Governments Play a Crucial Role in Promoting Innovation - Essay Example

?Governments Play a Crucial Role in Promoting Innovation Introduction It is obvious that the ability of a nation to innovate and successfully bring this innovation to the market is and will continue to be a crucial determinant of its competitiveness in the global market. Many policy makers are positing that the major driver of a nation’s well being and economic progress is its innovative activity. In addition, these activities are vital in the build up towards addressing global challenges like sustainable development and climate change (de Serres, Kobayakawa, Slok and Vartia, 2006). Today, innovative activity is a vital undertaking in determining the competitiveness of a country in the global markets as well as its economic progress. Despite the great importance that innovation bears in addition to the opportunities brought about by globalisation and new and advanced technologies; many governments around the globe are faced with difficulties in strengthening their activities in this area (Cole, 2010). This paper sets out to discuss the policy issues and challenges that face innovation and look at the ways to address these challenges. In the process of addressing these challenges; it is evident that influencers of policies regulating innovation activities are mostly governments. In addition, the major steps to be taken towards addressing most of the challenges are often within the power of the government. Today, the rise in the standards of living of people around the globe can be attributed to innovation. Today’s more productive economy can be pointed to the application of technological advances in combination with innovative and entrepreneurial approaches in the creation and distribution of commodities; both goods and services (Economist Intelligence Unit, 2009). In areas where the regulatory and market structures are favourable to the expansion of the more productive activities; the result is more economic growth and development hence; the effort of innovation in conjunction with formal research and development (R&D) remain the main themes of growth. Research opines that innovation is on the rise towards forming a major part of the economic activity (Warda et al., 2006). In the past two decades, growth in investment in machinery and equipment has been more rapid than in knowledge in most countries. In countries such as the United States and Finland, investment in knowledge is much greater than that in machinery and equipment. Furthermore, activities of R&D have intensified in most countries in the past decade but major developed nations still remain unchanged in this area. The rate of growth of productivity is heavily influenced by improvements made in the skill composition of the workforce. More recently, the significance of innovation has been bolstered by the rapid technological advances and globalisation that have led to the establishment of new markets and new forms of competition that deliver consumers with innovative products and services. Even though these developments hasten the need for many countries to elevate the value chain; de Serres et al. (2006) opine that strengthening innovation performance is a major problem in these nations. An example is the slow progress witnessed with the Lisbon strategy of the European Union. However, a renewal of the strategy resulted in some success in helping the EU’s R&D and innovation performance – which is a key element of the Lisbon strategy; to increase the intensity of R&D in every economy. Innovation, however, is difficult to measure using R&D since for it to succeed it requires that a number of policies be implemented across extensive domains ranging from funding of the R&D, entrepreneurship, immigration, education as well as financial, product and labour market regulations. Analysis from the past decade reveals that the rapid increases in the intensity of R&D in many countries around the globe are due to a number of factors. These factors include (de Serres et al., 2006): i. Reduced anti-competitive regulations of the product market that stimulate business R&D and reinforce the innovation incentives. In addition, reduced restrictions on FDI (foreign direct investment) are essential in improving trans-border transfers of knowledge. ii. Existence of macroeconomic environments that are stable in addition to low rates of interest that create a low-cost market environment that is stable enough to spur the growth and development of innovative activity. iii. Abundance of both internal and external finance. iv. Increased public research that supports research by the business sector. This requires increased efforts to create capable and sufficient human resources. v. Openness to the idea of foreign R&D for countries with a highly capable domestic R&D results in higher productivity growth. The recent past has seen developments where the public policy’s interest in what promotes greater innovation is increasing. However, Warda et al. (2006) posit that many developing countries around the globe have been subject to decimal improvement in performance regardless of the opportunities presented by the technological advances – ICT in particular - and globalisation. Addressing the Challenges Labour market and product reforms would promote innovation. In addressing the challenges posed by these policies; the relevance of the government in promoting innovation can be evaluated. In order to strengthen the outcomes of innovation, it is essential that policy reforms take place (Conway, De Rosa, Nicoletti and Steiner, 2006). The main innovation driver is business. Consequently, an improvement directed to the business environment is ideal for innovation activity. In addition, liberalisation of the network industries and the services sector in OECD countries, for example, could promote innovation. According to Conway et al. (2006), adoption of regulations friendly to innovation in combination with FDI and lower barriers of trade will ensure competitiveness on top of fostering the transfer of knowledge and technology across borders. In addition, innovation activity can be promoted via the reformation of the labour markets through employment protection legislation that is well designed to help firms and entrepreneurs to adjust and draw more benefits out of investing in technology and innovation (Cole, 2010). Several studies have established a negative association between productivity growth and the restrictiveness of labour market and product economic regulations. Limited competition among suppliers in the product markets may result in a rise of input costs thus making the supplied products less innovative. This may make development of innovation costly or wholly discourage it. A labour market that is restrictive may restrain the ability of business organisations implementing changes necessary for the realisation of the benefits with which new technologies and globalisation come with. In more specific terms, empirical research involving countries in OECD shows that regulations that restrain competition have a dragging effect on the catch-up rate with the technological limit. Warda et al. (2006) argue that there is a high positive correlation between investments in ICT and high uptake as well as diffusion of innovation. The correlation is drawn upon the link between the use of ICT and the ability of firms and countries to innovate in the form of introduction and production of new products, business processes, services and applications. In addition, the significance of ICT in facilitation of innovation can is evident in the speed of today’s scientific discoveries. ICT is also the force behind networking that has resulted in extensive inter-firm and inter-country cooperation and informal learning on top of outsourcing. Despite ICT being an integral part of promoting innovation; its investment as a share of the total investments is relatively lower in highly regulated environments, for instance in the economies of Continental Europe as compared to the slightly high investments evident in economies that are lightly regulated such as Finland, United States, United Kingdom, Sweden and Australia (Conway et al., 2006). The introduction of ICT firms and institutions is a task that most developing governments in the contemporary world are struggling with. This reason is why most countries have not yet realised the full benefits of innovation with respect to technological advancements. According to Cole (2010), implementation of specific policy breakthroughs by governments to remove regulations against competition like those related to break up of telecommunications monopolies, unbundling of software programs from hardware devices, restrictions on air transportation and or on entry of parcel delivery has on many occasions stimulated innovation. An environment that is innovative and friendly to growth and expansion with respect to regulations does not include deregulation across the border. Establishment of regulations that are appropriate is a key factor in ensuring that there is competitiveness and innovative activity in markets newly liberalised, and in those in which technological convergence demands a revision of the regulatory framework, for instance broadcasting and telecommunications. It is essential that governments develop policies that are appropriate to maintain the Internet in the future as a secure and reliable medium that can be trusted as a basis for economic and social development (Conway et al., 2006). Up to now, it is evident from the discussion that policy reforms are a vital step towards the promotion of innovation. Major policy reforms are directly carried out by governments and some are heavily influenced by the same governments. Governments in developing countries should devise mechanisms that open up their borders to allow for entry of new technologies and knowledge that is necessary to realise the innovative abilities in these countries’ residents. The other sector of the economy that requires reforms in the hunt for innovation promotion is the financial markets sector. Governments can step in to reduce the financial woes faced by small innovative firms. According to de Serres, Kobayakawa, Slok and Vartia (2006), sectors of the industry in countries with developed financial systems that heavily depend on external aid or finance record a much faster growth and development as opposed to those in countries with poor financial systems. In addition, these sectors usually have the tendency to invest more in R&D, for instance electronic equipment, pharmaceuticals as well as refined petroleum products (Minniti, 2006). The existing competition in the financial markets has encouraged many companies to step up their efforts towards producing quality company reports and management practices on intellectual property or assets. This is a good step towards promotion of innovation even though the best practices have yet to be dispersed across jurisdictions and companies. As a result, governments of these countries should come out and encourage the diffusion of the best practices that the best and advanced firms around the planet already practice but in a principle-based approach. Adoption of extensive and or minor reforms in education systems is a huge step towards promotion of innovation. Through the creation of basic knowledge in both education and science, innovation would be spurred. An education system that performs well and is broadly accessible eases the process of adopting and diffusing innovation (Economist Intelligence Unit, 2009). Numerous research studies exists that document the contribution made by accumulation of human capital and education to the growth a country’s economy; some of which occur via innovation and science. In order to determine the contribution made by scientific research to the progress of scientific activities and innovation; the major factor to observe is the level of investment made by a country in education and in researchers and general employee training. In addition, human resource plays a major role in adopting new technological platforms plus the introduction of innovative activity and practices. Workers and managers have skills that are innate to them and the growth of these skills and related competencies is essential in the whole process (Conway et al., 2006). The whole process of creation, development and diffusion of new commodities and processes calls for quality skills in science and technology in addition to many other entrepreneurial and non-research skills (Aubert, 2004). Possession of strong and quality skills eases the uptake plus use of new and advanced technologies that promote innovation and innovative activities in the economy. Innovative activity does not always arise from the sophisticated research and design part of the production process. It can also arise from skills that are softer and less tangible like communication skills, entrepreneurial ability, adaptability etc. in cases of service industry and organisational innovation. Hence, developments in recent education systems emphasise on teaching and evaluating individual skills in the complex real-world context; for instance expert thinking - the ability to structure complex communications, problems, strategies for learning and self concept. Makers of education policies in developing nations have begun paying close attention to the outcomes of innovation (Aubert, 2004). In addition, there is an increasing focus towards developing or establishing a school condition where there are fewer restrictions, reduced partitioning of the theoretical training and practical understanding, and moving towards ensuring a successful group of students with extensive skills. Good outcomes of education are usually associated with heavy spending and investing in the same. However, Minniti (2006) argues that this is not everything required to ensure of an innovative population. A more innovative approach in the economy can be supported by good education outcomes that involve shifts in the structure of the delivery mode of learning, from focusing on provision to focusing on choices of the individual learner, from uniformity learning to individual learning, from management of inputs to education towards devolution of tasks and enablement of outcomes, from talk of equity towards delivery of the same. Data from OECD countries reveals that the problems start off from the stratified and highly compartmentalised systems with learning outcomes heavily dependent on the individual learner’s social background and as a result leaves behind or wastes the human potential in these individuals (OECD, 2006). Again, it is viable to argue that governments are charged with the responsibility to adjust their education systems in accordance to the successful other systems as well as make the necessary reforms in ensuring that learners get the maximum possible out of their learning endeavours in the hunt to promoting innovativeness. Funding of public research in research institutions to focus on relevance and excellence is another major step towards promotion of innovation. These investments in basic research and science have an essential role to play in developing ICT and related technologies and hence enabling or rather promoting innovation. It is reported that many existing commercial success involving high technologies and related fundamental innovations with mass positive impacts on the society and economy have their roots buried deep in public research; arising from research findings that were previously almost impossible to predict (Sheehan and Wyckoff, 2003). Suitable examples of such innovations include the Web browser and the World Wide Web that have their roots in research studies and projects funded by the government and conducted in public institutions such as industries, universities, government research centres and laboratories, and not from processes of the competitive market (Sheehan and Wyckoff, 2003). Much of the research and design procedures were conducted as part of a programme of the government where some instances involved cases where the research proceeds from a previously market-initiated and abandoned research study or project. This projects that are abandoned by the market are often due to unavailability of sufficient finances to fund the whole project and as such abandon it while some instances involve shifts in the economy that force some managers to abandon the innovative and learning practices and focus towards saving their organisation from failure and possible dissolution. Governments can initiate special reforms in the funding of science institutions and higher education via the provision of incentives focusing on the excellence of the learners and relevance in order to strengthen the contributions made by public investments towards the progress of scientific and innovative activities. Through the implementation of new mechanisms and strategies, public facilities and institutions like laboratories and universities respectively can be achieved. Mechanisms to employ include selectively funding projects and research studies for fields with significant economic and social needs, the better use of project funding, and the development of multidisciplinary networks or centres for research to serve both to promote research practices at the nexus of several major disciplines. Changes in the research and design practices have a strengthening effect on the already established disincentives for the private sector to invest in basic research. As a result, Sheehan and Wyckoff (2003) believe that government support is required in accommodating these changes and spur research practices that promote innovation in the country. It is therefore an essential undertaking that the government secures support for basic research regardless of the fact that some governments have found it hard to achieve this milestone. In addition, it is also very important that the gained public knowledge be protected or safe-guarded so as to ensure that the findings of the publicly funded research are extensively diffused across the whole country. More efforts need to be put in private and public exchanging of tacit knowledge (Eurasia Group, 2007). This can be achieved via human resource movement or mobility. There are low rates of mobility of researchers between the private and the public sectors of many countries proving to be a major restriction to the flow of knowledge in these countries. These governments can initiate regulatory reforms with respect to intellectual property rights, mobility of labour and licensing. According to Minniti (2006), these reforms can be complimented by other measures that help in the stimulation of industry demand for scientific inputs as well as improve the ability of public research facilities to transfer technology and tacit knowledge to the private sector. Furthermore, governments should develop suitable policies that enhance the science-industry correlations as part of a strategy to address the demand for the products of public research by the business sector. Support of the public towards business innovation can be made to be more effective as a measure towards promoting innovativeness of a country. Research in the OECD region reveals that all the countries provide public support aimed at promoting their innovative activities in the private sector (Sheehan and Wyckoff, 2003). Through identification of a suitable mix involving indirect and direct instruments like tax credits, support for rigorous evaluation and innovative clusters, and public-private partnerships that are well-designed and direct support; governments provide the private sector with necessary support to promote their innovative endeavours. However, the effectiveness of this support can be improved in order to ensure that the goals of the public support are achieved in a manner that is efficient. Despite the rise in the use of indirect schemes like tax credits; the use of direct support to promote business innovation can also be done through the use of or guaranteed or subsidised loans or competitive grants and still bears weight. Reviews carried out in policy of innovation resulted in the onset of reforms in some countries like Finland, United Kingdom, Austria, Norway and the Netherlands (OECD, 2006). In addition, countries with a market dominated by small programmes are have made attempts to restructure support and concentrate their programmes on the obstacles in the path of the process of innovation. The adoption of tax allowances on R&D is a strategy that is used by many countries in order to spur business expenditures on R&D (Sheehan and Wyckoff, 2003). This is due to the fact that business organisations have little benefits that can fully be appropriated by the investing firm and as a result most firms are reluctant in heavily investing in R&D practices. Direct support can directly be linked to the priorities of the public policy in the areas of innovation and science in addition to enabling for more focus on intervention from the government in the business undertakings (Rodrick, 2004). In order for the importance of direct support in promoting innovation to be realised; Saraga (2008) affirms that it is vital that it is based on a merit-based and competitive selection of suitable projects that can yield maximum social returns. Here, it is required that the desired policies to support innovation be carefully evaluated in order to ensure their effectiveness and that they achieve their objectives and or goals. Conclusion The business world today is faced with the challenges of global warming and sustainable development (OECD, 2009). In order to succeed and survive in the prevailing global market that is highly volatile due to the rapid technological advances and globalisation; it is essential that firms and countries in general develop innovative products and services that are unique to the market. Governments play a crucial role in promoting innovation and this is true with respect to the findings in this document. The ability to influence policies that have large and extensive impacts in innovation is the major role played by the government in influencing innovation. Innovation can be achieved via development and adoption of the best policies both domestically and internationally. The government’s role is to influence the reforms of these policies in a way that ensures that firms and business entities stay encouraged to produce innovatively as well as participate in R&D activities. References Aubert, J.E. 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