J M Barber: What lessons can evaluation of support for Innovation under ERDF learn from experience of National Innovation Policies?
INTRODUCTION 1. There is extensive experience of both ex-ante assessment and ex-post evaluation of support for innovation at the national level not just in Europe but also in North America, Asia and elsewhere. This experience covers a wide variety of different measures ranging from support for collaboration between Universities and commercial firms to undertake leading edge research to support for the spread of business best practice to SMEs in traditional sectors. There is also much experience at the EU level particularly in respect of the Framework Programmes though evaluation of EU programmes is conditioned by considerations that do not apply at the national level. Traditionally regional policy has been focussed on infrastructure, fixed investment and the creation of employment and only recently has promotion of innovation come to be seen as a key element in regional regeneration. Experience of evaluation of innovation support at the regional level is therefore less readily available.
2. This paper will try to draw out some of the lessons which ex-ante assessment and ex-post evaluation of national and supranational support for innovation may have for the equivalent activities at the regional level and thus provide some guidance for the assessment of the contribution which EDRF programmes make to innovation at the regional, national and community levels. These lessons have more to do with the general approach to assessment and evaluation than with the specific techniques used. The specific evaluation techniques appropriate to any given programme will depend on the details of the programme’s design, particularly on the objectives and how it is proposed to achieve them; on the economic and social system which it is trying to influence including the nature of innovation processes involved; and on the political and administrative circumstances in which the programme operates.
3. The paper starts with discussion of some key features of innovation; it is important that these are taken account of in ex-post evaluation. There is then a short section on Innovation System. This is followed by a description of the various types of innovation policy instruments. Next there is a discussion of an integrated approach to ex-ante appraisal, monitoring and ex-post evaluation. Some suggestions are then offered about how evaluation should be undertaken. This is followed by discussions of technology transfer and programme delivery both of which pose important issues for ex-post evaluation. The paper finishes with a short list of main conclusions.
4. Professor Richard Nelson, who is probably the world’s leading expert on the economics of innovation, defines innovation as:
“The processes by which firms master product designs and production processes that are new to them, if not to the world, nation or sector.”
This is a wide definition that includes not only the development of new products, processes, services and systems but also their diffusion throughout the economy and society. The last is important if we are interested in the effects of innovation on productivity and economic performance. Studies show that the initial introduction of new products etc accounts for only a small part of the ultimate economic and social benefits. The vast majority of the benefits flow from subsequent diffusion typically involving considerable further development that may change the product etc. concerned almost beyond recognition and greatly enhance its economic and social utility. In addition one innovation frequently leads to others either in complementary technologies/activities, in those products with which the first innovation is in competition, or in unrelated activities.
5. Innovation is an activity carried out by commercial firms or by equivalent organisations in the non-trading sector. In a rapidly changing world firms can only survive and succeed if they are able to match or surpass their competitors in the profitable development and exploitation of new markets, new products and processes, new skills, and new forms of organisation. A firm that continues to sell an increasingly out of date product will soon find itself selling increasingly lower quantities at ever decreasing prices. A firm that fails to upgrade its process technology in line with its competitors will find itself at an increasing disadvantage in respect of costs and quality. Thus innovation is crucial to the competitive survival and success of firms and much of what firms do to survive and prosper consists of innovation in one form or another.
6. Since innovation includes not just the initial introduction of a novel product, process or e service but also its subsequent diffusion it is therefore useful to talk about innovation not only being new to the world but also new to the sector, country, region or firm concerned. Most innovation is incremental in the sense that firms adapt pre-existing products etc. to their own needs or the needs of their customers. Innovation enables firms to cut costs of production and/or improve the quality of their output and add new features, so that their customers are prepared to pay more than would otherwise be the case. Higher gross profit per unit of output leads to higher value-added per head, in other words to higher productivity.
7. Innovation can be regarded as the purposeful promotion and exploitation of change in order to yield commercial, economic and social benefits which exceed the associated costs. The outcome of innovation is inherently uncertain since it involves a departure from what is known and established whether in terms of technology, business practice or market demand. The net benefits of any particular innovation will only become clear when it has been in use, sometimes for a quite a long period of time. The net commercial and economic benefits of innovation will ultimately be decided by the market but not all of these benefits will necessarily accrue to the firm or individual that first launches the new product, process or service. In many cases the bulk of the benefits will flow either to firms copying the innovation or adapting it to new purposes or markets. These ‘externalities’ adds to the uncertainty facing the original innovator. The uncertainty surrounding the benefits of innovation and the fact the original innovator may not be able to appropriate many of them makes it difficult to obtain external funding except for the more routine and most promising projects.
8. The novelty in innovation can derive from the following elements:
New technology or combination of existing technologies;
New business practices
Changes in organisation;
Upgrading of work-force knowledge and skills.
In many instances all or most of these elements need to be present if a firm’s efforts at innovation are to be successful. In particularly research shows that new process technology will only yield up its potential commercial benefits if it is accompanied by work-force retraining and organisational change.
9. Technology consists of the following interrelated elements:
The last category merges into business practices. Knowledge is a public good, one firm’s use of a piece of knowledge does not preclude its use by another firm. Codified knowledge is easily transferred between people with the relevant expertise and the possession of a technology largely consisting of codified knowledge is not normally by itself a source of competitive advantage for very long1. Tacit knowledge can usually only be acquired through close person to person contact or through learning by doing.
10. Both case study research and innovation surveys show that firms obtain technology and knowledge of business practices from a wide variety of sources including suppliers, customers, competitors, universities, research institutes, in-house R&D and engineering development, recruitment of skilled labour, suppliers of professional services, trade fairs, banks etc. Learning by, doing using and interacting plays an important role. The ability of firms to understand, acquire and exploit technology and knowledge from elsewhere depends on the extent of their in-house technological expertise, knowledge and skills usually referred as their absorptive capacity. Generally speaking the smaller the firm and more traditional the sector it belongs to the less will be its ability to develop and adapt technology in-house and the lower will be its capacity to absorb new technology from outside.
11. The mix of knowledge sources used varies systematically across sectors. Some sectors such as Pharmaceuticals are science-base, undertake significant amounts of in–house R&D and have a lot of direct contact with the science base. Other high-technology sectors such as Aerospace and motor vehicles rely mainly on systems integration, on high level engineering development and on production engineering skills. Note that while experimental development falls within the official (Frascati) definition of R&D engineering and systems development do not. Many traditional sectors such as textiles rely on their suppliers of equipment. software and services as a source of technological innovation. Most firms, particular small firms, do not make direct use of the outputs of university research which they are not capable of absorbing. Instead the results of scientific benefit most firms through intermediaries such as applied research units and suppliers of specialist equipment, software, materials and services.
12. Innovation is not a linear process but results from complex interactions between the expanding set of scientific and technological possibilities (technology push) and the perceived needs and wants of actual or potential customers (demand pull). Ideas for new products or services will often emerge from the interface between suppliers and customers and in some cases from customers by themselves (Von Hippel).These will be informed by both existing and newly emerging science and technology but the innovation process is best characterised by the entrepreneur’s or intrepreneur’s search for a technological solution to a perceived market need
13. Because of the complexity of the innovation process firms often do not innovate by themselves. They interact with other organisations such as suppliers, customers, competitors, universities, research institutes, investment banks, government departments etc. to gain various kinds of technology, knowledge, information, market access and other resources. In an increasingly complex, specialised and globalised world appropriate contacts and sources will increasingly need to be found abroad; the number of international joint ventures has been increasing rapidly.
14. The ability and willingness of individual firms to innovate does not only depend on the extent and quality of their interactions with other organisations but also on the wider economic and social environment. For example the fiscal system, the financial system, the system of intellectual property protection and the legal system generally, the educational system, the propensity of the population to buy novel products and services, attitudes to enterprise all affect the innovation performance of individual firms.
INNOVATION SYSTEMS (NIS) 15. The concept of a national Innovation system provides a framework for describing and explaining national innovation performance, how innovation takes place and how technologies are developed and diffused. According to Professor Chris Freeman (SPRU), one of the original inventors of the concept, the national innovation system (NIS) is the ‘network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies’ in the country concerned. Institutions is a complex concept which includes both
organisations which are active in the innovation process;
laws, standards, practices, habits, beliefs etc which shape innovation behaviour.
Since successful technological innovation is conditioned by and often requires changes in organisation and in business practices, models and strategies the NIS must cover these as well.
16. The set of ‘institutions’ which affect a particular innovation or technology or the innovation efforts of any one firm may be clustered locally, sectorally, regionally, nationally or internationally. The system of institutions which support one particular innovation may have little overlap with the system which supports another. The system of institutions which supports the total innovation efforts of a country will include important influences from overseas. In the case of individual regions the institutions affecting the innovation performance of individual are much more likely to exist or be determined outside of the region itself. For example firms may be part of large groups which have their headquarters and ownership elsewhere or may be dependent on R&D establishments situated in other parts of the country. The smaller the region (or country) the more likely firms are buying from suppliers or selling to customers outside of the region’s boundaries. Many of the intangible institutions (laws, standards etc.) will be set at the national level.
17. If the innovation system of a particular region contains a large number of firms in the same or in a group of closely related sectors then it may be possible to speak of a cluster. Firms in clusters benefit much more from external economies of scale such as deeper markets in specialist skilled labour and the close proximity of suppliers of specialised materials, equipment, services and finance. They also benefit from well developed strong networks along which knowledge of technology and business practices and opportunities can flow. Opportunities for collaboration between firms will be greater. It is important that clusters remain open to influences from outside and do not become in-bred as has been the case in some declining European regions.
NATIONAL INNOVATION POLICY 18. National policy affects innovation performance in two ways. First there are all those policies and programmes which are directly targeted at innovation processes. These policies and programmes constitute innovation (or technology and innovation) policy proper. Secondly there are those policies which affect innovation via their impact on the wider economic and social environment. These include fiscal policy, tax policy, public procurement, policies on education (including higher education) and training, financial and monetary policy, trade policy, policies towards commercial law and intellectual property protection, science policy, policies on consumer protection and health and safety, etc. This paper is not primarily concerned with this latter group of policies but it should always be remembered that they condition the impact of innovation policy proper and in some cases may be used to actively support innovation activities e.g. public procurement. They may sometimes emerge as issues in evaluation. These policies are normally determined at the national or even the supranational level and are not normally within the remit of those responsible for innovation support at the regional level.
19. Given the wide scope of innovation activity and the many elements involved there are a wide variety of policies which have been used to develop and diffuse technology and encourage innovation at both the national and regional levels. They include:
Support for the development of emerging and future science based technologies usually by funding collaborative research undertaken jointly by leading high-technology firms, universities and research institutes :
Funding of universities and research institutes to adapt advanced science and technology to meet the needs of small and medium sized companies typically in more traditional sectors:
Support for mission orientated research, development and systems integration in sectors such as space, health provision, aerospace and defence using a variety of instruments:
Support for the creation and subsequent development of new technology based small companies by encouraging spin-outs from universities and research institutes; funding for science parks and incubation units; promoting the growth of venture capital and giving tax breaks to business angels; provision of advice on intellectual property and business more generally etc:
Promotion of enterprise and new firm creation more generally:
Subsidies for single company R&D either in the form of grants or tax allowances. Grants can be used selectively according to a variety of criteria but state aids rules usually means that they are confined to SMEs. Tax breaks are generally speaking non-selective though distinctions may be drawn between different sizes of firms. Innovation projects may also receive support via state guarantees for bank lending or even interest rate subsidies:
Support for technology and knowledge transfer and the spread of business best practice through a wide variety of means such as:
Support for technology development and adaptation at public and private research institutes and its subsequent dissemination to small and medium sized companies in more traditional sectors;
Support for in-firm innovation projects by grants, funding of technology associates etc.
Financial assistance for use of consultants;
Support for company visits by experts in technology and/or business
Support for small firms to attend workshops, seminars, trade exhibitions etc.
Creation of centres of excellence, networks, and sources of business advice;
Awareness campaigns using mail-shots, TV/Video, internet, exhibitions, road shows etc.
20. These policies may be delivered at a supranational, national, regional, sectoral or even at a local level. In Europe a) and c) are almost entirely delivered through the Framework Programmes or through equivalent national programmes. This is mainly true of f) as well though there are examples of R&D grants being controlled or administered by regional authorities e.g. UK Grants for Research and development. The remaining policy types have or could be used at the regional level. There are examples of ex-post evaluation of all of these instruments, most of which can be found on the Internet.
EVALUATION 21. Evaluation consists of the following three components:
Ex ante assessment (appraisal) of proposed new policies or programmes to decide whether or not they should go ahead and if so in what form.
Monitoring is the collection of information on the progress of programmes during their lifetime.
Evaluation is the ex post assessment of appropriateness, efficiency and effectiveness of programme after they have ended or have been running for some time.
22. In some EU discussions the term evaluation is used for all three components. Although each is a discrete activity in its own right if they are to be fully effective they should be carried out as an integrated process from the initial conception of the programme to the final verdict on its performance. From 1986 to 1999 the UK Department of Trade and Industry did this for Innovation support via the ROAME system. ROAME stands for Rationale, Objectives, Appraisal, Monitoring and Evaluation to which F for Feedback was added later though this last stage was always implicit. After 1999 the formal structure of the evaluation system was changed partly to incorporate evaluation into a comprehensive system of performance indicators though the underlying principles remained the same. Policy and organisational changes since then make it difficult to assess what the impact of the changes has been2.
23. The role of each of the stages of the ROAMEF process is set out below.
24. Many, but by no means all, public policies to promote innovation and technology development can be seen as government interventions in activities which are primarily the responsibility of commercial firms operating in the market place. Such interventions are seen as requiring an overall rationale which can be seen as consisting of the following three elements:
Identification of some aspect of national or regional innovation performance which is regarded as unsatisfactory or some future worthwhile objective or strategy whose achievement is threatened;
Identification of a defect in the working of market forces, or in the functioning of the innovation system, that seems likely to prevent the weakness in performance from being corrected or worthwhile objective being realised at least within a reasonable timescale. It is this element which is usually referred to as the ‘rationale’
Some form of public support or intervention which will eliminate or offset the defect at a cost which is (expected to be) less than the benefits thus realised.
All of these elements must be present if a particular innovation policy can be justified ex-ante and is successful ex-post in yielding value for money.
Objectives 25. Each programme or policy needs an appropriate hierarchy of objectives. The first kind of objectives are operational objectives which define the activities which make up the programme, for example, provide a R&D grant to X number of small firms. Although the exact numbers contained in these targets are sometimes a matter of guesswork they help to direct the implementation of the programme and provide an early check of whether it is proceeding along the right lines. Results describe the direct economic and commercial effects which the programme is trying to bring about, for example, help Y small firms in a region to adopt a new process. Impact3 objectives encapsulate the ultimate economic benefits which the programme is aiming to bring about for example increase net value added in the region or country concerned.
26. It is important that the objectives are agreed with those managing and implementing the programme and that the latter clearly understand the criteria by which their performance is to be judged. They should also be agreed with or at least made known to the other stakeholders. Evaluation is at the end of the day a social process.
Appraisal 27. Appraisal within the ROAMEF system covers the rules which determine which projects and activities qualify for support under the policy or programme and the application procedures to be followed. They must be consistent with the rationale and objectives because they will determine at a detailed level what is supported and how this support is provided. They will need clearly understood by the programme managers and clearly communicated to those firms who the policy makers wish to apply to, and/or participate in, the programme. They must discourage frivolous and inappropriate applications but the application procedures and the qualifying criteria must not be so onerous to discourage significant numbers of those firms which the programme is intended to support. It is important to examine them carefully in any ex-post evaluation to make sure that the implementation of the programme lived up to its original purpose and objectives.