-‐growth companies are from only three sectors (SE data, June 2012)

–  Explore potenEal for corporate spin-‐offs ?


RedirecEng policy to the trigger points of innovaEon based growth

•  Challenge sectoral & regional partnerships to increase the number of innovaEon acEve firms –  through tailored acEon to enhance absorpEve capabiliEes and internal R&D management of firms with ‘ambiEons to innovate’

–  Seek to increase number of ‘innovators in business’ -‐ graduate placement type schemes.

•  Rebalance support for knowledge transfer towards broader learning in the economy: –  Half of spending in Scotland’s innovaEon system focused on two-‐way knowledge transfer (SE-‐HIE-‐SFC, June 2012).

–  Foster both internal learning by doing and external learning from other firms (suppliers, etc.).


A taxonomy of learning mechanisms (Radosevic, 2011)


Comments / QuesEons

•  Alasdair Reid -‐ alasdair.reid@technopolis-‐group.com

•  Alex Coad -‐ [email protected]


Art & Photos

The Role of Technology and Technology-based Firms in Economic Development