ABOUT THE EDITORS ContentsSimon Tilford is the chief economist at the Centre for EuropeanReform. His previous CER publications include: ‘How to save theeurozone’ (October 2010); (as co-author) ‘The Lisbon scorecard X:The road to 2020’ (March 2010); (as co-author) ‘Carbon Captureand Storage: What the EU needs to do’ (February 2010); ‘The new About the editorsCommission’s economic philosophy’ (February 2010); ‘Rebalancingthe Chinese economy’ (November 2009). Editors’ acknowledgementsPhilip Whyte is a senior research fellow at the Centre for European ForewordReform. His previous CER publications include: ‘Why Germany isnot a model for the eurozone’ (October 2010); (as co-author) ‘The 1 Introduction: Why does innovation matter? 1Lisbon scorecard X: The road to 2020’ (March 2010); (as co- by Philip Whyteauthor) ‘The new Commission’s economic philosophy’ (February 2 What is innovation? 92010); and ‘How to restore ﬁnancial stability’ (January 2010). by John Kay ★ 3 Innovation and frontier research 13EDITORS’ ACKNOWLEDGEMENTS by Helga NowotnyWe are grateful to all the experts who contributed articles to this 4 New evidence on ‘creative destruction’ in Europe and the US 19volume. We are also indebted to Charles Grant, Katinka Barysch, by Albert Bravo BioscaHugo Brady, Stephen Tindale and Clara O’Donnell for commentson earlier drafts – and to Kate Mullineux for layout and production. 5 Improving productivity performance is not rocket science 25 by Nicholas CraftsFinally, we would like to thank Lundbeck for sponsoring the report,particularly as some of the views expressed in it do not necessarily 6 Skills, education and innovation 29coincide with theirs. We take full responsibility for all errors and by Andreas Schleicheromissions. 7 Innovation policy in the EU: The biopharmaceutical sector 33 ★ by Jim Attridge 8 Financing the venturesome economy 37 by Amar Bhidé 9 Promoting innovation in an age of austerity:Copyright of this publication is held by the Centre for European Reform. You may not copy, reproduce, The European dimension 43republish or circulate in any way the content from this publication except for your own personal and non- by Máire Geoghegan-Quinncommercial use. Any other use requires the prior written permission of the Centre for European Reform.
10 How the EU’s single market can promote innovation 49 by Malcolm Harbour Foreword11 Innovation policy: A view from the British goverment 55 by David Willetts12 Growth and innovation: The contribution of the digital single market 59 Lundbeck is delighted to support the CER’s latest publication. Innovation is the by Esko Aho lifeblood of the pharmaceutical industry. Its business model requires it to bring a new medicine to market every 10-12 years.13 Does Europe really want to be innovative? 63 by Michael Schrage As such the pharmaceutical sector represents an excellent model to illustrate the challenges facing the European economy. From being, in the former Vice President14 Conclusion 69 Verheugen’s words, “the pharmacy of the world” in the 1980’s, Europe is now by Simon Tilford witnessing a relative decline in investment, productivity and sales. The pharmaceutical sector is facing increasing challenges in bringing a new medicine to market. Even when these are met, we can no longer be certain of market access. This is impacting companies’ behaviour. For example, we are seeing companies exit the important area of depression. This is perhaps surprising given the high level of unmet medical need. A recent Health Council Conclusion noted that mental disorders account for the greatest share of disability-adjusted life years in the EU. The World Health Organisation estimates that mental disorders affect one in four citizens during their life time and can be found in ten per cent of the EU population during any given year. What message should policy-makers send to companies that are committed to continuing to search for new treatments in depression? As the authors of this report note, governments need to champion and reward new research, especially incremental developments, and cease rewarding old technologies. From a health perspective we need to change the way we regard illness. Rather than treating it with silo budgets, we need to look at illness holistically, treat medicine expenditure as an investment, and acknowledge that medicine can prevent expensive costs of hospitalisation, aide recovery and enable the patient to return to work rapidly and contribute to society. The report marks an important contribution to the debate. It provides some valuable insights and recommendations for policy makers and others to consider. Lundbeck welcomes the publication and looks forward to the debate that will follow. Ulf Wiinberg, CEO, Lundbeck
1 Introduction: Why does innovation matter? by Philip WhyteInnovation policy is currently very much in vogue. The EuropeanUnion (EU) has made it one of the seven ‘ﬂagship initiatives’ of its‘2020 strategy’. And the Obama administration has placed it at thecentre of its own strategy for economic recovery. Whateverinnovation means, there appears to be widespread agreement oneither side of the Atlantic that more of it is essential – not only toraise productivity, but also to ‘compete with China’ and meet allsorts of other challenges, from climate change to energy security andpopulation ageing. Indeed, claims to the effect that innovation iscrucial if countries and companies are to prosper in an increasinglycompetitive world economy have become something of acommonplace – repeated with monotonous regularity by policy-makers, commentators and businessmen in speeches, interviews andopinion columns.Yet it is not always clear what innovation actually means, or howit relates to prosperity. Some innovations, such as Facebook, maytransform the way people interact, but do little to increaseproductivity. Others may have the potential to increase productivity,but require other things to happen before they do so. (This is thenub of ‘Solow’s paradox’ – the observation by the US Nobellaureate, Robert Solow, that the information technology revolutionin the early 1990s was everywhere to be seen except in theproductivity numbers.) Other innovations still may be positivelyharmful to prosperity. Those who extol the virtues of innovationoften forget that one of the most consistently creative sectors of theeconomy is the ﬁnancial sector – the relentless ingenuity of which
2 Innovation: How Europe can take off Introduction 3recently contributed to the most spectacular destruction of wealth in a laboratory, or of a pioneer applying the latest technology toin human history. developing new goods and services. For John Kay, an academic and columnist, both are misleading images of what innovation entails. ItIn short, what innovation is, how it inﬂuences productivity, and what should not be conﬂated with R&D (because numerous innovativepolicy should do to encourage it are less straightforward issues than ﬁrms, like budget airlines, have no R&D budget to speak of). Noris often assumed. The aim of this report is to explore these questions should innovation be confused with novelty. The distinction betweenby bringing together the thoughts of leading experts in the ﬁeld. It innovation and novelty is captured by the difference between Appleshould come as no surprise that they often reach different conclusions (an innovative ﬁrm that is adept at ﬁnding new and commerciallyon what innovation means and how it should be promoted. successful ways of using existing technology) and Sir Clive SinclairNevertheless, most of the authors appear to agree on two things. The (an endearing eccentric who invented things that no-one wanted).ﬁrst is that there is much more to innovation than what goes on in The essence of innovation, Kay concludes, is ﬁnding new ways ofresearch and development (R&D) laboratories. The second is that meeting customer needs.innovation is a multi-dimensional and increasingly ‘democratic’process involving entrepreneurs and scientists, consumers and The President of the European Research Council, Helga Nowotny,producers. Innovation is as much about ﬁnding new ways of using or accepts that innovation is a complex, multi-layered process whichdelivering existing goods and services as about producing new ones. involves much besides the output of research laboratories. Even so, she argues that basic (or ‘frontier’) research remains vital. Even ifPerhaps the most striking difference among contributors to the advances in science do not always increase general prosperity, theyvolume is that between academics (or think-tankers) on the one are often signiﬁcant drivers of it. It was basic research, she points out,hand, and policy-makers on the other. The former point out that which drove the information technology revolution. Besides, in manySchumpeter’s famous description of innovation as a process of areas of research, the boundaries between basic and applied science‘creative destruction’ has two components that are inextricably are blurring. Scientiﬁc curiosity continues to drive basic research, butintertwined. One cannot embrace creation (that is, the emergence of researchers increasingly work in inter-disciplinary environments ininnovative young ﬁrms) without accepting destruction (letting which the search for commercial applications is actively pursueduncompetitive incumbents go to the wall). Yet policy-makers, (hence the term ‘frontier research’). Most European countries, sheparticularly in Europe, want to have their cake and eat it: they want argues, need to become better at commercialising ideas.innovation, but without the accompanying economic dislocationand social disruption. This largely explains the difference in policies Nowotny broadly agrees with Kay’s deﬁnition of innovation asprescribed. Whereas academics tend to emphasise the need for ﬁnding new ways of meeting (and creating) consumer needs. Thelowering barriers to entry, politicians are more inclined to advocate way she sees it, however, innovation is heavily inﬂuenced bypolicies that are supported by incumbents. scientists and researchers, whereas for Kay it is driven mainly by entrepreneurs. Albert Bravo Biosca of the National Endowment for Science, Technology and the Arts (NESTA), strongly agrees thatWhat is innovation? innovation is about more than research and that entrepreneursFor many people, the word ‘innovation’ is likely to conjure the have a central role to play. But he points out that it involves moreimage of a scientist in a white coat conducting cutting edge research than launching new products and services. If one of its purposes is
4 Innovation: How Europe can take off Introduction 5to raise productivity, then innovation should be more broadly The claim that innovation is becoming more multi-faceted andunderstood to include the new ways that businesses come up with consequently less elitist (or more democratic) is also advanced byto make the best use of technology. Placing a computer on every Amar Bhidé of Tufts University. Failing to recognise this trend, hedesk will not necessarily raise productivity if businesses do not goes on to argue, can often result in pointless or wasteful initiatives.change working practices. For example, encouraging more people to become scientists and engineers will not increase a country’s prosperity if the result is a dearth of managers who understand how working practices withinHow should innovation be promoted? their organisations should be changed to make the best use of newNicholas Crafts of Warwick University strongly agrees with Biosca technologies. The same goes for policies designed to improveon what policy-makers should do to support innovation and funding conditions for young ﬁrms. Too much attention is arguablyproductivity: they should embrace creative destruction by devoted to developing the venture capital (VC) industry. VC has itsencouraging the growth of innovative young ﬁrms and, where place. However, since most ﬁrms will never actually need VCnecessary, accepting the demise of stodgier incumbents. As Biosca funding, democratic innovation requires a diversiﬁed ﬁnancialnotes, a lower ‘churn’ of ﬁrms suggests there is less creative system to fund it.destruction in Europe than in the US. Crafts suggests that the twomost important things EU policy-makers can do to narrow the Jim Attridge of Imperial College London argues that it would betransatlantic productivity gap would be to ease employment law wrong to ignore the importance of R&D and highlights how(making it easier for companies to reorganise themselves to make disadvantageous Europe’s business environment is becoming tobetter use of information technology) and to enforce competition innovation in the pharmaceutical sector. Firms in the pharmaceuticalpolicy. Crafts suggests these are preferable policies to increasing sector face three costly phases: a research phase, when they competespending on R&D, pursuing sector-speciﬁc industrial policies, or to patent discoveries; an even costlier development stage, whenexpanding numbers in higher education. drugs are subject to clinical trials; and a diffusion phase, where ﬁrms must persuade clinicians and health bodies to adopt their newAndreas Schleicher of the OECD takes a slightly different view. For treatments. But across Europe, the economics no longer stack up.him, skills form the cornerstone of innovative societies. They spur Faced with governments that enforce low prices and restrict patientinnovation by generating new ideas, and by facilitating the adoption access to innovative treatments, R&D in the sector is becomingof existing technologies. Since innovation is not conﬁned to R&D increasingly unproﬁtable. If this situation is not reversed,labs, a modern economy requires an ever broader participation in pharmaceuticals companies will continue to withdraw from R&Dthe innovation process – encompassing producers and workers, but activity in Europe.also consumer and public-sector bodies. The bad news for Europe isthat skills are unequally distributed, and that too many people do Promoting innovation in Europenot even have the most basic competences to participate in aninnovation-driven economy. Moreover, producing the right mix of What sort of echo do the views expressed in the academic worldskills is getting harder, because labour markets are becoming more ﬁnd in policy-making circles? The European Commissioner forcomplex and dynamic: workers have to upgrade their skills more Research, Innovation and Science, Máire Geoghegan-Quinn, arguesregularly than in the past to adapt to changing work patterns. that promoting innovation is more necessary and more difﬁcult in
6 Innovation: How Europe can take off Introduction 7an age of ﬁscal austerity – more necessary because increased sector contracts are awarded to small and medium-sized enterprisesproductivity is key to ensuring debt sustainability, and more under the UK’s Small Business Research Initiative (SBRI), and thatdifﬁcult because ﬁscal consolidation is often sought by cutting similar steps be taken at EU level before the next Frameworkpublic investment in education, infrastructure and R&D. The Programme for R&D (FP8) comes into force.Commissioner makes the case for a “strategic and integrated”approach to innovation, in which national governments, the For Esko Aho, a former prime minister of Finland and a currentEuropean Commission and the private sector work closely together. member of the executive board at Nokia, one of the most importantKey elements would include the completion of the European things that the EU can do to promote innovation is to extend theResearch Area, the adoption of a common EU patent, and the single market. The EU’s four traditional freedoms of movement (fordevelopment of an EU-wide regime for VC. goods, services, people and capital) now need to be complemented by a ﬁfth – for digital services and content. The absence of such aMalcolm Harbour, a member of the European Parliament for the market, Aho argues, is a serious lacuna which hampers bothBritish Conservative Party, agrees with much of the European innovation and productivity – not just in the information technologyCommission’s thinking. The best thing the EU can do to promote sector, but also across the economy more generally. Removing theinnovation, he suggests, is to deepen the single market. National barriers that hamper the emergence of a single European digitaljealousies and protectionist habits must be set aside so that the best market would consequently bring numerous beneﬁts. Not onlybrains move to the best projects. The Services Directive must be would it help to spawn new solutions to the various challengesproperly implemented. The Commission should adopt an (social, demographic and environmental) that the region faces, but‘innovation test’ to ensure that EU policies do not deter R&D. it would also support economic growth.Standards should be harmonised so that common EU standardsbecome global ones. Governments should ensure that public Do Europeans want to be more innovative?procurement acts as a catalyst for the growth of innovative ﬁrms byproviding ‘lead markets’ for new technologies. And more should be The penultimate article, by Michael Schrage of the Massachusettsdone to increase spending on R&D, notably by improving the Institute of Technology, throws cold water on European policy-infrastructure for its funding. makers by asking whether they are serious when they proclaim their ambition to make their countries more innovative. Innovation, heA national perspective on what governments can (or should) do to points out, is a disruptive process with risks and costs attached. Itpromote innovation is provided by David Willetts, Britain’s minister makes no sense to celebrate the upside of innovation while trying tofor universities and science. Willetts agrees with the proposition resist the downside. Yet this is exactly what politicians across Europethat most European economies are experiencing diminishing returns do. They say they want to encourage the growth of innovativefrom labour inputs and investment in capital and must therefore companies. Yet they spend their lives resisting the demise of staidincreasingly rely on innovation for future economic growth. incumbents because they fear the social and political costs of painfulInterestingly, given his party’s longstanding commitment to a smaller adjustments in labour markets. The debate Europe must have, itstate, he recognises that governments can actively support follows, is not about the role of entrepreneurs or new technologies.innovation – notably as a big purchaser of goods and services. For It is about Europe’s ability to tolerate – and manage – theexample, the government wants to make sure that more public disruptions which innovation inevitably provokes.
8 Innovation: How Europe can take offThe concluding article, by Simon Tilford of the Centre for European 2 What is innovation?Reform, shares some of these concerns. Policy-makers, he argues,think of innovation too narrowly. And their fear of economic by John Kaydislocation often encourages them to advocate policies that haveonly a limited impact on productivity. Governments that want topromote innovation, he argues, should focus mainly on two areas.The ﬁrst is delivering an education system that equips people withthe ability to generate ideas, commercialise them and absorb them Apple is the most innovative consumer products company of the lastinto working practices. The second is to promote competition and decade. It has redeﬁned how people listen to music, blindsiding bothmarkets, so that young, innovative ﬁrms can emerge to challenge music publishers and established electronics manufacturers. And itincumbents. Tilford wonders, however, whether the political climate has reinvented the telephone. Yet Apple’s achievement is not thein Europe is conducive to such policies. Since the ﬁnancial crisis, result of its technology. The gizmos in the gadgets are much the sametraditional European suspicions of competition and markets have as the gizmos in the gadgets of other companies. Apple’s success liesbecome more entrenched. in deploying existing technology in ways that meet consumers’ needs and in attracting buyers through coolly designed devices that do notPhilip Whyte is a senior research fellow at the Centre for European require you to be a computer geek to use them.Reform. Understanding the needs of customers is what distinguishes innovation from novelty. Quirky inventors have a place in the affections of everyone who enjoyed physics or chemistry at school. But the quartz watches and home computers that Sir Clive Sinclair championed in the UK were quickly overtaken by better products from other businesses, and his C5 electric vehicle was not wanted by anyone. Pioneers of innovation are routinely pushed aside by competitors whose skills are in the marketplace rather than the laboratory. The invention of the body scanner won a deserved Nobel Prize for EMI’s Geoffrey Houndsﬁeld, but almost destroyed the company. The market for scanners is now shared by Siemens and GE. My favourite innovative company is Easyjet. There is nothing technologically advanced about what it does. Indeed, there is nothing that it does that some other airline is not doing. Yet Easyjet catalysed fundamental change in the sleepy European airline industry. Innovation is about ﬁnding new ways of meeting
10 Innovation: How Europe can take off What is innovation? 11consumers’ needs, often including needs they did not know they had. Michael Dell, who was barely in it. But IBM did not know theSometimes such ideas come from a laboratory scientist but, more future of the industry. If it had known, it would – sensibly – haveoften, the innovation that changes the business landscape comes tried to prevent it. The interests of the industry and of consumersfrom the imagination of a Henry Ford or Walt Disney, Steve Jobs or were not only different from those of the dominant business: theyStelios Haji-Ioannou. were diametrically opposed.For years research and development scorecards have dutifully If a decade later you had wondered what government could do torecorded how much pharmaceuticals companies spend on the promote Britain’s civil aviation industry, you would have askedsearch for new drugs and the expenditure of governments on British Airways – and perhaps its main rival, British Caledonian. Thedefence electronics. But most of the spending that promotes government tried to promote competition through liberal policiesinnovation does not take place in science departments. The that particularly favoured Caledonian. All irrelevant, of course –ﬁnancial services industry may have been Britain’s most innovative Caledonian would disappear and the people who controlled theindustry in the past two decades – perhaps too innovative, for future were Michael O’Leary and Stelios Haji-Ioannou. But asmany tastes – but practically none of the expenditure behind that business minister, you would have had no reason to give them theinnovation comes under “R&D” rubric. And the same is true of time of day. Companies such as Easyjet see opportunities that othersinnovation in retailing, media and a host of other innovative have missed. Most of these opportunities do not actually exist andindustries. Most innovation is the product of entrepreneurs, not the innovations fail. But only a few such entrepreneurs have to bepeople in white coats. right to change the face of business.So what should government do to promote innovation? Understand Confusion between the interests of an industry and the interests ofthat support for innovation is not the same as support for R&D, still existing companies pervades last year’s Digital Britain policyless the activities that established ﬁrms in industry regard as document and the legislation that followed. An admirable desire toinnovative. We despise geeks – but we are also intimidated by them, promote Britain’s creative industries is translated into a wish list forand they retain a powerful inﬂuence on our thinking. Outside many corporate lobbyists, hired by large companies and tradeuniversity cities around the world there are biotechnology estates associations. Who else could they be hired by? There are fewestablished by governments that believe high technology is the key certainties about how these creative industries will evolve. But oneto a competitive future. The funds that governments provide to such is that if an industry is to advance, much – perhaps all –support innovation are all too often appropriated by large innovation will come from businesses that do not yet exist. Theircompanies that are better at forming committees to pontiﬁcate about founders may not even have imagined the activities that will onewhat the global village will want in the future than they are at day make them celebrities.assessing what their customers want today. The primary role of government in promoting innovation is theIf you were in a government department pondering the future of the promotion of markets. The objective of promoting innovationcomputer industry in the 1970s, you would naturally have turned to should not be to reward grandees with knighthoods, favours andIBM for thoughtful experts and presentations. You would not have positions on committees: it should be to encourage a new generationconsulted Bill Gates or Steve Jobs, who were barely out of school, or of people such as Gates, Dell and Jobs, Haji-Ioannou and O’Leary.
12 Innovation: How Europe can take offPromoting innovation means making it easy for new entrants to 3 Innovation and frontier researchdevelop new products and business processes, not subsidisingexisting research and development. by Helga NowotnyJohn Kay is a visiting professor at the London School of Economicsand a columnist for the Financial Times. There has always been an inherent tension between the demands of policy-makers for practical innovation, seen as the undisputed motor of productivity and hence economic growth, and the deeply-rooted interests of scientists in curiosity-driven research. Some of my academic colleagues fear that, by stressing ‘innovation’, politicians focus on incremental technological advancement only. As a result, the pivotal role of basic research remains largely unacknowledged. Politicians, on the other hand, feel that researchers are often uninterested in confronting today’s pressing problems, preferring to remain ensconced in their labs. The US has been more successful than Europe at resolving this tension between the research community and policy-makers. European scientists seem to want to wish away the tension, while the policy-makers, maybe even more naïvely, believe that commercially- applicable knowledge can be commissioned top-down. Innovation is a collective bet on our future. We have to get this right. With its rapidly ageing population Europe has to compensate for its falling birth rate by becoming more innovative. The contradictory perspectives of scientists and policy-makers are shaped by their differing time horizons. For politicians, the battle to ‘win the future’ means that results must be obtained immediately. For their part, scientists know from long experience that it is impossible to predict research outcomes, and that even when the outcomes are known, it may still take years to fully realise their beneﬁts. What is innovation? We can broadly deﬁne innovation as the successful economic application of an idea. It results from enhancing
14 Innovation: How Europe can take off Innovation and frontier research 15the way something is produced or from introducing new products. The process of innovation depends on many variables: the speciﬁcIt can also involve new ways of organisation and modes of ﬁnancing. ﬁeld of scientiﬁc knowledge and technological know-how; nationalAs a result, it is difﬁcult to identify the processes through which and EU-level institutional contexts; regulatory frameworks thatinnovation actually happens. Moreover, innovation does not always seek to ban state-aid while encouraging governments to use publichave to be a technology. In the ‘real’ world, social innovations may procurement to stimulate demand for new technologies;be just as important. The more technological innovation we want, intellectual property rights which may help as well as hinder thethe more social innovation we need. burst of activities in novel areas; and, crucially, geographic location. Innovation ecosystems tend to emerge in certain placesNobody doubts its importance for economic growth and societal and not in others. Excellence (and the opportunities it provides)development, but the results of innovation cannot be foreseen and attracts excellence. Finally, there is the elusive, yet vitalsuccess remains unpredictable. Innovation describes a very complex, Schumpeterian human element of leadership. If we were to makenon-linear process on various levels. It is therefore misleading to progress in understanding and coping with all these elements, wethink of innovation merely as a chain starting with an idea and could make a giant step forward in what I call theending in its proﬁtable application. Such a ‘linear model’ of institutionalisation of innovation.knowledge production fails to capture the nature of research orhow ﬁrms operate. Sometimes, the successful commercial What does this mean for basic research? Firstly, we cannot draw adevelopment of a new technology triggers basic research by opening concrete link between speciﬁc scientiﬁc insights and increases inup new ways of tackling a problem. Sometimes research conducted productivity. But there is no doubt that investment in basic researchin a lab turns out to be tremendously productive and useful for other contributes signiﬁcantly to the processes that lead to innovationpurposes outside the lab. and productivity. For example, it was basic research that underpinned the breakthroughs in ICT, biotechnology andInnovation should therefore be understood as a multi-layered nanotechnology that have driven such pervasive economic andprocess. First, there is the interaction of individuals, ﬁrms, societal changes over the last 30 years. Basic or investigator-drivenorganisations and governments. Second, invention and innovation research generates the scientiﬁc insights that lead to the developmentare both continuous and discontinuous processes. Many important of new technologies and markets.innovations are continuous in the sense that subsequentimprovements in a product may be vastly more important than the Secondly, the European Research Council, an EU funding body setinitial idea. This is what ‘incremental innovation’ is all about. But up to support investigator-driven frontier research, was wise tothere is also a discontinuous, deeply disruptive form of innovation. change the term basic or fundamental research to frontier research.Had we continued to improve candles we would never have This was not only semantic. It indicates a change in the waydeveloped electricity. And had we continued to improve the research is conducted and its very nature. In many areas of frontierproduction of electricity, we would never have come up with the research, the boundaries between basic and applied science havelaser. Such ‘radical innovation’ has enormous repercussions for the become blurred. While frontier research continues to be driven bystructure of our economies and their growth potential. Radical scientiﬁc curiosity, researchers are often working in aninnovation is almost entirely due to new scientiﬁc insights, interdisciplinary context and increasingly with potentialdiscoveries and technologies made in basic research. applications in mind.
16 Innovation: How Europe can take off Innovation and frontier research 17Thirdly, past experience shows that governments are poor at picking changes in productivity. Such paradigm shifts are driven bywinners. The once so popular discourse on National Innovation curiosity-driven scientiﬁc enquiry. However, Europe also needs toSystems based on the idea of nationally centralised innovation is get much better at commercialising or diffusing new insights. Closerrapidly giving way to a debate about ‘open innovation’. Again, with links between scientists on the one hand and policy-makers anda more distributed, diverse and hybrid innovation ecosystem businesses on the other would help. But we also need to make sureemerging, public and private actors will continue to mix; and that the national and EU-level institutional contexts are conducivemarkets and research will move closer to each other. Moreover, the to innovation. Policy-makers need to strike the right balanceideas of collective property rights and open access have begun to between the rights of developers of intellectual property and thechallenge the more orthodox views of intellectual property rights. need to disperse new technologies. Firms must face strong market incentives to commercialise technologies and/or to reorganise inCrucial questions remain. How do we manage the inherent tension order to make the best use of them. This is Europe’s sputnikbetween the political impatience for practical results and the moment. Europe cannot afford to fail to develop more favourableinsistence of scientists that in frontier research the outcome is innovation ecosystems if it is to meet its mounting economic andimpossible to predict? How do we foster innovation across a wide social challenges.spectrum of possibilities and cope with the inherent uncertainty andrisks that scientists face when working at the frontier between what Helga Nowotny is director of the European Research Council.is known and yet unknown? And how do we contribute to theestablishment of the European Research Area?Rather than trying to suppress the inherent tension between theinterests of policy-makers and scientists, we need to acknowledgeit openly. If we want to foster innovation, we need to boostfrontier research. That does not mean pouring moneyindiscriminatingly into basic research. Although frontier researchis inherently uncertain, that does not mean everything can be leftto chance. It is vital that scientiﬁc excellence is the sole criteria forthe funding of frontier research. This will inevitably mean thatfunds continue to be concentrated in leading institutions. This isas it should be, but excellence does not equal exclusivity. Weshould do everything to nourish existing innovation ecosystems,and enable new ones to emerge.The process of innovation is a complex and unpredictable one: wecannot pick winners. However, we do know that basic or frontierresearch is an indispensable element of this process. Perfectingexisting technologies is important, but it will not lead to step-
4 New evidence on ‘creative destruction’ in Europe and the US by Albert Bravo BioscaEurope faces major challenges recovering from the recession. Theimmediate ones are to avert a full blown sovereign debt crisis,consolidate the nascent recovery and create jobs. But in the longerterm more fundamental changes are needed. The European economyhas structural weaknesses that preceded the ﬁnancial crisis. So areturn to ‘business as usual’ is not an option. Improved productivityis essential if European economies are to thrive in the next decade:European businesses are less productive on average than their UScounterparts, and the gap had been widening for over a decadebefore the recession took hold.Closing this gap requires a more innovative and dynamiceconomy. For much of the second half of the twentieth century,European countries could grow by accumulating capital andimitating others’ inventions. Now we need to foster innovation todrive productivity growth. This is also the most appropriateresponse to increasing competition from emerging markets. And itis the only sustainable route if ﬁrms and countries are to move upthe value chain.Innovation needs experimentation in the real world, going beyondthe R&D lab. Innovation is about putting new ideas into practice.Trying a new business model, exploiting a new technology orlaunching a new product often requires a ﬁrm to expand its currentcapabilities (for example, by setting up a new plant or hiring a newmarketing team). However, since innovation is uncertain and marketselection harsh, too many companies prefer an ostensibly safer ‘wait
20 Innovation: How Europe can take off New evidence on ‘creative destruction’ in Europe & the US 21and see’ approach to riskier experimentation, particularly if failure has long vexed European policy-makers. But the new databaseis too costly. In the long term, such conservatism could be far riskier. shows that this is only part of a wider picture:While experimentation is necessary, it is not enough. Companies ★ European countries have a lower share of high-growth ﬁrmsmust build on their innovations. This means growing and replacing than the US. But they also have fewer medium-growth ﬁrmsless successful ﬁrms, and forcing competitors either to improve their and fewer shrinking ﬁrms. At the same time, Europe has aperformance or to shrink and exit the market altogether. This much larger share of ‘static’ ﬁrms, that is, ﬁrms that neithercreative destruction is what ultimately drives productivity growth. expand nor contract over time.Are European economies up to the challenge? The evidence is not ★ The fastest growing half of ﬁrms grow faster in the US than inencouraging. Both Europe and the US have highly successful the average European country, while the bottom half shrinkcompanies, but the European ones are generally much older. A study faster. Thus, the gap between successful and unsuccessful ﬁrmsby Bruegel, a Brussels-based think-tank, shows that only 2 per cent is larger in the US than in Europe.of the European companies in the world’s largest 500 ﬁrms bymarket capitalisation were founded after 1975, compared with 14 ★ There is a strong negative correlation between the growth rateper cent in the US. of ﬁrms at the top and the bottom of the growth distribution. In other words, the faster successful companies grow, the fasterThis is not just about differences in rates of entrepreneurship. unsuccessful companies in the same industry shrink.Researchers at the OECD and the World Bank have shown thatthe main differences between the US and Europe lie in the rate at ★ The average high-growth ﬁrm multiplies its workforce by 2.5which new ﬁrms grow rather than the number of new ﬁrms. US over three years. Therefore, despite their small share (3-6 perstart-ups grow much faster in their early years than their cent of ﬁrms), high-growth ﬁrms account for a disproportionateEuropean counterparts. share of job creation (between a third and half of all jobs created by surviving ﬁrms with ten or more employees).To shed further light on the dynamism of Europe’s businesslandscape, the Danish Ministry of Economic and Business Affairs ★ A less dynamic business growth distribution, with a largerand Britain’s National Endowment for Science, Technology and the share of ‘static’ ﬁrms as in Europe, is associated with lowerArts (NESTA), with support from the International Consortium for productivity growth. Importantly, both a higher share ofEntrepreneurship, collaborated with researchers and statistical growing and shrinking ﬁrms are correlated with higheragencies in 11 countries across three continents to collect new and productivity growth, which is consistent with a fastercomparable data on business growth. The resulting database, which reallocation of resources (both labour and capital) towardsdraws on individual records for six million businesses, provides successful innovators.useful lessons for policy-makers. Europe’s less dynamic businesses – both in terms of growth andThe dearth of European equivalents to Google or Microsoft – contraction – should be a concern. We are not good enough atinnovative start-ups that grow quickly to dominate their markets – creating an environment where ﬁrms experiment with new projects,
22 Innovation: How Europe can take off New evidence on ‘creative destruction’ in Europe & the US 23scaling them up when successful while being able to backtrack and Current attempts to create an EU-wide corporate tax system (theshrink when unsuccessful. As a result, innovation in Europe suffers. common consolidated corporate tax base), a single European patent (the EU patent) and a single legal form for SMEs (the EuropeanThis has implications for European policy-makers. The debate on Private Company – ‘SPE’) suggest a potentially valuable third way.high-growth ﬁrms often considers them in isolation. But policies A new ‘28th regime’, sitting alongside the 27 national regimestargeted solely at high-growth businesses, such as improving the without replacing them, could give ﬁrms the option to operate underclimate for venture capital, are not enough to address the lack of the same set of simpliﬁed rules and procedures across the EU, whiledynamism that hampers Europe’s productivity. They need to be still preserving the rights of member-states over speciﬁc issues suchcombined with deeper structural reforms that remove not just as tax rates. Other beneﬁts would follow. For instance, it wouldbarriers to entry, but also barriers to growth and contraction, such make it easier for ﬁrms from different countries to work together,as improving product and labour market regulation and tackling create a less fragmented market for business services providers, andaccess to ﬁnance. Some European countries are more advanced facilitate the development of Europe-wide ﬁnancial intermediaries.than others in this respect, so governments have much to learnfrom their experiences. Achieving a more innovative Europe requires action in multiple areas. Removing barriers to make it easier for innovative businessesFinally, Europe needs an ambitious push to reduce its market with high-growth potential to experiment and expand across Europefragmentation. While the single market has made it easier to sell is crucial. European policy-makers must make it happen. After all,goods across borders, the liberalisation of the market for services has the sooner we start addressing our long-term growth challenge, thebeen too slow. And even with planned reforms, differences in easier it will be to navigate today’s uncertainties.regulation between member states will still make it difﬁcult forcompanies, particularly SMEs, to operate across borders. Albert Bravo Biosca is senior economist at NESTA and author of ‘Growth Dynamics’, a report on which this essay is based. To readThe European Union represents a potential market of half a the full report, visit www.nesta.org.uk.billion customers, the third largest after China and India, and hasa combined GDP larger than that of any country in the world.But a ﬁrm wishing to set up establishments across the 27 EUmember-states would still be subject to 27 different legal regimes,with different registration requirements, labour regulations,intellectual property systems, tax rules, commercial law, judicialtraditions and bankruptcy proceedings, among others. Whiledealing with 27 different jurisdictions may be merely anannoyance for large multinationals (to the beneﬁt of their armiesof advisers), it can be an insurmountable challenge for innovativesmaller ﬁrms willing to grow (in fact, some ambitiousentrepreneurs simply choose to relocate to the US altogether toavoid the hassle).
5 Improving productivity performance is not rocket science by Nicholas CraftsFrom the mid-1990s to the eve of the global ﬁnancial crisis,European productivity performance was disappointing. The rate oflabour productivity growth in the EU-15 averaged 1.5 per cent peryear, compared with 2.1 per cent in the US. Around this Europeanaverage, there were, of course, large national variations, with labourproductivity growing by 3.5 per cent a year in Ireland, but by just0.4 per cent in Italy. The fact remains, however, that in ten Europeancountries labour productivity grew by less than 2 per cent a year. Forthe ﬁrst time since World War II, much of Europe has been fallingfurther behind the US, rather than catching up.European politicians often respond to these ﬁgures by stressing theimportance of promoting a dynamic, knowledge-driven economy.The task, they argue, is to achieve faster economic growth byprioritising a stronger research and development effort andexpanding higher education. Accordingly, they are often temptedto launch initiatives to encourage the rebalancing of economiestowards high value-added, new-technology growth sectorsthrough selective industrial policies. These approaches to theproductivity agenda are seen as modern and proactive and oftenget a good press.It is certainly reasonable for governments to support researchactivities, including those in universities. There are divergencesbetween private and social returns, so there is a traditional market-failure justiﬁcation for such policies. More generally, governmenthas an important role in underpinning productivity performance
26 Innovation: How Europe can take off Improving productivity performance is not rocket science 27through ‘horizontal’ industrial policies. Policies which raise the rate produce ICT equipment, but how to make best use of it. And thisof return to private investment and innovation – notably by raising consideration has been inﬂuenced more by regulations than bythe quality of state education or improving the provision of shortfalls in human capital or domestic R&D spending.transport infrastructure – can have a favourable impact on the long- Employment protection legislation, for example, can make it hardrun rate of productivity growth. and expensive for businesses to reorganise themselves to make best use of the ICT they have invested in. Similarly, restrictions onHowever, there is usually no good case for ‘selective’ industrial retailing create barriers to entry and slow down the exit of lesspolicies which subsidise favoured businesses or sectors. Economic efﬁcient ﬁrms.theory tells us that such policies will generally be skewed not only toadvancing producer interests at the expense of consumers, but also Consider the case of distribution. It is a large sector across Europe,to supporting declining industries which have the most to gain from typically employing as many people as manufacturing. And itlobbying. Economic history from the 1930s through to the 1970s happens to account for a sizeable share of the widening transatlanticand beyond bears out these predictions and shows that such policies productivity gap after the mid-1990s (when labour productivitywere a dismal failure in terms of improving growth performance. growth in this sector fell from 1.7 per cent to 1.3 per cent per year in the EU, but rose from 2 per cent to 6.5 per cent in the US). TheIt is also important to put the role of domestic R&D in true US’s strong productivity performance was based on the entry andperspective. Recent research has conﬁrmed that investment in exit of retail establishments – in other words, creative destruction.‘intangible capital’ has a signiﬁcant impact on productivity growth. Retailing has become a big user of new technology, especially ICT.However, intangible capital includes much more than just But since it carries out very little R&D, it would never be the focusconventional R&D. Typically, about two-thirds of intangible capital of a so-called ‘growth strategy’. In short, the example of theis made up of other components such as computerised information, distribution sector underlines the importance of competition policydesign, and economic competencies – items which are generally not (rather than industrial policy) and of technology diffusion (rathergood candidates for subsidy on market-failure grounds. Recent than R&D) for innovation and productivity growth.research suggests that investment in ‘innovative property’ (a broaderconcept than traditional R&D) accounted for only about 10 per cent There is compelling evidence that competition promotes productivityof the productivity growth difference between Europe and the US growth. Yet competition is generally weaker in the EU than in theafter the mid-1990s. US. Competition works through its positive impact on management quality, by creating pressure to invest and innovate or lose marketThe two most important things that EU countries can do to raise share, and by ensuring that productive resources are reallocated toproductivity is to encourage the rapid diffusion of new technologies, better uses. It is therefore disappointing to note that regulationsand to facilitate creative destruction. For the typical European which inhibit competition and the rapid take-up of new technologiescountry, at least 90 per cent of the R&D that contributes to its are still prevalent in many European economies. Moreover, theproductivity growth is conducted abroad. It is therefore the effective impact of the single market programme on productivity has beentransfer and assimilation of this knowledge that is required. impaired because its implementation by many member-states hasInformation and communications technology (ICT) is an excellent been half-hearted. The symptoms of inadequate competition areexample: for most countries, the big issue has not been whether to relatively high price-cost mark-ups, as well as lower market shares
28 Innovation: How Europe can take offof high-productivity ﬁrms in the EU compared with the US. Rather 6 Skills, education and innovationthan reverting to industrial policy, strengthening competition policyis much the better way to go. by Andreas SchleicherThe message must be that an effective policy to promote innovationis not just, or even mainly, about stimulating R&D and givingsubsidies to hi-tech sectors. It is mainly about the decidedlyunglamorous, even thankless, task of putting in place a framework Skills have never been as central to the prosperity of nations andthat encourages the efﬁcient diffusion of new technology and ensures individuals as they are today. Skills spur innovation by generatingthe exit of the inefﬁcient and outmoded. Both literally and new knowledge, and facilitating the adoption and adaptation ofﬁguratively, it is not about rocket science. The economics is quite existing technologies and ideas. In so doing, they contribute tostraightforward; the problem is the politics. Implementing an productivity (and hence economic growth). They also play a key roleappropriate policy will provide fewer photo opportunities for in countering earnings inequality.politicians, and may in any case lose rather than win votes. Because innovation is not conﬁned to corporate R&D laboratories,Nicholas Crafts is director of the Research Centre on Competitive a modern economy requires broad participation in the innovationAdvantage in the Global Economy (CAGE) at the University of process – among users, suppliers, workers and consumers, and in theWarwick. public, private and non-proﬁt sectors alike. It is worrying, therefore, that skills are highly unevenly distributed across Europe, and that substantial numbers of people still do not even reach the minimum levels of basic skills. While some countries have managed to improve their skills base in recent years, others have stagnated or even declined – this at a time when the economic and social costs associated with low skills have been rising. Matching the supply of relevant skills to the demand for them is never straightforward. Skills mismatches can occur when a worker would be more productive in another job, or when there is a general surplus or shortage of speciﬁc skills. And they can result from any number of factors. Employers may be ineffective at signalling their needs; education and training systems may be unresponsive to changes in demand for certain skills; and skills can atrophy or be lost altogether – either because they are not developed or sustained through education and training, or because they are not used (commonly as a result of unemployment).
30 Innovation: How Europe can take off Skills, education and innovation 31What does all this mean for policy? The foundation for building a skills Female educational achievement has increased signiﬁcantly and, forpool remains the acquisition of what can be called ‘cognitive foundation the younger cohorts, it has now overtaken that of men. But whileskills’ – in plain language, basic literacy and numeracy. Both are key female participation in the labour force has increased, the gendertools for continued learning, and for developing more advanced and gap remains substantial: on average, only about 60 per cent ofspeciﬁc types of human capital. If countries are to avoid wasting talent women in OECD countries are employed or looking for work,from the outset, they must ensure access to education for all – not just compared with 80 per cent of men.to reach the right level of basic education, but also to make it possibleto upgrade and extend skills during the course of a person’s lifetime. Lifelong learning will require the development of new funding models. Investment in learning needs to be cost and tax-efﬁcient forHowever, making the optimal use of existing skills and preventing individuals and their employers. For those out of work, fundingthe erosion of skills through lack of use is just as important as needs to be accessible to support and incentivise learning.producing the right skills in the ﬁrst place. As job and occupational Governments should encourage, via the tax system and regulation,mobility increases, and the shelf-life of domain-speciﬁc knowledge the development of new ﬁnancial instruments that allow learners todeclines, individuals must upgrade their skills more regularly than in access opportunities when they need them most. For learningthe past. With demand for skills growing and changing over time, beyond universal education, education and training systems need totraditional education and training systems that select individuals ﬁnd ways to share the costs among government, employers andand assign them to particular streams are increasingly out of date. students based on the respective beneﬁts obtained.Governments need to improve skills across the population as awhole; ensure that vocational training focuses on more than Policies must become less piecemeal than they have often been in theimmediate employability (notably by developing transferable skills past. Large gains can be achieved by co-ordinating efforts at allthat facilitate occupational mobility); and make sure that skills are levels and by investing tight public budgets more effectively anddeveloped through lifelong learning (which may require new ways of efﬁciently. To this end, governments must build new relationships‘bringing learning to the learner’). with learners, providers, businesses, social investors and innovators.Governments must also develop more targeted policies to support Andreas Schleicher is head of the Indicators and Analysis Division,groups that are currently marginalised in the labour market. School Education Directorate, OECD.drop-outs represent one group at risk. Key policy actions for thisgroup must include early interventions to support young people atrisk of leaving the education system without a recognisedqualiﬁcation, as well as measures to assist young people in ﬁndingjobs. Other groups at risk include immigrants and minorities. Theintegration of such communities into the labour market remains amajor challenge in many EU countries.Despite welcome change in recent years, women still represent thelargest under-utilised pool of human capital in OECD countries.
7 Innovation policy in the EU: The biopharmaceutical sector by Jim AttridgeThe pharmaceutical industry creates many positive spill-overs.Aside from the development of treatments for crippling, painfuland life threatening conditions, wider social and economic beneﬁtsﬂow from having healthier populations and high qualityemployment. For years now the industry has been consolidatingits research and development (R&D) spending in fewer placesand on a reduced number of diseases. There is less R&D moneyaround and more competition for it. Europe is losing out to theUS and increasingly to fast-developing economies such as Chinaand India. This is because the EU and member-state governmentsare failing to strike the right balance between the need to containrising healthcare costs and the need to provide pharmaceuticalsﬁrms with sufﬁcient incentives to develop new innovativemedicines in Europe.Innovation in the pharmaceutical sector epitomises what Schumpetercalled routine innovation. The research component of R&Dinvestment is much like many other sectors, involving laboratory-based studies by academic and industry-based scientists and acompetitive race to patent inventions. But the second stage – thedevelopment phase – is exceptionally long and expensive; it isdominated by clinical trials, which test the efﬁcacy and safety oftreatments against stringent criteria. The third phase of theinnovation process – the often overlooked diffusion phase – requiresinnovators to persuade conservative clinicians and ﬁnancially-pressed health bodies to adopt their new treatments. Once a productenters the market, the ﬁrm responsible for its development beneﬁts
34 Innovation: How Europe can take off Innovation policy in the EU: The biopharmaceutical sector 35from only around ten years of market exclusivity before it faces should militate against the need for further regulations to limit thecompetition from cheaper generic versions of the drug. prices of new patented treatments or to cut the prices of those already on sale in EU countries. Governments need to recogniseThe discovery of a new way to treat a disease results in the ﬁling of that after decades of ‘cut and cut again’ cost saving measures,numerous patents by many competing academic and industrial Europe’s R&D-based pharmaceuticals industry is wilting. This isorganisations across the world. Companies with the necessary largely the result of a failure to recognise the impact that costresources then have to decide whether to risk embarking on a ten containment by governments has had on the attractiveness ofyear development programme – costing around US$1bn – to Europe as a location for pharmaceuticals R&D. The threat emanatestranslate the invention into a commercially viable product, which not only from the US – where European pharmaceuticals ﬁrms arestands a good chance of being approved by the various regulators. doing an increasing share of their bioscience R&D – but increasinglyEarly market access beneﬁts both patients and the innovator seeking from China and India, whose fast-growing markets make thema return on their investment. formidable rivals for R&D investment.However, the full therapeutic potential of a new treatment may only There have been some positive EU initiatives to increase the rewardsbe realised following many more years of additional investment in for investing in innovation. The EU’s ‘orphan drug concept’,clinical trials and associated product development. This highlights introduced in 2001, has encouraged R&D into treatments forthe crucial distinction between the primary research, which leads to numerous rare diseases. This has been achieved by fast-trackingthe initial invention, and the incremental development of that regulatory approval for the medicines and extending the period oftreatment over many years. This distinction is at the heart of a time that ﬁrms beneﬁt from patent protection. However, patient accessvigorous debate over how and where to invest public research funds to the new treatments varies greatly across EU member-states, withand how EU governments should determine access to treatments and some countries severely restricting access to them on cost grounds. Thethe prices paid for them. Public health insurance schemes are the Innovative Medicines Initiative, a joint public-private collaborationdominant funders of prescription medicines in the EU. Burgeoning between the European Commission and the pharmaceuticals industry,demand for treatments combined with weak public ﬁnances means aims to both promote a wider science base through funding researchthat these organisations are under huge pressure to cut costs. Over projects and through initiatives to streamline development processes.many years this has spawned a plethora of national regulations for Whilst such initiatives are undoubtedly helpful, their scale and effectthe pharmaceutical sector, the main thrust of which has been to are unlikely to offset the much greater impact of ever tighter priceenforce low prices and restrict patient access to innovative controls and regulatory changes.treatments. This, in turn, has reduced the amount of revenueaccruing to a ﬁrm over the life-time of an innovative new treatment, The lack of a holistic approach encompassing all three of theand undermined the attractiveness of Europe as a location for innovation phases – research, development and diffusion – has led topharmaceutical R&D. poor policy towards the pharmaceuticals industry. A key EU policy shift in recent years has been to reduce the amount of money ﬁrmsOver the next three years the patents on a large number of high receive for what are considered minor or incremental advances invalue drugs will expire, reducing companies’ revenues and providing treatments; the aim being to concentrate R&D investment in areassubstantial savings for both public and private health systems. This likely to produce major new medicines. Despite the obvious appeal
36 Innovation: How Europe can take offof such policies, they are incompatible with the inherent nature of 8 Financing the venturesomethe innovation process. All the evidence suggests that reducing theamount of money pharmaceuticals ﬁrms receive for incremental economyinnovation will accelerate the withdrawal of R&D activity from by Amar Bhidéever more areas of disease. This trend is well illustrated by thecurrent crisis in the development of new antibiotics. Declining R&Dinvestment into antibiotics means that there are now few newproducts to treat resistant organisms, such as c.difﬁcile or MRSA.Over the coming decade further ‘innovation deserts’ will emerge,and the capabilities and infrastructure necessary to respond quickly A relatively small number of individuals and organisations is oftenand effectively to new diseases will be much diminished. credited with advancing the scientiﬁc and technological frontier (and hence with sustaining the well-being of all). In reality, however,To prevent this, the EU and member-state governments need to re- this common yet elitist conception of innovation misrepresents itsthink policies on two fronts: nature and role. Widespread prosperity and rewarding work depend on the creativity and enterprise of many individuals, rather★ The European Commission needs to focus less on maximising than a few. Innovation is a multiplayer game, not a professional the short-term interests of consumers and do more to sport in which a few highly talented and well paid athletes put on champion the pharmaceuticals industry as a strategic EU asset a show for the rest of us. Narrow conceptions of innovation are in a global context. damaging in a modern economy because they often prompt pointless and wasteful initiatives.★ EU member-states need to integrate better their national strategies for healthcare – balancing the need for affordable Inclusive innovation treatment with the need for a thriving pharmaceuticals industry. Better integrated models will need to acknowledge that Europe In earlier times, new artefacts were often developed by a small faces intensifying competition for internationally mobile number of inventors and sold to a few wealthy buyers. Alexander bioscience and biopharmaceutical activities. Graham Bell, for example, invented the telephone with one assistant. Likewise, automobile pioneers were one- or two-manJim Attridge is research fellow at Imperial College London. shows – Karl Benz and Gottlieb Daimler in Germany, Armand Peugeot in France, and the Duryea brothers in the US. Early car buyers were rich hobbyists. These days, innovation is far more inclusive. Innumerable entrepreneurs, venture capitalists, executives of large companies, researchers at universities and commercial and state-sponsored laboratories, programmers and members of standard-setting institutions as well as politicians have played their part in turning the
38 Innovation: How Europe can take off Financing the vernturesome economy 39Internet into a revolutionary medium of communication. Steve Jobs, primary bottleneck. We should always remember that the mostoften portrayed as a brilliant solitary inventor, relies on tens of important innovations are often the organisational changes neededthousands of individuals working at Apple and its network of to make use of new technologies.suppliers. And, unlike the early buyers of automobiles, millions ofregular consumers scoop up products such Apple’s iPad and Ofﬁcial preference for particular technologies conﬂicts with theMicrosoft’s Kinect. principle of encouraging the many to draw on their unique imaginations and experiences. Faced with the same generalThe many kinds of ideas and know-how needed for the opportunity, different innovators will often come up with verydevelopment and widespread use of new products and services different solutions – and no one can predict whose will work best.favours such ‘inclusive innovation’. Consider the microprocessor, So, for example, the problem of global warming is best confrontedwhich is at the heart of so many modern gadgets. The necessary with numerous independent approaches, from more efﬁcient solarknow-how ranges from high-level general principles (the laws of cells to carbon capture and storage, safer nuclear power, bettersolid state physics, mid-level technologies including circuit designs insulation of homes, and fewer cars.and chip layouts, and so on) to ground level problem-solving (liketweaking conditions in a speciﬁc semiconductor fabrication plant At the same time, ofﬁcial indifference will not do either:to maximise the quality and yield of the microprocessors technological advances often require an increase in the role ofproduced). The development of these multiple levels is best government. The growth of the automobile industry, for example,entrusted to many individuals and organisations with specialised required the building and maintenance of roads, the formulation andknowledge and skills. enforcement of driving rules, a system of vehicle safety inspections, and controls on vehicle emissions. Rather than lead or ignoreIn general, therefore, the development of new technical know-how technological advances, governments should provide broad butis not enough. A new ‘diskless’ computer, for instance, will generate ‘oblique’ support, as John Kay would put it. The ups and downs ofvalue only if it is effectively marketed by producers and properly the US ﬁnancial system illustrate the importance of a sensibledeployed by users – all of which requires marketing and indirect government role.organisational innovations. Innovation also requires venturesomeconsumers. The use of a new product or service is not a passive act: Funding innovationeach time we buy a new computer we take a chance that it will beworth the money and effort. Financing innovation often brings to mind professional venture capitalists (VCs) who invest in high-tech start-ups. But it is often forgotten that VCs fund less than one half of one per cent of annualPolicy implications US business start-ups. Most small businesses are not suited for VCPolicies to advance cutting edge science and technologies that derive funding and never develop revolutionary products, yet still play afrom an elitist view of innovation often do more harm than good by crucial role in the innovation game. Innumerable small outﬁts –diverting resources away from other activities. Encouraging more including retailers and customisers of off-the-shelf software –people to become engineers and scientists instead of managers will worked hand-in-hand with enterprises such as Apple, Microsoft andexacerbate the problem if the development of technology is not the Intel to put a computer in virtually every home and ofﬁce in the US