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The 'system of innovation' approach, and its relevance to developing countries
  • The 'system of innovation' approach, and its relevance to developing countries

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Summary

The term 'Systems of innovation' is often used in academic and policy circles. But how do such systems operate and what is their impact?

Introduction

The 'system of innovation' (or 'innovation system') approach to the production of scientific and technological knowledge has been gaining ground in policy and academic circles over the last two decades. It has, for example, already been endorsed by an array of international and national bodies, including the Organization for Economic Co-Operation and Development (OECD), the Inter-American Development Bank (IDB), the World Bank, and various United Nations agencies, as well as non-governmental organisations and governments in both developed and developing countries.

As a result, those responsible for funding and supporting research, technological development and innovation in developing countries are increasingly likely to come under pressure to adopt the innovation system approach as a guide to decision-making.

The approach represents a major change in the way that the production of knowledge is viewed, and thus supported. It shifts attention away from research and the supply of science and technology, towards the whole process of innovation, in which research is only one element.

The concept of 'innovation' refers to the search for, development, adaptation, imitation and adoption of technologies that are new to a specific context. [1] An innovation system is therefore a network of organisations within an economic system that are directly involved in the creation, diffusion and use of scientific and technological knowledge, as well as the organisations responsible for the coordination and support of these processes.

The intellectual roots of the innovation system approach to the production and dissemination of knowledge lie in attempts to understand the complexities of the innovation process that have taken place over the past decades. Two key features of the process have emerged from this analysis.

The first is that innovation is essentially the result of an interactive process between many actors, including companies, universities and research institutes. Individual organisations rarely possess all the knowledge necessary for the whole process of innovation. As a result, they need to combine scientific, design, engineering and operational knowledge from different sources.

The second feature is that innovation does not follow a linear path that begins with research, moves through the processes of development, design and engineering, and production, and ends with the successful introduction of new products and processes. Rather, it tends to involve continuous feedback loops between the different stages.

Another important aspect of the innovation systems approach is that it can been applied to different levels of the economy, depending on whether one is trying to analyse (or promote) innovation at a 'supra-national', regional, national, local or sectoral level.

Finally, the innovation system approach has considerable appeal for policymakers. The concept of a system of innovation brings together in a single framework the elements of good practice required to foster innovation. In other words, it provides a coherent analytical tool for handling the disparate processes of knowledge creation, distribution and use, as well as the ways that these affect productivity, competitiveness, and economic and social development. 

But although there is a general consensus among researchers and practitioners that the innovation system approach is useful for advanced countries, caution should be taken in using it in the very different conditions found in developing countries. Where such an approach is being promoted in a developing country setting, it is important that the innovation system proposed is one that is appropriate to local social and economic conditions, not one that merely attempts to replicate what has been achieved elsewhere.

This policy brief aims to:

  • describe the key features of a well-functioning system of innovation
  • describe the main contributions of the innovation system approach to policymaking on scientific, technological and innovation issues
  • discuss the application of the innovation system approach to developing countries
  • raise issues that need to be considered by decision makers and policy analysts seeking to use the innovation systems approach in their work in developing countries

Essential elements

The concept of a system of innovation is based on the fact that, as shown by the experience of advanced industrialised countries, a range of organisations and practices are required for successful innovation to take place.

The core organisations are those in the business sector, such as companies and — particularly in developing countries — farms. These are the locations in which knowledge is translated into goods and services, and, as a result, where wealth is created.[2] They also tend to be the institutions whose products — such as drugs and vaccines — are used to provide for social needs.

Other institutions that are fundamental to a well-functioning system of innovation include science and technology organisations, such as universities, research institutes and public research and development organisations. Equally important are organisations that provide the infrastructure for innovation systems. These include government agencies and departments, patent offices, and both private and public funding organisations.

None of these organisations acts in isolation; each is embedded in a web of interrelationships. Furthermore, each operates according to a set of 'rules of the game'. These can be formal policies, regulations and laws; alternatively they may be informal rules, norms and procedures.

Each organisation performs at least one of the functions that are required by a well-functioning system of innovation. Some of these may be described as 'hard' functions that are associated with the undertaking of research and development, as well as providing scientific and technological services such as engineering consultancy. Others may be characterised as 'soft' functions, related to policymaking, coordinating or catalytic roles, or acting as an interface between separate 'hard' functions. [3]

Based on this distinction, one can suggest that a system of innovation is made up of two overlapping networks. One includes organisations that create, diffuse, adapt, distribute and use knowledge. The second comprises the organisations that shape policy agendas, design policy and implement them.

In practice, of course, these two networks can overlap. This is because some organisations perform a number of functions, and participate in activities within each type of network. For example, companies and universities may both undertake research and development, and both may also participate in the policy networks that help to set agendas and make decisions.

Nevertheless it is useful to consider them for both practical and policy purposes as representing two different dimensions of the innovation process.

Contributions to policymaking

The value of thinking in terms of systems of innovation, particularly for policymakers, lies in the understanding it offers for the overall process involved in the production, diffusion and application of knowledge, as well as the impact of this process on economic and social development.

With this approach, all research, development, technological and innovation activities within an economic system — whether such a system covers a country, a region or even a sector within a country — as well as the organisations involved with these processes, can be seen as parts of a single entity.

Furthermore the overall system includes many feedback loops, and embodies multiple relationships between the organisations of which it is made up; every element of the system is therefore important to the innovation process as a whole, and both influences and is influenced by the others.

There are several ways in which the innovation systems approach can guide policy. Firstly, it helps to shift the focus of policy from individual organisations to both the organisations and the interactions between them. Some of these interactions can involve various organisations engaged in the production of knowledge related to innovation, such as companies (users, suppliers or competitors, for instance), universities and research institutes. Other types of interactions are concerned with policymaking, and involve policy organisations and relevant stakeholders.

The second way in which the innovation system approach is useful is that shifts attention from scientific and technological inputs — such as research and development activities — to innovation processes and outcomes, in other words to the processes involved in introducing new products and methods to a particular economy. 

Thirdly, thinking in terms of systems of innovation helps to shift the emphasis of policy away from deciding on whether to support the supply or the demand for science and technology, and towards issues that affect the interaction between the supply and demand of knowledge.

Another way in which the approach is valuable is that it acknowledges the behaviour of both firms and science and technology organisations (such as universities, research organisations or technological centres) to be influenced by a wide range of institutions and supporting organisations. Such institutions, for example, can create incentives for applying the results of scientific research and technological experimentation. But informal rules, norms, customs and routines that favour new ways of doing things are also important; supporting organisations may, for example, include those concerned with standards, certifications or patents.

Fifthly, the innovation system approach emphasises that policy analysis, as well as interventions to support innovation, can operate at many levels of the economy — for instance, at the supra-national, national, regional, local, sectoral, and technology levels. The original emphasis of this approach primarily to national innovation systems is now changing, and more attention is being paid to other levels.

This is relevant because, for example, policies are designed and implemented at the supra-national level, as has been done with the European Union's 'framework' programmes for supporting science and technology. At the same time, differences in types of innovation, as well as the organisation of innovative activities in different business sectors, are now recognised as demanding different policies at the sectoral level.

Finally, thinking in terms of innovation systems changes the focus of analysis from the internal working of an economic system (whether countries, regions or national sectors), to the way that the system interacts with the outside world. Sources of knowledge for a national innovation system, for example, are often located outside the national boundaries by which the system itself is defined. Similarly international institutions, such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization, influence the research and development decisions of firms in any national systems of countries that are members of the organisation.

Application to developing countries

There is a growing consensus that the range of activities highlighted in the innovation system approach are important for fostering innovation in developing as much as developed countries. For example, it can highlight what is absent within a particular country, as well as imbalances and distortions within any type of innovation system that already exists (see panel 1).

As an analytical tool, the approach can also identify obstacles to the formation of a well-functioning system of innovation in countries where such a system may only exist in embryonic form. [4] Indeed identifying the practices followed in developed countries, and contrasting them with the reality found in developing countries, can be the first step towards implementing the innovation system approach.

Another role is as a prescriptive tool for policymaking. [5] The practices that it encourages, such as viewing the whole innovation process in a systemic way, can help guide policy initiatives that are intended to address all the components needed by an economic system to facilitate learning and innovation.

In developed countries, the understanding of the limitations of a linear view of innovation led to changes in policy practices which became more systemic. In developing countries the problem has tended to persist into the start of the 21st century. The case of the Brazilian health biotechnology innovation system illustrates this trend.

Brazil's innovation system in the field of health biotechnology has managed to produce a considerable scientific output, as is amply evident in the steep increase in publications and outstanding examples of contributions to knowledge production at the world's scientific frontier. Yet translating this success in science into the production of economically and socially relevant goods and services has been limited.[6]  For instance, Brazil is an importer of vaccines, and there was also a marked increase in pharmaceutical imports into the country between 1981 and 2002. There are a few examples of successful introduction of indigenously developed products and services. But a great number of new products are the result of imported licences, and the majority of firms rely on the production of generic medicines.

These limitations are due to the way the innovation system has been developed. Public research and educational organisations are the system's key knowledge-producing organisations. They do most of the research, and there is close collaboration among leading organisations. This joint effort was evident in the project to sequence Xylella fastidiosa — a plant pathogen that affects citrus fruits — which catapulted Brazil to a leading position in gene sequencing in 2000. But Brazilian companies generally have limited links with the science and technology organisations, and play a more peripheral role in knowledge production, although there are a few exceptions. A few companies have introduced products developed locally, such as the recombinant human insulin patented by Biobras.

Overall, there is a strong 'research' effort, considerable 'production' capacities, but 'development' investments are considerably weak. Brazil's science and technology minister captures this well: "Brazilians get lost between basic research and its transformation into technology, between academic life and the manufacturing system." [7]

A 'linear' belief that investing in scientific research will lead to innovation underpinning the public policy initiatives of the government agencies has contributed to this state of affairs. The government agencies have been slow to internalise a more systemic understanding of knowledge production, diffusion and use. Government policies continue to treat research investments in universities and public research organisations and publication outcomes in a privileged way. [8]  There are also problems with coordinating the design and implementation of policy initiatives among various government agencies and departments. [9] However, some signs of a shift to alternative models are starting to emerge within the system (see panel 2).

 

Of course, all developing countries face different challenges, and are at different stages of their economic and social development. In particular, the obstacles to creating systems of innovation in the least developed countries are very different from those faced in the more advanced developing countries. In practice, therefore, it is also important to know how public policy can promote the 'good practices' advocated in the innovation systems approach in different contexts, while starting from very different starting points.

Key issues for developing countries

Our understanding of the creation, distribution and use of knowledge, as well as the factors that influence those processes, continues to grow. There is increasing awareness that, in order to be effective, policy initiatives need to respond to the specific needs, priorities and capacities of a developing country that are appropriate to its stage of development.

There are no blueprints for the design of policies fostering the development of a coherent system of research, development and innovation. However, two broad issues clearly need to be considered, namely strengthening capabilities and supporting networks. These are illustrated by the case of FIOCRUZ (Oswaldo Cruz Foundation) and the Brazilian health biotechnology innovation system, as described in panel 2.

FIOCRUZ can be seen as a microcosm of the structure of the Brazilian health biotechnology innovation system. It illustrates the imbalances that can occur between the supply of high-level scientific knowledge and limited demands for research, development and design in manufacturing. It also shows how institutions (particularly policies) influence the behaviour of individual organisations. At the same time, it shows how organisations can address systemic failures, and how their accumulation of technological capabilities can have a positive impact on public policies.  

FIOCRUZ is a public research organisation originally intended to cover the whole innovation spectrum, from basic and applied research, through development, design and production, and higher education and training activities. FIOCRUZ is active primarily in public health, biomedicine, health biotechnology and genetic engineering.

The foundation is composed of 16 institutes, among them two research hospitals, two manufacturing plants and around 800 employees with PhDs. FIOCRUZ has become one of Brazil's leading research organisations in health biotechnology, responsible for 16 per cent of the national publications in this field appearing in international journals. But there are limited investments in development due to strong incentives of public policies on publication outcomes.

One of the two manufacturing plants of FIOCRUZ, Bio-Manguinhos, was created in 1976 to centralise FIOCRUZ vaccine production. Up to the mid-1990s, the activities of Bio-Manguinhos never achieved industrial scale. It was based on basic process technologies and low value-added products of low quality but involving high costs. There were no flows of knowledge between other FIOCRUZ institutes and Bio-Manguinhos, and the limited efforts for technical development were amateur, and carried out in the plant. The plant made only a limited contribution to meeting the demands of the Brazilian market, and the government relied on imported vaccines on a large scale.

In the mid-1990s, the National Immunization Programme was under pressure to pay for the increasingly high prices of imported vaccines, and Bio-Manguinhos was threatened with closure. In spite of the strong research capabilities of FIOCRUZ, National Immunization Programme and Bio-Manguinhos had to rely on a technology transfer agreement with Smith-Kline Beecham (later GlaxoSmithKline) to acquire the technologies to produce a pneumonia and meningitis vaccine (Hib).

From that, the plant followed a path of technological learning — going from less to more complex technology-changing activities — starting with production, then engineering and entering development activities. At the initial stage, it absorbed the imported technologies, and started producing the vaccine. It used the new expertise to revamp its other lines of products. As a result, it became the largest producer of vaccines in Brazil, and the largest producer and exporter of yellow fever vaccine in the world.

It started to introduce cost-reducing and quality-enhancing incremental changes in the acquired technology. It used the extra revenue generated to invest in technological development, seeking partnerships with other FIOCRUZ institutes and other domestic and international organisations to develop new products and processes.

As a result of these developments, Bio-Manguinhos has become increasingly prominent in the policy networks in the health biotechnology innovation system. FIOCRUZ is starting to bridge the gap between government agencies, linking actors in the system to coordinate government programs and actions in health biotechnology.

 

Strengthening capabilities

The overall performance of a particular system of innovation depends partly on the existence of a critical mass of relevant players, such as companies, government ministries and universities. But it also reflects the ability of these organisations to carry out important functions, such as R&D, the provision of technical services, and the development of policy (see panel 2).

In developing countries, technological learning — defined as the process of accumulating a capacity to innovate — usually results from the experience gained during a series of increasingly complex activities. Initially these tend to focus on the acquisition of foreign technologies, and their imitation. Subsequently there are attempts to modify imported technologies through incremental changes.  Finally — as illustrated by the newly industrialised countries in East Asia — an indigenous capacity to carry out R&D-based innovation can emerge.

Government policy should respond to the needs of both countries and organisations at each stage of this evolutionary process. For example, at an early stage of a country's economic development, policies should support efforts to imitate and adapt foreign technologies, as well as increase the education levels of the population. As the capacity to adapt technologies increases, policy measures should focus increasingly on strengthening R&D capabilities — particularly those relevant to local needs -- in the business sector, in higher education institutions (such as universities), and in public research laboratories. 

Equally importantly, organisations and government ministries responsible for drawing up and implementing policy must develop the capacity to carry out these tasks effectively. Furthermore the capacity to formulate and implement such policies should not remain an exclusive privilege of the state. Other stakeholders — such as firms, universities and research organisations — need to develop the capabilities to participate in the policy process.

Supporting networking

Finally, developing countries need to address the fact, that the efficient operation of a system of innovation involves not only the activities of its component parts, but also the interaction among them. Furthermore, such interdependence is important both for producing and distributing knowledge, and for developing policy.

It is important for stakeholders to interact in policy issues in order to ensure that their demands are represented in discussions around such issues. The networks created in this way also help to improve coordination among policy initiatives. Indeed, policy-oriented networks that link not only individuals but also organisations can reduce the dangers of unintentional (or intentional) bias against specific interests (as illustrated by the example in panel 1), and help build a consensus around an agreed course of action.

As far as the knowledge-oriented networks are concerned, the main form of learning — particularly in private companies, even in the most advanced of developing countries — remains assimilating and adapting technologies developed elsewhere. These activities are usually carried out in-house, and seldom require the input of knowledge from other sources.

Despite this limited demand for external inputs, there are isolated cases where networks for technological learning and innovation in developing countries have developed successfully. But in general, such networks are either weak, or absent. [12] They tend to emerge in response to intra-organisational factors — such as an organisations' level of both absorptive and generative capabilities — and the incentives of external policies. Such policies should therefore focus on the need to strengthen the demand for knowledge in the business sector, and to support investments in research and development that respond to the types of demand encountered at each stage of development.

Conclusions

The innovation system approach is now a popular one in developing countries. Care must be taken in applying to developing countries any approach developed in industrial nations. Nevertheless its core insights about the factors influencing innovation make the innovation system approach a valuable analytical and prescriptive tool for policymaking in developing countries.

As an analytical tool, the approach can help identify context-specific factors that obstruct the creation of systems of innovation in the least developed countries, and systemic failures within such systems in more advanced developing countries.

As a prescriptive tool, it provides a way of designing policies that respond to the specific needs of developing countries at different stages of their development. For example, it may identify a need to develop intermediary organisations or to increase a demand for science and technology in the private business sector.

There are no blueprints for these complex tasks. The best that the innovation system approach can do is provide a series of guidelines, such as the importance of capacity building in both the business sector and supporting research organisations, fostering inter-organisational linkages, and encouraging a continuous feedback between institutions engaged in research, development, engineering, production and marketing.

The history of virtually all developed countries illustrates how developing these various functions, and encouraging them to operate as a coherent system, opens the door to economic growth and social progress. The newly industrialised countries within East Asia (Taiwan, South Korea, Singapore and Hong Kong) demonstrate that the experience can be successfully followed. It is now up to the rest of the developing world to find its own way along the same path.


References

[1] Based on Dosi G. 'The Nature of the Innovative Process'. In: Soete L. Technical Change and Economic Theory (Pinter Publishers, London, 1988, p222).
[2] Arnold E. and Bell M. 'Some New Ideas About Research for Development' (PDF), Partnership at the Leading Edge: A Danish Vision for Knowledge, Research and Development (Danish Ministry of Foreign Affairs, April 2001, p288-316).
[3] Galli, R. and Teubal M. 'Paradigmatic Shifts in National Innovation Systems'. In: Edquist C. Systems of Innovation: Technologies, Institutions and Organisations. (Pinter Publishers, London, 1997, p342-364).
[4] Viotti suggests that a 'learning system' approach is more appropriate to analyse the experience of developing countries, since limited research and development-based innovation is found in most developing countries. See Viotti, E. 'National Learning Systems: A New Approach on Technological Change in the Late Industrializing Economies and Evidence from the Cases of Brazil and South Korea'. Technological Forecasting and Social Change (2002, 69: 653-680).
[5] Arocena, R. and J. Sutz (2000:55-6). ‘Looking at National Innovation Systems from the South’. Industry and Innovation, Vol. 7(1): 55-75:58.
[6] Interview with FIOCRUZ; see also Ferrer, M. et al. 'The Scientific Muscle of Brazil's Health Biotechnology'. In: Nature Biotechnology (2004, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 8-12).
[7] Quoted in Ferrer et al., 'The Scientific Muscle', 11.
[8] Interview with FIOCRUZ
[9] Interview with FIOCRUZ
[10] Ferrer et al., 'The Scientific Muscle'.
[11] Thorsteinsdóttir et al. 'Introduction: promoting global health through biotechnology'. Nature Biotechnology,  (2004a, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 3-7); Thorsteinsdóttir et al  'Conclusions: promoting biotechnology innovation in developing countries'. In: Nature Biotechnology (2004b, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 48-52).
[12] Cf. the following studies: Intarakamnerd P., P.-a. Chairatana, et al. 'National Innovation System in Less Successful Developing Countries : The Case of Thailand.' In Research Policy (2002, 1421: 1-13); Liu X. and White S. 'Comparing Innovation Systems: a Framework and Application to China's Transitional Context.' Research Policy (2001, 30: 1091-1114); Alcorta L. and Peres W. 'Innovation Systems and Technological Specialization in Latin America and the Caribbean.' Research Policy (1998,  26: 857-881); Hou C. M. and Gee S.  'National Systems Supporting Technical Advance in Industry: The Case of Taiwan'. In: Nelson R. National Innovation Systems (Oxford, Oxford University Press, 1993, 384-413); Kim, L.  'National System of Industrial Innovation: Dynamics of Capability Building in Korea'. In: Nelson R. National Innovation Systems. (Oxford, Oxford University Press, 1993, 357-383); Teubal, M. 'The Innovation System of Israel: Description, Performance, and Outstanding Issues'. In: Nelson R. National Innovation Systems (Oxford, Oxford University Press, 1993, 476-502).
 
The author would like to thank Martin Bell, Andrew Barnett and Geoff Oldham for their comments on an initial draft of this paper.

 

References

[1] Based on Dosi G. 'The Nature of the Innovative Process'. In: Soete L. Technical Change and Economic Theory (Pinter Publishers, London, 1988, p222).
[2] Arnold E. and Bell M. 'Some New Ideas About Research for Development' (PDF), Partnership at the Leading Edge: A Danish Vision for Knowledge, Research and Development (Danish Ministry of Foreign Affairs, April 2001, p288-316).
[3] Galli, R. and Teubal M. 'Paradigmatic Shifts in National Innovation Systems'. In: Edquist C. Systems of Innovation: Technologies, Institutions and Organisations. (Pinter Publishers, London, 1997, p342-364).
[4] Viotti suggests that a 'learning system' approach is more appropriate to analyse the experience of developing countries, since limited research and development-based innovation is found in most developing countries. See Viotti, E. 'National Learning Systems: A New Approach on Technological Change in the Late Industrializing Economies and Evidence from the Cases of Brazil and South Korea'. Technological Forecasting and Social Change (2002, 69: 653-680).
[5] Arocena, R. and J. Sutz (2000:55-6). ‘Looking at National Innovation Systems from the South’. Industry and Innovation, Vol. 7(1): 55-75:58.
[6] Interview with FIOCRUZ; see also Ferrer, M. et al. 'The Scientific Muscle of Brazil's Health Biotechnology'. In: Nature Biotechnology (2004, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 8-12).
[7] Quoted in Ferrer et al., 'The Scientific Muscle', 11.
[8] Interview with FIOCRUZ
[9] Interview with FIOCRUZ
[10] Ferrer et al., 'The Scientific Muscle'.
[11] Thorsteinsdóttir et al. 'Introduction: promoting global health through biotechnology'. Nature Biotechnology,  (2004a, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 3-7); Thorsteinsdóttir et al  'Conclusions: promoting biotechnology innovation in developing countries'. In: Nature Biotechnology (2004b, Vol. 22, Supplement on Health Biotechnology Innovation Systems: 48-52).
[12] Cf. the following studies: Intarakamnerd P., P.-a. Chairatana, et al. 'National Innovation System in Less Successful Developing Countries : The Case of Thailand.' In Research Policy (2002, 1421: 1-13); Liu X. and White S. 'Comparing Innovation Systems: a Framework and Application to China's Transitional Context.' Research Policy (2001, 30: 1091-1114); Alcorta L. and Peres W. 'Innovation Systems and Technological Specialization in Latin America and the Caribbean.' Research Policy (1998,  26: 857-881); Hou C. M. and Gee S.  'National Systems Supporting Technical Advance in Industry: The Case of Taiwan'. In: Nelson R. National Innovation Systems (Oxford, Oxford University Press, 1993, 384-413); Kim, L.  'National System of Industrial Innovation: Dynamics of Capability Building in Korea'. In: Nelson R. National Innovation Systems. (Oxford, Oxford University Press, 1993, 357-383); Teubal, M. 'The Innovation System of Israel: Description, Performance, and Outstanding Issues'. In: Nelson R. National Innovation Systems (Oxford, Oxford University Press, 1993, 476-502).
 
The author would like to thank Martin Bell, Andrew Barnett and Geoff Oldham for their comments on an initial draft of this paper.

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