The Future Role of Innovation and Innovation Policy

By: Frode Lundsten

Since 2009 we have been suffering a serious global economic crisis and the situations in most small countries, including Denmark, has been very difficult due to growing unemployment and unsustainable public finance deficits. This crisis has occurred at a time of structural problems related to an ageing population. InnovationManagement interviewed Bengt-Åke Lundvall, Professor in the Department of Business Studies at Aalborg University, on the role of innovation and innovation policy in this context.

On almost any given day, and in most countries, there are newspaper headlines attesting to the importance of innovation for national prosperity and future competitiveness. There is a constant call for national initiatives, increased budget allocations for research and education, and stimulus packages for national industries.

InnovationManagement interviewed Professor Bengt-Åke Lundvall from the Department of Business Studies at Aalborg University, on the role of innovation and innovation policy in this context of growing unemployment, unsustainable public financing deficits amid demographic issues.

How do you see the role of innovation and innovation policy in this context?

— My first observation would be that the debate and economic policy in Denmark is extreme in terms of its focus on our becoming better off through working, rather than focusing on innovation and productivity growth. This bias is all the more remarkable since Denmark is already the leader in Europe for employment ratios while, for the last decade, it has been at the bottom of the ranking for productivity growth. It reminds one of the mediaeval quack doctor, who bleeds his patients whatever their ailment, and if the attempt is unsuccessful, bleeds the patient some more – until eventually he dies.

Can you explain this bias?

Danish economists do not understand the dynamics of productivity growth.

— Danish economists have huge responsibility for this. On the whole, they do not understand the dynamics of productivity growth and overstate demographic issues. They have constructed a ‘dream’ model such that increased productivity does not contribute to resolving the balance. Within the framework of this dream model, the only way to solve the problems is to increase the supply of labour. There is neglect or denial of the fact that mobilization of the very last reserves of labour will have a further negative impact on productivity. This is based not just on large numbers of poorly qualified workers: when employees join the workforce as a result of threats and sanctions they are less willing to participate in and contribute to change.

But the Danish government has increased public investment in R&D and made efforts to stimulate collaboration between universities and industry. It recently appointed a group of experts to set up a Growth Commission. Is it not unfair to say that they are neglecting innovation and productivity growth entirely?

The problem with Danish innovation strategy is that it too narrowly promotes “science-based” innovation in technology sectors.

— For more than half a decade, the focus of Danish innovation strategy was too narrow – focusing on ‘science-based’ innovation in high technology sectors. After 2000, innovation policy was included in the responsibilities of the Ministry of Science giving it a similarly very narrow focus. Innovation policy was concerned mainly with imposing more central control and a small range of success indicators related to academic research and transfer of financial resources from academic education and basic research to applied research.

— More recently, attempts have been made to broaden innovation policy to include concepts such as user-driven, employee-driven and efficiency-driven innovation. But the pattern has been set, and this new terminology is not proving helpful in developing coherent innovation policy strategy.

What do you dislike about this terminology? Does it not indicate a broader approach to innovation policy and innovation management?

— It does, but it is misleading since the main ‘drivers’ of innovation in the private sector are the efforts made by businesses to grow, make profits and survive in a competitive environment. It is much more useful to distinguish between modes of innovation that make more direct use of science (science-technology-innovation (STI) mode), and modes of innovation that are more based upon the processes of learning by doing, using and interacting (DUI) (Jensen et al., 2005). It has been demonstrated that Danish firms that combine these modes are much more innovative than those that practise only one. And this distinction is helpful when it comes to developing a broad and comprehensive innovation policy.

But is it not useful also to take account of the role of users and employees in the innovation process?

It is old wisdom to engage lead users in the process of innovation.

— Absolutely, but it needs to be done in the case of all innovations. It is old wisdom in innovation research that product innovations that neglect the needs of final users will fail. It is also old wisdom that in many cases it is very useful to engage lead users in the process of innovation. Finally, and this is more recent wisdom, von Hippel argues that there is a tendency towards more democratic innovation in which the users themselves innovate. To reduce this to a policy focus on a specific class of ‘user-driven innovations’, in my view, would be a serious mistake – for example, neglecting the user can be especially serious in science-based sectors such as the ICT-sector.

What about employee driven innovation? I understand that you have been involved in researching this in recent years.

The most innovative European firms are located in countries that give the majority of their employees access to learning.

— Yes I have, and I think that the link between work organisation and innovation is extremely important. It is not so much about single innovations being proposed by individual employees. It is rather about establishing a link and a relationship between technical and organizational change at the level of the firm. We have shown that in Europe the most innovative firms are located in countries that give the majority of their employees access to learning, and offer them some autonomy in problem-solving.

— The most recent sets of data from 2000 and 2005 indicate that the Nordic countries have developed higher levels of worker participation than other parts of Europe. This should constitute an ‘innovation advantage’ in the context of international competition. But, again, the involvement of employees needs to be considered relative to all kinds of innovation; thus, ‘employee-driven’ innovation narrows the perspective.

Of course, it was you and Chris Freeman who first coined the phrase ‘national system of innovation’ in the mid 1980s and worked on developing the concept. Your 1992 edited collection has become one of the most cited books. However, how do you see this concept today? Is it still relevant to focus analysis, policy and management strategies at the national level?

— I can see that the tension between the current national systems of governance and global problems is growing. It is true also that some of the major challenges for innovation will require global efforts. This is true of eco-innovation and ‘financial innovations’ aimed at a sustainable global financial system. And national science systems are tending to become interconnected. However, at the same time, it is important to note that certain dimensions of national innovation systems (those related to the DUI-mode of innovation) are still nation-specific. This is true of formation of human resources – nation specific education systems and labour markets, shape the agents operating in their innovation systems and thereby they shape the interaction among agents.

— It has been demonstrated that, even in Europe, there are dramatic differences in relation to how work is organised and how industrial networks are structured. This implies that Europe’s economies learn differently, and that firms need to take account of these differences in deciding to operate abroad.

Let us go outside of Europe. You have worked for extended periods in China and collaborated with Chinese experts, on innovation. How do you see the challenge from China?

China is on a growth plan that is not sustainable.

— China’s growth path is not sustainable. To make it sustainable the domestic market will need to be stimulated, pollution and waste reduced, and the beginnings of a welfare state established. It is not the first time that China has faced a structural crisis and it is possible that again it may find a way out.

— The political leaders refer to ‘harmonious development’ to signal a new trajectory, but they may come up against strong resistance from local bosses who have benefited from the hitherto unhampered industrial growth. If they succeed, I see great opportunities for both business and public sector institutions, in Denmark and other countries in Europe, to contribute to a transition.

But is it not also the case that there is a tendency in China to move toward ‘technological nationalism’?

— Yes, a key concept in China’s new long term plans is ‘independent innovation’, and the intention is to stimulate innovation in domestic firms, for instance, by making selective use of public procurement. This reflects the reality that the spill-overs from massive foreign direct investment, to Chinese firms has been quite limited. A very large share of patents is from foreign owned firms. Here, I think that foreign business firms that find ways of combining the protection of strategic knowledge with the sharing of certain other knowledge elements will have great opportunities.

Should Danish business get involved in doing business with China? What about its stance on human rights?

There is a tendency for bright Chinese students to prefer employment in foreign firms.

— In the case of China, a withdrawal of foreign capital would not promote democracy. One mechanism that might help to establish more openness is competition among foreign and domestic firms for the best graduate students. There is a tendency for the more highly educated to prefer employment in foreign firms because of their more open and democratic work procedures. And, in general, we would expect a spill-over effect when it comes to organizational practices, from foreign to domestic firms. One of the major reasons why I went to China to teach innovation was because aiming at innovation requires more open and democratic education systems.

So, a final question about your ideas on innovation management: currently there is a strong tendency to emphasize ‘open innovation’ – do you support this tendency?

— The idea of ‘open innovation’ is useful despite its being around for several decades before Chesbrough popularized it so widely. If I were to sum up what I have learnt about innovation over three decades, I would emphasize innovation as a process in which various agents interact and different kinds of knowledge are combined in new ways. This implies that the major task for innovation policy and innovation management is to build bridges, or to reduce the barriers between ‘disparate’ agents – both within and across organizational borders.

— From the point of view of innovation, ‘intrapreneurs’, who build innovative relationships, are more important that ‘extrapreneurs’, who concentrate on building their own individual businesses. This perspective has important implications for public policy in several sectors. Science policy should provide incentives for scientists to engage in cross-disciplinary efforts. Education policy should aim at high quality in terms of numeracy and literacy competence, and also promote individual and collective creativity and social skills. Reducing the barriers between disciplines and professions is one way to stimulate the formation of new ideas.

— For a successful firm level, design process it is crucial to reduce the barriers between functions, including external partners such as suppliers, users and knowledge institutions. In both the design phase and the phase of implementation of new technologies, success will reflect broad participation among employees and a corresponding reduced social distance between the bosses and the workers. The more turbulent the economy, the greater the need to democratize work life and to transform work places into learning sites.

By Frode Lundsten MBA, Editor for Denmark