Innovation and Science & Technology Policies

On November 12, 2009, the American-German Institute (AGI) and the German Institute for Economic Research (DIW Berlin) held a workshop in Washington, DC, on “Innovation and Science & Technology Policies in a Post Crisis World – A Transatlantic Perspective,” which was made possible through the generous support of AGI’s Business & Economics Program and DIW Berlin. The three panels brought together an interdisciplinary group of scholars and experts from Germany, Europe, and the United States to examine both the short and medium-term innovation policy issues from applied and academic perspectives.

The first panel discussed the different innovation policy approaches around the world and how the United States, Germany, and other industrialized nations fare in terms of innovative performance. The speakers agreed that in order to become successful, innovators require a considerable amount of money, demand, and a favorable market. One panelist was quick to point out that innovation should never be equated with research and development (R&D) as the latter is used to induce innovative practices. While the United States has used research and development tax credits to fuel innovative output, there is little evidence to suggest that this has been a successful policy. In Canada, tax credits are ineffective as they require a consistent stream of revenue and a massive amount of upfront capital. However, in some countries such as the United Kingdom and in Latin America, the estimated return on R&D can be quite high, as the government plays a significant role in funding a project. While government intervention can help secure the funds necessary to move forward, highly skilled workers become less innovative as people are channeled into secure government jobs. In large part, the United States has been able to appropriate returns to innovation by securing the first mover advantage of gaining control of resources and being the first to enter the market, thereby ensuring secrecy, providing complementary sales and service, and establishing patents. Yet, one panelist noted that patents have served as an important defense mechanism against a more “knowledgeable economy.” In addition, America established itself as a pioneer by creating innovation surveys which are used to measure innovative success and have been mimicked in the European Union, Asia, and Latin America. The surveys are crucial as they gauge American competitiveness in innovation, productivity, and sales per worker. The panel stressed the importance of university-industry collaboration as a means of increasing performance, but highlighted that the relationship remains tense and should continue to be nurtured. One speaker downplayed the role of venture capital firms in spurring innovation as they require a well-developed financial market and are often the last step in securing funds for new technologies.

A recently published innovation indicator report analyzed seventeen industrialized countries from North America, Europe, and Asia. The study used a number of indicators to measure a country’s innovative competitiveness; however, it turns out that education, demand, research and development, and networking serve as the most determining factors of innovative growth. Although the United States continues to lead as the most innovative country, the Scandinavian states continually rank above their larger counterparts. One speaker noted that the smaller European countries practice “smart specialization” whereby firms, not the government, are allowed to choose the projects they want to specialize in. As for Germany, it continues to decrease in rankings and suffers greatly in the areas of education and financing. Germans are risk averse when it comes to investing in innovation and they follow the European preference of job security over flexibility.

The second panel focused specifically on innovation challenges faced after the financial and economic crisis. The speakers agreed that both the United States and Germany would need to foster economic growth during the recession by driving innovation. As a result of the economic crisis, entrepreneurs have been forced to develop a bottom-up strategy toward innovation. There has been a significant shift toward developing new sources of energy and commercializing renewable energy alternatives in order to help transition into a “green economy.” The panel again highlighted the need for greater collaboration between universities and small and medium enterprises as well as multinational corporations. The panelists agreed there should be a larger role for small businesses which serve as a major source of innovation but continually suffer from funding gaps.

In both the United States and Germany, businesses, governments, and universities have had to adapt to globalization and shape it through innovation by initiating change. Germany will need to reinforce the role of universities and give students a thorough understanding of the marketplace. As a result, the German federal government, together with the Länder, has developed the “Excellence Initiative” which aims to re-establish universities as the center of research and innovation by funding research schools and clusters of excellence, among other concepts. However, one speaker noted that the German education system is fractured since it is the responsibility of the sixteen states to implement educational standards. In America, universities are increasingly supporting innovation as they begin securing intellectual property rights. Also, the Obama administration has chosen to elevate the Office of Innovation and Entrepreneurship in order to encourage education, training, and mentoring while also providing assistance with data collection. Research and development continues to play an important role in the innovation process. In terms of sustained support for research and development, one panelist argued that of the European countries only Spain, France, Finland, Sweden, and the Netherlands are putting plans into action. In Germany, R&D spending is low and disproportionate as 50 percent is amassed in the southern states – when adding North-Rhine Westphalia this number climbs to over 75 percent.

The third panel examined how to develop new technology policy to drive innovation for the green economy. This issue was approached from three different perspectives: the general requirements for technology policies in order to drive innovation in the green economy sector as well as experiences from Germany and from the United States.

Four factors were pointed out as being essential to drive innovation in the green economy: needs and wants, ability, facilitators, and reward. With regard to the first factor of “needs and wants,” it was illustrated that technology policy should promote information on opportunities. This leads to broader knowledge of the opportunities in the sector and therefore produces more competition that eventually increases the speed to market. The second factor of “ability” aims to highlight that innovation itself requires knowledge and imagination. In particular in the field of the green economy the intellectual potential of many disciplines is needed. Against this background it was stressed that technology policy should motivate advanced education in the disciplines of science and engineering. Moreover, innovation is driven by the third factor, “facilitators.” Technological developments can only be realized if funding is provided. For this reason the importance of close collaboration between research institutes and entrepreneurs as well as the private sector was emphasized. Technology policies hence need to encourage public-private partnerships. For the last factor, “reward,” it has been pointed out that in order to increase rewards, policy should lead to a more efficient patenting process and a better international patenting cooperation.

From a German perspective, it was explained that, besides technology policy, reliable long-term climate policy is also necessary to induce and accelerate technological innovation on a successful level. On that account, it was argued that innovation in the green economy sector is only possible if both policy strategies are implemented in a complementary fashion. Germany can be regarded as an example for the successful implementation of both policy instruments. In 1991 Germany introduced the system of feed-in tariffs, a renewable energy policy through which German electricity companies were obliged to feed-in renewable energy into the grid. This feed-in system helped to create the world’s largest market for renewable energy technologies in Germany. This success for the domestic industry was not only based on climate targets and guaranteed revenues, but also on a focused technology policy that started in the early 1980s. Germany’s success in the green technology sector – including the fields of solar, wind, biomass, waste, and geothermal energy – however, is challenged by intensified global competition. It was stressed that this intensification of the global competition leads to increased outsourcing of German production to low-wage countries.

From an American perspective, it was discussed that energy technology policy has become much more important with the Obama administration now in office. In February 2009 Congress enacted the economic stimulus package, the American Recovery and Reinvestment Act (ARRA), funding $787 billion for economy infrastructure as well as for energy, health, and education needs. ARRA provided $36.7 billion to the Department of Energy to fund several climate and technological policies within the United States. Among them are issues such as promoting energy efficiency, deploying renewable power, modernizing the grid, reducing oil consumption, restoring America’s scientific leadership, reducing legacy environmental footprint, and reducing greenhouse gas emissions. As part of the Department of Energy, the Office of Energy Efficiency and Renewable Energy (EERE) focuses on research and development of cost competitive clean energy technologies and practices and at the same time on facilitating their commercialization and deployment in the marketplace. Against this background it was illustrated that the EERE conducts energy programs that are based on cooperation between local and state government, the private sector, universities, and the national laboratories of the Department of Energy. In promoting cooperation between the private and public sectors and focusing on research and development as well as on the commercialization and deployment of clean technologies, the EERE also tries to resolve problems occurring from a lack of availability of capital required for the cost-intensive phase of prototype, demonstration, and market validation.