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KEYNOTE ADDRESS
GOVERNANCE OF INNOVATION SYSTEMS IN THE CURRENT GLOBAL SETTING
By
M. Nawaz Sharif Principal Consultant, Myriad Solutions, Maryland, United States of America Adjunct Professor, Johns Hopkins University, United States of America
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ENTERPRISES AND TECHNOLOGICAL INNOVATION
“Innovation and development” is a topic that is being widely discussed in developing countries with different objectives such as policy planning, capacity building and governance, from various perspectives such as academic excellence, R&D relevance and regional economic development. This presentation attempts to offer a business perspective of the relationship between innovation and development.
The term “innovation” means something new that did not exist or not utilized before at a given place (an enterprise, in this context). Innovation starts as an idea, conceived by an individual. This idea then becomes a reality with the help of collective efforts and resources expenditure by a risk-taking enterprise. Innovation involves creativity in real-world problem solving, utilizing both tacit and explicit knowledge. Empirical studies show that innovation trajectories are conditioned by social, cultural, economic and political forces. Figure 1 depicts innovation premises.
Knowledge
Change
Figure 1: A description of innovation premises
Creativity
Theory
INNOVATION
Value
Idea
Risk
INNOVATION
Practice
What is possible with technology
INNOVATION What is What is viable in desirable to the market the society
Having defined innovation from the business perspective, let us look at the rationale for focusing on “technological innovations” in achieving economic growth through competitive goods-producing enterprises. In the world of business, innovation is typically understood as the commercialization of something new and better for an enterprise in meeting its universal challenges regarding international market competition, which are: creating values; satisfying customers; adapting to market flux; and sustaining growth. Enterprises seek different innovations to gain market advantage (Figure 2).
Technological innovation is the prime mover for all other innovations sought by enterprises. It is also an underlying enabler for harnessing several other “capitals” that are sought after by enterprises to achieve competitive advantage (Figure 3). It boosts economic growth by enabling local goods to be traded internationally. Therefore, in the current global setting, the governance of technological innovation systems needs to be in focus.
Let us examine the current global setting, the realities and realizations driven by technological innovations for present-day enterprises, looking at the playing field as well as the ball game confronted by an enterprise (Figure 4). Every enterprise exists in the current global setting, or the new playing field and the ball game. We can categorize the playing field by identifying its characteristics. One is the dizzy pace of technological
Figure 2: Innovations sought by enterprises
Quality Innovation
Business Operation Innovation
Innovation in Customer Relation
Customer Relation Innovation
Product Innovation
Innovation in Value Creation
Innovations sought by enterprises
Innovation in Growth Creation
Service Innovation
Business Model Innovation
Innovation in Market Adaptation
Supplier Relation Innovation
Process Innovation
Figure 3: Capitals utilized by enterprises
Naturebased Physical Capital ENERGY MATERIALS LAND/WATER ORGANISMS
Other Types of Capitals Utilized by Business Enterprises
Culturebased Mindset Capital ASPIRATIONS VALUES BENEFITS ATTITUDES
Namebased Goodwill Capital IMAGE BRANDS STATUS CREDIBILITY
Internetbased Knowledge Capital TEXTS IMAGES NUMBERS INFORMATION
Loanbased Financial Capital MONEY EQUITY PROPERTY CREDIT RATING
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Figure 4: The global setting enterprises face – the playing field
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Proven successes of innovations
Dizzy pace of INNOVATIONS
Everrising demands for productivity
Fiction turning into realism
Fuzzy state of THE FUTURE
2 Increased appearance of surprises
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Technological Innovations Shape the Playing Field
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Instant connections and actions
Messy kind of CONNECTIONS
Many more actions and reactions
Efforts to catch up and leapfrog
Shaky scope of PARTNERSHIP
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Demonstrated success of new venture
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innovation – the rate at which innovations are taking place is mind-boggling. What is happening currently in the field of technology could not have been imagined a few years ago, and we cannot imagine what is going to happen in a few years from now. The second is about connections. The remarkable advances in the information and communication technologies (ICT) have ensured that we live in a closely connected world. Some term it globalized – that too is in the sense of being interconnected. This has many implications for an enterprise. The third is the fuzzy state of the future, or the unpredictability of future developments. The fourth characteristic is the transient nature of relationships – inter-enterprise and intra-enterprise relationships lasted longer earlier than they do now. In the present day, companies merge and separate within the span of a couple of years, because fast-changing business situations necessitate such actions. This happens within organizations too, with more people leaving companies in less number of years, partly because the knowledge gap between the top and lower strata of the staff has narrowed considerably.
There are changes to enterprises too – the ball game that every enterprise plays or has to be prepared to play (Figure 5) has altered. Enterprises have become more flat and networked. Now hierarchies are shorter and linkages are more in organizations,
partly because of ICT. The second aspect is that, as the means of transportation and communication have improved considerably, geographical distances are no longer a problem for enterprises. This has very important implications for small enterprises in developing countries, as their markets are now being invaded by large enterprises from outside. On the one hand, isolated, protected market is a thing of the past: every enterprise is now a part of the interconnected, interdependent, globalized economic environment. On the other hand, technology is helping enterprises to be globally present
Figure 5: The changing ways of enterprises – the ball game
Flat and Networked Firms Power, distance & hierarchy disappearing due to Internet & ICTbased business intelligence
Death of Distance and Demise of Isolation Geographic distance not a barrier for global operations, and no enterprise can remain isolated from global actions
Global Existence and Virtual Presence Enterprises can locate its procurement, marketing and production activities anywhere in the world; and employees work 24/7 in realtime, virtual space
Reimagine, Reinvent, Redesign & Renew to become lean, agile, mobile and green
Innovation is Paramount Competitive edge based on local resource endowment is temporary; created resourcebased advantage has become critical for competition
Technological innovations have influenced the ball game
through virtual representation, and conduct business round the clock with different agents spread out across the globe. Modern technology has changed the work environment so significantly that some management gurus are now advising that the traditional way of managing enterprises is not valid any more. For example, assembly line type of mass production has given way to flexible, batch-mode robotic production. Therefore, businesses have to be “re-imagined, re-invented, re-designed and renewed”. Many are now suggesting that the “re-” part is most critical. If we think carefully, what else is “re-” but innovation; something new that works better now. Innovation, thus, has become paramount.
Technological innovation, obviously, is the only lever that enables an enterprise to achieve sustainable prosperity in the current global setting. Hence, the present world calls for re-imagining the operations of an enterprise in a technology-centric way. What could be the “re-imagined” principal and supportive work functions, focused on technological systems, of goods-producing enterprises for international market competition?
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PLACING TECHNOLOGICAL INNOVATION IN ITS CONTEXT
Technology sophistications are bought or made for both principal and supportive work functions of an enterprise. A goods-producing enterprise uses technology as the transformation mechanism to convert materials and components (inputs) into goods 2 (outputs) – the principal work function of an enterprise.
However, all enterprises following this same path do not become successful in the market, because an enterprise also needs to have better productivity than competitors to succeed in the marketplace. For continuous productivity gain, both cost reduction and value addition are essential. The supportive enabler functions – communication ability, transportation ability, transaction ability and collaboration ability – help an enterprise in achieving market advantage. These functions have become increasingly important to enterprises to survive and compete in the current global setting.
It must be remembered that productivity-driven competitive advantage is temporary, as others catch up in due course of time. For sustaining competitive advantage, product-process syndication is the key. Therefore, enterprises focus on technological innovation efforts, which can be either incremental (by improving existing processes) or disruptive (by adopting new products and processes in place of existing processes) in nature. Enterprises other than small-sized ones often use R&D syndication to achieve this.
Figure 6: Inter-related components of a technological system
Object embodied physical facilities (tools, devices)
Work embodied operational schemes (flows, routines)
T
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H
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Person embodied human ingenuities (skills, talents)
Record embodied codified knowledge (specifications, recipes)
Larger enterprises also use technological systems – comprising Technoware (tools, devices, etc.), Humanware (skills and talents of people), Inforware (knowledge in the form of recipes, specifications, etc.) and Orgaware (workflows, routines, etc. practised by an organization) – for pursuing activities that establish their social and climate-wise standing (Figure 6). The four components of any technological system are dynamically
2 All functions (principal as well as supportive) of an enterprise are undertaken through a network of interdependent production activities (work packages) meant for specific value addition and cost reduction. Technological systems are employed to achieve such im-provements of capabilities and competencies.
inter-related: for example, a more sophisticated machine (Technoware) requires less human intervention and therefore less operator skill (Humanware). It must also be remembered that while all technological systems, such as production of microchips or creation of software, have the four components, they will not be of equal importance. For instance, Technoware is of vital importance in the microchip industry but of less importance in the software industry.
The relationship between technology strategy and business strategy in a goods-producing enterprise is such that the sophistication (and importance) of Technoware increases as the company moves up the business ladder. At the bottom stratum of the market, the enterprise uses mature Technoware in a technology extender strategy that aims at price-sensitive consumers. In the next higher level, proven Technoware is utilized with quality-sensitive consumers in mind, following a technology exploiter strategy. In the next higher level where feature-sensitive consumers populate the market, an enterprise adopts technology follower strategy to use advanced Technoware. At the top end of the market, the enterprise uses technology leader strategy, wherein state-of-the-art Technoware ensures goods that satisfy status-conscious consumers.
In a holistic economic development context, business enterprises and technology incubators (core of the ‘Innovation Triangle’ that links companies, academia and R&D units) are at the centre and form the core of a technology innovation system (TIS). TIS comprises integrated agencies that serve as linked infrastructure for generation, production, application and diffusion of locally made technologies for economic value addition. These include:
z z z z z z z
Institutes for higher learning and postgraduate research universities;
Design and tool engineering agencies;
Standards and certification agencies;
Information service agencies;
Venture capital financing agencies;
Knowledge networking agencies; and
Intellectual property regulation agencies.
The core of an innovation triangle (company-academia-R&D unit) can be product-specific, industry-related and general-national.
TIS infrastructure is more or less the same everywhere, and a minimum critical mass of such infrastructure is required to make TIS functional. National practices, however, differ and are reflected mostly in linkages. A functional linkage between the active intermediaries is essential for any meaningful performance. Such linkages are very strong in developed countries but weak in most developing countries.
The key components of a National Innovation system (NIS) are: academic entities that create Inforware; scientific laboratories that produce Orgaware; professional agencies that generate Humanware; and industrial laboratories that produce Technoware. While many developing countries have all these, they are often weak and the quality of output (Inforware, Orgaware, Humanware and Technoware) is low and not integrated. Further-more, most of them also lack the capacity for producing high-quality tools and dies, advanced machinery and equipment, industrial-scale manufacturing facilities, etc.
Many of us are familiar with Prof. Habibie’s model describing strategic industrial development, the four-stage development that starts with component assembly and
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works backwards. At the start, the assembly industry is generally based on imported technology and components, usually with a joint venture partner. In the next stage, some parts are manufactured, usually under licence, and assembled with imported parts. These two stages are induction stages, while the two that follow are innovation stages. In the third stage, manufacture shifts to core parts and important components. Product designing and diversification to newer and better products occur in the last stage. As can be seen from Figure 7, at each of these stages, there needs to be linkages with the NIS; this, however, does not happen in many cases. Technology transfer centres, while useful for the first two stages, are of little value for the last two stages. However, if a country has its own multinational coorporations (MNCs), then the strength of a product- or industry-specific incubator is not so critical as most MNCs have their own innovation systems.
Figure 7: Technological Innovation System needs of enterprises
Established mature goods industries
Assembling products from imported parts for lower end of the market, usually under joint venture and taking advantage of local resource endowments Technology extender and exploiter strategies through humanware & orgaware innovations Manufacturing simple parts to assemble with coremodular imported parts, usually under licence, for local market gain Manufacturing core and essential parts for the entire product sold in local market, usually under own name Technology follower and leader strategies by inforware & technoware innovations Original designing and manufacturing better and newer product lines for local and global markets
NEED
Technology transfer centres assisting small and mediumscale enterprises manage contracts for importing production technologies
General NIS laboratories
ACADEMIC LABS having PhD level education and research activities producing INFORWARE
SCIENTIFIC LABS having high level S&Tbased procedural activities producing ORGAWARE
PROFESSIONAL LABS having technical human resources training activities producing HUMANWARE
INDUSTRIAL LABS having high quality complex engineering processes producing TECHNOWARE
World class companies in: design engineering; tools and dies making; and industrialscale machinery and production facilities
New technologybased industries
Most large multinational corporations have their own factor creation mechanisms (R&D units and academes) and they acquire all necessary services through subcontracting, contract funding and hiring consultants
Most small and medium scale enterprises and most new technology startup companies
Active intermediaries; information; IPR; VC; standardization and certification agencies
NEED
Product or related industry specific incubators linking innovation triangles – AcademeR&DIndustry
In the case of new technology-based small and medium enterprises (SMEs), there is a vital need for the support of an NIS. It is important to note that SMEs (accounting for more than 95 per cent of all enterprises in most developing countries) do not have the resources and risk-taking capacities for research and development efforts (R&D for innovation) that can help them to move from the imitation to innovation mode. They desperately need the help of product- or industry-specific, incubator-based technological innovation system for jump-starting the desired transition. They also require active intermediaries for information, intellectual property, venture capitals, etc.
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SOME IMPORTANT LESSONS AND REALIZATIONS
Success of technology transfer depends on local R&D for absorption and adaptation of the imported technologies. Unless there is local capacity built up to make the imported technology work advantageously in local conditions, a technology import is not likely to make much difference. This is something that can be learnt from the cases of Japan and the Republic of Korea, countries that have spent considerable amounts of money to absorb and digest imported technologies. Yet, in most developing countries, while there are technology transfer centres to assist with negotiation for and importation of technologies, there is no mechanism to help with the understanding and assimilation of the imported technology. This is a critical drawback.
Academic programmes in most developing countries strive to be centres of excellence, which are often not relevant for national innovation needs. Research activities tend to be extensions of previous academic research done elsewhere under different conditions. There is often no effort to assess the national relevance, in terms of strategic national needs, of research activities. The outcome is that while the limited resources are being expended on S&T research, the results are not contributing towards addressing national socio-economic needs. There is a need to integrate, at the national policy level, technological innovation plans with economic development plans.
Private public bonds
Figure 8: Determinants of technological Innovation
National S&T legal system
Related industry clusters
National S&T talent system
Goods producing firms in the competitive market
National incubator system
Cultural social norms
National R&D labs system
Own global firms
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Another critical shortcoming is the negligible quantum and spread of private R&D. In the private sector, investment in R&D seeks returns, while there is generally no such compulsions in the public sector. Consequently, a good part of private expenditure in R&D would bear results, while the public expenditure in R&D is often wasted. Public R&D expenditure should therefore focus on motivating more R&D in the private sector. Some of the large Korean conglomerates had started as SMEs and grew into their current status through in-house R&D.
A related issue is that public R&D is based on requests made by current performers of R&D activities. As a result, R&D investments tend to be skewed towards doing more of the same. Over a period, this would stifle new R&D initiatives that trigger innovations.
Figure 8 captures in brief the determinant factors of technological innovation.
Some other salient observations and realizations are listed here:
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We focus on quantity, not quality, and we only talk about linkage, but we are not monitoring results for conformity; We create totally isolated high-level councils for national economic development and technology innovation plans; Instead of focusing on workable, pragmatic solutions with respect to global competition, we strive for all-inclusive solutions; Economic development gap between countries is actually the manifestation of technological innovation gap; As we cannot continue in the same old path, we cannot copy old successful models of industrialized nations, though good concepts can be adapted for implementation; NIS models of already developed countries have to be adapted for our situation, using true concepts; Related industry cluster is meant for technological factor creation, not distributed job creation; and Technological innovation investment decisions are not technical, but national leadership choices and therefore, there needs to be demonstrated commitment by top-most executive authority to implement tough technology policies and plans.
The time is opportune for late-starting countries to go for leapfrogging in carefully targeted areas of technological leadership of the future world we want to live in. When everything is changing at mind-boggling speed, the best strategy for competition is to lead technological change (innovation) in at least a few areas.
As a prelude to my suggestions, allow me to recall a few messages by world renowned personalities (and adapt those messages to our current circumstances).
Amartya Sen: “Freedom is the principal goal and purpose of development.” [Innovation capacity is needed for freedom]
Muhammad Yunus: “Established systems only help those already established.” [Laggards have to develop necessary new systems]
Rabindranath Tagore: “You cannot cross the sea merely by standing and staring at the water.” [Move from talking to doing … now!]
Lee Kuan Yew: “If you follow someone else’s footsteps, you will be always behind.” [Venture into new promising territories]
Hyung Sup Choi: “Implementation of a crude plan is better than non-implementation of grand plans.” [Run with satisfactory solutions]
B.J. Habibie: “Start at the end and step-by-step move to the beginning.” [Imitating to innovating … helped by incubators]
Anonymous: “Success is never final and failure is never total.” [Ultimately, it is technological innovation capacity that counts!]
Now, a “Framework and governance of technological innovation for targeted competition”, based on the brief discourse we have had and some lessons learnt from experiences in many developing countries, can be presented. This framework shows the different aspects related mainly to three areas – policy, governance and law. Particular em-phasis is on the first aspect – some prerequisites to policy-making. It is very important to have a policy-making body consisting of knowledgeable personalities from innovation-related fields; not politicians or bureaucrats who do not have the subject matter expertise. The second point is that all policy decisions should be guided by a vision for the country aimed at achieving targeted technology leadership. Policies must be based on global foresight that considers possible threats and opportunities, as well as on local insight that considers a country’s strengths and weaknesses. The last prerequisite is that the identification of target areas and determination of priority areas should be a transparent process and the result of a thorough analytical exercise.
Once these prerequisites are in place, then we can turn our attention to the policy side per se. Policies must target, after a very careful selection and time-bound prioritization, the goods that are to be produced for global market competition. Such targeting is to cover individual industries as well as related industries cluster as production entities.
Drafting policies to integrate economic development and technological innovation activities should preferably be carried out by a single empowered committee based on articulated national vision. A current practice tends to constitute two separate high-powered councils (with majority ex-officio members) for the two policy areas; such a practice precludes the essential integration of policies pertaining to these two areas and is best avoided.
In the area of governance, in terms of the selected and prioritized goods, the development of an institutional infrastructure for technological innovation is to be pursued through public-private partnerships (PPPs). Such an infrastructure would entail academic agencies that produce inforware, scientific labs that produce orgaware, professional entities that produce humanware and industrial units that produce technoware – all centred on clusters of related industries. The infrastructure must also include the development of design engineering and tool building facilities, again through PPP, for technology incubators that will carry out prototyping, testing and scaling-up operations. Establishment of technology transfer centres and business incubators, through PPP, would be needed to aid in technological innovation.
Finally, for the successful implementation of governance activities, it is imperative to have a national legal framework in place for: formulation and timely revision of legal policies; conceiving and delivering PPP schemes; and sustained allocation of sufficient funds, backed by built-in risk-tolerance mechanisms.
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