13.2 Innovation Systems and Policies in Emerging Economies
6 min read•july 30, 2024
Innovation systems drive technological progress in emerging economies, fostering growth and development. These networks of institutions create, share, and use knowledge to boost productivity and competitiveness, helping countries catch up with more advanced economies.
Key components include firms, universities, government agencies, and financial institutions. Effective policies support R&D, build capacity, and coordinate across sectors. Emerging economies face unique challenges in developing innovation systems compared to developed nations, requiring tailored approaches.
Innovation Systems for Economic Development
Concept and Relevance
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- Innovation systems are networks of institutions in the public and private sectors whose activities and interactions initiate, import, modify, and diffuse new technologies and practices
- These systems drive technological progress, a key determinant of long-term economic growth and development
- Effective innovation systems facilitate the creation, dissemination, and exploitation of knowledge, leading to increased productivity, competitiveness, and economic prosperity (e.g., Silicon Valley in the United States, Shenzhen in China)
- The concept emphasizes the importance of interactions and knowledge flows among various actors, including firms, universities, research institutes, and government agencies
- Innovation systems are particularly relevant for emerging economies, as they can help these countries catch up with more advanced economies by promoting technological learning and upgrading (e.g., South Korea's rapid industrialization in the 20th century)
Role in Economic Development
- Innovation systems contribute to economic development by:
- Enhancing productivity and efficiency through the adoption of new technologies and practices
- Creating new industries and markets, generating employment opportunities and economic diversification
- Attracting and fostering international technology transfer
- Improving the competitiveness of domestic firms in global markets
- Addressing societal challenges, such as healthcare, energy, and environmental sustainability, through innovative solutions
- Effective innovation systems can help emerging economies escape the middle-income trap by enabling them to transition from resource-based to knowledge-based economies (e.g., Malaysia's efforts to develop its high-tech industries)
Components of National Innovation Systems
Key Actors
- Firms are central actors in innovation systems, as they are responsible for developing, commercializing, and diffusing new technologies and products
- Universities and research institutes play a vital role in generating new knowledge, conducting basic and applied research, and training skilled human capital (e.g., Stanford University's role in the development of Silicon Valley)
- Government agencies and policymakers shape the and provide support for innovation through funding, regulations, and incentives (e.g., the National Innovation Agency in Thailand)
- Financial institutions, such as banks and venture capital firms, provide the necessary capital for innovative activities and help manage the risks associated with innovation (e.g., the rise of venture capital in Israel's high-tech sector)
- Intermediary organizations, such as technology transfer offices and industry associations, facilitate knowledge exchange and collaboration among different actors in the innovation system
Supporting Elements
- The education system, including primary, secondary, and tertiary institutions, is crucial for developing a skilled workforce capable of absorbing and applying new knowledge
- Science, technology, engineering, and mathematics (STEM) education is particularly important for fostering innovation capabilities
- Vocational training and lifelong learning programs help workers adapt to technological changes and acquire new skills
- Consumers and users of new technologies provide feedback and demand, which can drive innovation and shape the direction of technological change (e.g., the role of mobile phone users in shaping the development of mobile applications in Kenya)
- Intellectual property rights regimes, such as patents and copyrights, provide incentives for innovation by granting temporary monopolies to inventors and creators
- Quality infrastructure, including standards, metrology, and testing services, ensures the reliability and compatibility of new technologies and products
Effectiveness of Innovation Policies
Policy Instruments
- Innovation policies encompass a range of measures designed to support and stimulate innovation, such as:
- R&D and to encourage private sector investment in innovation
- Tax incentives for R&D activities and technology adoption
- Public procurement of innovative products and services to create market demand
- Intellectual property rights protection to incentivize invention and commercialization
- Science and technology parks to foster clustering and knowledge spillovers (e.g., the Zhongguancun Science Park in Beijing)
- Effective innovation policies should address market failures and systemic weaknesses that hinder innovation, such as underinvestment in R&D, lack of access to finance, and insufficient collaboration among actors
Capacity Building
- Policies aimed at strengthening the absorptive capacity of firms and the workforce can enhance the ability to adopt and utilize new technologies
- Investment in education and training programs to develop human capital
- Support for technology transfer and extension services to facilitate the diffusion of knowledge and best practices
- Encouraging international collaboration and exposure to global innovation networks
- Targeted policies that support specific sectors or technologies with high growth potential can help emerging economies develop competitive advantages and achieve technological leapfrogging (e.g., China's support for the development of artificial intelligence and 5G technologies)
Policy Coordination and Evaluation
- Successful innovation policies require coordination and alignment across different policy domains, such as education, trade, and competition policy, to create a coherent and supportive environment for innovation
- Monitoring and evaluation mechanisms are essential for assessing the impact of innovation policies and making necessary adjustments based on evidence and learning
- Establishing clear performance indicators and targets
- Conducting regular reviews and assessments of policy effectiveness
- Encouraging experimentation and learning from failures
- Engaging stakeholders, including the private sector, academia, and civil society, in the policy design and implementation process can enhance the relevance and legitimacy of innovation policies
Innovation Systems: Emerging Economies vs Developed Nations
Variations in Development Stages
- Emerging economies vary in their stage of development, institutional frameworks, and resource endowments, which shape the characteristics and performance of their innovation systems
- Some emerging economies, such as China and India, have made significant strides in building strong innovation capabilities and have emerged as major players in global innovation networks
- China has become a global leader in fields such as e-commerce, mobile payments, and renewable energy technologies
- India has developed a thriving software and IT services industry, with companies like Infosys and Wipro achieving global success
- Other emerging economies, particularly those in Africa and Latin America, face greater challenges in developing effective innovation systems due to factors such as limited financial resources, weak institutions, and brain drain
- Many African countries struggle with low levels of R&D investment, limited scientific and technological capabilities, and inadequate infrastructure
- Latin American countries often face challenges related to insufficient innovation financing, weak university-industry linkages, and limited technology commercialization
Role of the State
- The role of the state in innovation systems differs across emerging economies, with some countries adopting more interventionist approaches while others rely more on market-based mechanisms
- China has pursued a state-led approach to innovation, with heavy government investment in R&D, strategic industries, and infrastructure (e.g., the Made in China 2025 initiative)
- Chile has adopted a more market-oriented approach, focusing on creating a supportive business environment and encouraging private sector innovation through instruments such as start-up accelerators and venture capital funds
- Developed nations generally have more mature and well-functioning innovation systems, characterized by:
- Strong institutions and governance structures that support innovation
- Highly developed scientific and technological capabilities, with world-class universities and research centers
- Vibrant private sectors with a high propensity to innovate and commercialize new technologies
- Efficient capital markets that provide adequate financing for innovative activities
- Effective intellectual property rights regimes that incentivize invention and protect innovators
Context-Specific Policy Design
- Emerging economies also vary in their focus on different types of innovation, such as incremental versus radical innovation, and in their emphasis on different sectors, such as agriculture, manufacturing, or services
- India has focused on incremental innovations and frugal engineering to develop low-cost solutions for local markets (e.g., the Tata Nano car)
- Brazil has emphasized innovation in the agricultural sector, leveraging its strengths in agribusiness and biotechnology (e.g., Embrapa's development of new crop varieties)
- Successful innovation policies in one emerging economy may not be directly transferable to another due to differences in local contexts, capabilities, and priorities, highlighting the need for context-specific policy design and implementation
- Singapore's innovation policies, which focus on attracting multinational corporations and developing a highly skilled workforce, may not be directly applicable to countries with different economic structures and resource endowments
- Kenya's success in mobile money innovation (e.g., M-Pesa) has been driven by factors such as a large unbanked population and a supportive , which may not be present in other countries
Key Terms to Review (18)
Dani Rodrik: Dani Rodrik is a prominent economist known for his work on economic development, globalization, and the political economy of trade. His research often emphasizes the importance of national policies in achieving sustainable growth and highlights the need for countries to develop their own unique strategies tailored to their specific contexts. Rodrik's ideas resonate particularly in discussions about innovation systems and policies in emerging economies, as well as the dynamics surrounding emerging markets like the BRICS nations.
Foreign direct investment: Foreign direct investment (FDI) refers to an investment made by a company or individual in one country in business interests in another country, usually in the form of establishing business operations or acquiring assets. FDI is crucial for economic growth as it can bring capital, technology, and expertise into the host country, influencing various economic factors.
Global value chains: Global value chains (GVCs) refer to the interconnected production processes in which goods and services are created, traded, and consumed across international borders. This concept emphasizes how different stages of production are distributed globally, allowing firms to optimize their operations by taking advantage of varying costs, skills, and resources available in different countries. GVCs highlight the complexities and interdependencies in the global economy, as well as the role of developing countries in participating in and benefiting from these networks.
Grants: Grants are funds provided by governments, foundations, or organizations to support specific projects or initiatives, typically with no expectation of repayment. They play a crucial role in fostering innovation and development, particularly in emerging economies where resources may be limited. By offering financial support, grants can stimulate research, enhance education, and promote entrepreneurship, thus facilitating the growth of innovation systems.
Human capital development: Human capital development refers to the process of improving individuals' skills, knowledge, and abilities to enhance their productivity and economic contributions. It involves education, training, and health initiatives that empower people, making them valuable assets for both themselves and their communities. This concept is crucial in understanding how societies can grow economically while addressing disparities, especially in the context of gender issues, structural adjustments, innovation systems, industrial policies, and inequalities.
Innovation Clusters: Innovation clusters are geographical concentrations of interconnected companies, specialized suppliers, and service providers that collaborate to enhance innovation and competitiveness. These clusters foster a synergy among various actors in the innovation ecosystem, such as research institutions, universities, and government entities, facilitating knowledge sharing and technological advancement. In emerging economies, innovation clusters can be vital for driving economic growth by leveraging local talent and resources.
Innovation Ecosystem: An innovation ecosystem is a network of interconnected organizations, individuals, and resources that collaboratively foster the development and diffusion of new ideas, products, and technologies. This system includes a diverse range of stakeholders such as businesses, universities, government entities, and financial institutions, all contributing to an environment that promotes creativity and innovation. The dynamic interplay among these actors enables the efficient exchange of knowledge and resources, driving economic growth and adaptation.
Institutional framework: The institutional framework refers to the set of rules, policies, norms, and organizations that shape the interactions and behaviors of individuals and entities within an economy. This framework is essential in guiding economic development as it influences innovation, investment, and overall economic performance, particularly in emerging economies where the structures may be evolving and adapting to new challenges and opportunities.
Joseph Schumpeter: Joseph Schumpeter was an influential economist known for his theories on innovation, entrepreneurship, and economic development, particularly his concept of 'creative destruction.' This idea suggests that economic progress is driven by innovations that displace outdated industries and processes. His work emphasizes the dynamic role of entrepreneurs in fostering innovation, which connects closely to the functioning of small and medium enterprises and how these entities can stimulate growth and adaptation in emerging economies.
Knowledge economy: A knowledge economy is an economic system that relies primarily on the production, distribution, and use of knowledge and information, rather than on physical goods. In this type of economy, intellectual capabilities and innovation play a crucial role in driving growth and productivity, which is particularly significant in emerging economies as they seek to leverage technology and education for development.
National Innovation System: A national innovation system is a framework that encompasses the policies, institutions, and interactions that foster innovation within a country. It includes various actors such as government, businesses, universities, and research institutions that collectively contribute to the development and diffusion of new technologies and ideas. By understanding how these components work together, we can see how emerging economies leverage their national innovation systems to enhance economic growth and competitiveness.
Open innovation: Open innovation is a business model that encourages organizations to use external and internal ideas and paths to advance their technology and products. This approach recognizes that not all the smart people work for one company and leverages external knowledge, fostering collaboration with external partners, such as universities, startups, and other firms. By integrating these ideas, especially in emerging economies, companies can enhance innovation systems and policies that lead to economic growth and development.
Public-private partnerships: Public-private partnerships (PPPs) are collaborative agreements between government entities and private sector companies to finance, build, and operate projects that serve the public good. These partnerships leverage resources and expertise from both sectors, enabling efficient project implementation while sharing risks and rewards, often in infrastructure, services, and development initiatives.
Regulatory Environment: The regulatory environment refers to the framework of laws, regulations, and policies established by governmental authorities that govern economic activities within a specific jurisdiction. This environment influences the behavior of businesses and the overall economy, as it can either encourage or hinder economic development and growth through various compliance requirements, incentives, and restrictions. A favorable regulatory environment is crucial for fostering innovation and attracting investment, especially in emerging economies where policies can shape the direction of economic progress.
Research and development incentives: Research and development incentives are policy measures designed to encourage firms and organizations to invest in innovative activities that lead to the development of new products, processes, or technologies. These incentives can take various forms, including tax breaks, grants, subsidies, or direct funding, aiming to foster a more dynamic and competitive economy, especially in emerging economies where innovation is crucial for sustainable growth.
Subsidies: Subsidies are financial contributions provided by governments to support specific sectors, industries, or activities, aiming to encourage production and consumption while promoting economic growth. These payments can take various forms, including direct cash transfers, tax breaks, or grants, and they play a critical role in shaping market dynamics and influencing economic policies.
Technology transfer policy: Technology transfer policy refers to the set of regulations, practices, and strategic frameworks that facilitate the movement of technology and knowledge from research institutions to commercial applications. This process is vital for promoting innovation, especially in emerging economies, where local firms may lack the resources to develop cutting-edge technologies independently. Effective technology transfer policies can strengthen innovation systems by fostering collaboration between academia, industry, and government, thereby enhancing economic development.
Triple helix model: The triple helix model is a conceptual framework that illustrates the interaction between academia, industry, and government in fostering innovation and economic development. This model emphasizes the importance of collaboration among these three sectors to create a conducive environment for knowledge transfer, technological advancement, and sustainable growth, particularly in emerging economies where innovation is crucial for development.