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Promoting Innovative Development Through International Coopration St. Petersburg Economic International Forum

St. Petersburg, Russian Federation
4-6 June 2009

Statement by Mr. Ján Kubiš
United Nations Under-Secretary-General
Executive Secretary of the United Nations Economic Commission for Europe
Session 4. POWER OF INNOVATION: WHEN WILL TOMORROW START?
(5 June 2009; 14:00 – 16:00)

Excellencies,
Ladies and Gentlemen,

It is an honour and pleasure to speak at the prestigious St Petersburg International Economic Forum 2009. This outstanding international event has established itself as an important meeting point where prominent Russian and international political leaders, high-level decision makers and top corporate executives can debate key global economic issues and challenges.

Undoubtedly, the ongoing global economic and financial crisis still casts its shadow on these debates but we are now more confident as regards the possible ways out of it.

Nevertheless, a lot of our attention will continue to be devoted to the search of more effective and non-trivial, systemic responses to the crisis, including those involving cooperative efforts by the international community. Russia, as well as other leading world economies, has been adversely affected by the global crisis and is interested in finding such responses.

Let me now turn to the challenging topic of this session: “Power of innovation: When will tomorrow start?”
         
         

Innovation is a key driving force of economic development and growth in the modern world

The more one reads different studies and analyses about the current crisis and the way out, the more one can identify a set of key messages.  For example: 

  • future development will depend on domestic resources and savings rather than on unlimited continuation and expansion of freely available foreign financing,
  • it will in an increased degree depend on enhanced regional cooperation  and, notably that
  • the most valuable capital will be human capital, able to manage innovative, knowledge-based economy with environmentally-friendly policies, as growth multipliers creating the basis for countries’ competitiveness.

 

In a nutshell, knowledge and innovation are the prime factors of economic development and growth. In the modern world science, technology and innovation increasingly determine economic performance, the new employment opportunities and the competitiveness of industries and nations.

Innovation is thus a major source of competitive advantage, particularly in a fast changing environment where technological change and trade liberalization have been constantly increasing the scope for economic interaction. This creates opportunities but also challenges.

Innovation in the modern economies is a complex process, resulting from the interaction of multiple actors, including knowledge institutions, such as universities, companies and their customers and public authorities (at the local, regional and national levels).

The increasing sophistication of knowledge-generation and innovation has led to increased collaboration between companies and closer links between knowledge institutions and industry.

While competition is a major factor stimulating innovative activity, cooperation can further boost the generation and diffusion of innovation.

Innovation is not only limited to high-tech activities by new enterprises at the cutting edge of technology. Innovation can also be based on the use of existing technologies in different contexts. It can have a managerial, marketing or organisational character.

Successful enterprises are innovative enterprises that constantly adapt and rise to the challenges and opportunities of a fast changing world economy. Small and medium enterprises (SMEs), in particular, can increase the flexibility of the national economies to address these challenges. Facilitating the development of entrepreneurship nurtures the main forces of innovation and change.

Innovation has an important international dimension. Participation in international networks for the transmission of knowledge and technology is essential to sustain the innovative capacity of national economies. National innovation policies need to take into account this international context.          

Innovation is a risky activity, where returns are unproven and hard to predict. The level of risk and financing needs varies through the cycle of invention to mass commercialisation, but in any case, financing constraints can hamper the development of innovative activities.

Therefore, also the current crisis should be seized as a key opportunity to promote a knowledge-based innovative economy - and I would add with environmentally-friendly policies - as the basis of future growth. This new, post-crisis paradigm of development should thus find its adequate reflection in stimulus packages including tax incentives. We must be serious about taking such measures that would not only help create systemic conditions to heal and prevent re-emergence of crises, like the one of today, but that would turn this crisis into opportunity for growth and create conditions of future economic and social progress. This is essential for food-secure, energy-secure and water-secure real economy as a prerequisite for future human development and security based on knowledge, innovation and green investments.

Facilitating the access to appropriate financing now is crucial component of innovative entrepreneurship and innovation policies.         

The linkages between various actors involved in the innovation process and the attitude of these actors towards the associated risk depend on the existing system of incentives.

Establishing a system of incentives that stimulates innovative activities and the related interactions is thus an important ingredient of the policy environment for promoting knowledge-based development.

Public policy has a key role in driving the generation and diffusion of innovation

Public policies in a wide range of fields have a decisive influence in shaping the innovation system.

These policies have a key impact on the amount of public and private resources available for innovative activities but also on the efficiency with which these resources are able to generate commercially viable applications.

Some of these policies have a general significance but are nevertheless essential to create appropriate framework conditions where innovation can flourish.

These include, inter alia, the creation of the basic legal and institutional foundations for a well-functioning market economy and the definition and enforcement of the regulatory mechanisms to ensure fair market competition.

The public sector has a special role to play in the provision of quality education oriented towards future needs as well as infrastructure, which are critical for the generation and diffusion of innovation. Collaboration with the private sector in these fields can secure that public policies pay due consideration to business needs.

Proven modern financing arrangements such as public-private partnerships should be used more pro-actively to promote domestic and foreign investment.

In addition, the public sector can help the private sector to overcome the coordination problems that hamper innovation, working together to elaborate a common vision that translates into concrete shared strategies. The role of state in establishing such strategy and policies and in generating means of financing its requirements as well as in creating institutional and legal frameworks is crucial. It would be even more effective if such efforts could be a part of a coordinated strategy developed regionally and globally. As a good although not perfect example could serve the efforts of the EU and its Lisbon agenda, coupled with its environmental 20-20-20 agenda.

National and internationally-coordinated policies have a major role to play in creating an enabling environment for the development of new enterprises by innovative entrepreneurs. These include the definition of a legal and regulatory environment that reduces administrative barriers to entrepreneurship and avoids market concentration, thus preventing the weakening of competitive pressures. 

Usually, the benefits of an innovation can only be appropriated partially by the company that introduces it, while there is a positive externality associated with it.

However, the expected private return may not be a sufficient incentive for the firm to initiate the innovation and hence companies would not invest enough in activities fostering innovation. Policy interventions may be needed to correct for this market failure.

Public intervention can also provide direct support in the initial stages of enterprise development, facilitating access to vital business services. It can help to create a physical, organisational and cultural environment where these new firms benefit from synergies in its common development.

These supportive arrangements can take a variety of forms, with different degrees of public support, ranging from regional clusters to the creation of technology and science parks.

These policies may include directed targeted support but could also encompass public-private partnerships resulting in financing arrangements for innovative activities.

Financial development, including the depth and sophistication of capital markets, has a positive impact on innovation. Public policies need to create an enabling regulatory environment for efficient financial intermediation that encourages innovative development.

Appropriate definition and enforcement of intellectual property rights (IPRs) is an essential ingredient of an environment conducive to innovation.

IPRs create incentives to engage in innovative activities, providing a degree of protection that secures a return on the investment of successful innovators.

Allocation of IPRs among participants in collaborative research, sometimes with public funding, is an integral part of the creation of a suitable incentive structure that contributes to a positive outcome from these joint efforts.

The global economic crisis as a challenge and opportunity for innovative development

Let me once again underline - the global economic and financial crisis poses unprecedented challenges to policy makers and businesses with its prevailing focus on short-term recovery measures. It also has strong potential to adversely influence long-term innovation policies and innovative activities. We must not allow this to happen.

Short-term considerations and budget constraints often lead to the neglect of innovation policies. Innovation financing (from both private and public sources, as well as that related to FDI) faces additional constraints as a result of the global credit squeeze.

In particular, innovative start-up firms and SMEs – which have difficulties in raising finance for their development and growth anyway – are the most affected by these new financing constraints. In such an environment, there exist non-negligible risks of destruction of the future engines of economic growth.

Policy makers need to follow and assess these risks and design counteracting policy measures.

The current global economic and financial crisis has also brought to the forefront the vulnerabilities related to an excessive reliance on the extraction and exports of hydrocarbons and other natural resources in countries that are specialized in such exports.

The crisis have demonstrated that such economies are more susceptible to external shocks and have greater difficulties in putting in place policy responses and mechanisms of counteracting the negative effects.

At the same time, the crisis creates an opportunity for radical change in policies and business practices leading to an increased focus on innovation and knowledge-based development.

The crisis creates an environment in which the society is prepared to accept radical and sometimes painful changes if it sees that these are likely to improve the long-term economic prospects.

Thus, at present there are opportunities for: 1) an increased focus on knowledge-oriented policies as anti-crisis initiatives and policy responses; 2) an increased policy attention - nationally and internationally - to the development of strategies of economic diversification and enhancing the competitiveness of the non-energy sectors.

Economic diversification and innovative development are a long-term challenge that require a consistent and sustained policy effort and continued attention to the need to establish a business environment conducive to domestic investment.

On the other hand, strategies of economic diversification and knowledge-based development should be pursued: 1) rapidly but gradually building on firm foundations of inter-linked steps and measures; and 2) through the use of market-friendly policy measures which are aligned with the direction of the market forces and which facilitate – rather than counteract – the smooth operation of markets.

If these conditions are not met, such measures may backfire with market distortions and large fiscal imbalances.

The role of the UNECE in promoting international economic cooperation

The UNECE is one of five UN regional commissions whose mission is to facilitate economic development and integration among its member States. Membership covers 56 States: all European, Caucasian and Central Asian countries, the United States, Canada and the State of Israel. Its main areas of work cover: environmental policy; sustainable energy; transport; statistics; trade facilitation; promoting knowledge-based and innovative development.

The UNECE through its intergovernmental subsidiary bodies and expert networks is promoting an ongoing multi-stakeholder policy dialogue and exchange of good practices and policies. It also undertakes policy-oriented normative and other “soft” regulatory work in the above noted policy areas.

One important aspect of this policy dialogue is that the UNECE (and the UN system in general) offers a platform to all stakeholders to present their views on issues that concern them and to agree on common way forward, on common policy orientations.

This helps governments and national policymakers to make more informed choices in selecting policy options and reduces the risk of bias in these choices.

The UNECE promotes innovative development through international cooperation. International cooperation can make an important contribution in supporting innovation, through the cross-border pooling of efforts in joint projects, the exchange of best practices or the definition of standards that facilitate economic interaction and forward-looking strategic decisions by businesses.

The UNECE Programme on Economic Cooperation and Integration has as its objective to contribute to strengthening the competitiveness of our member States’ economies by promoting the knowledge-based economy and innovation.

International cooperation through our extensive expert networks (which include representatives of governments, academic institutions, the business community and NGOs) is instrumental in identifying good practices and policies supporting R&D, innovation and technological development. Innovation also features prominently in other areas of UNECE work such as trade facilitation, transport and others.

One example is the United Nations Centre for Trade Facilitation and Electronic Business (CEFACT) which facilitates the development of e-business standards that run across international boundaries and help lower business transaction costs worldwide.

Thus, by fostering and steering the cooperative efforts in these areas, the UNECE contributes to the strengthening of the knowledge foundations and innovative capacity of the economies in the region, and will further facilitate the generation and diffusion of innovation and knowledge-intensive technologies.

As already mentioned, international economic cooperation grows in importance during the global crisis. It is more productive for all partners in the global economic community to look at the current situation in a positive way, as a source of new opportunities.

The fact is that the crisis creates a need for immediate action and the measures to be taken may also become an opportunity for the global community, especially when they address long term concerns.

Knowledge-based, innovative development is one of the examples where internationally coordinated policy actions could have positive economic effect for all parties concerned, would shore up confidence in the short run and, probably even more important, will be beneficial to all of them in the long run.

Positive thinking regarding the possibilities to turn the current threats into new opportunities is key in discussing coordinated global responses to the crisis.

Moreover, in order to be balanced and equitable, such internationally coordinated global solutions have to be consistent with the prerequisites of sustainable global development, taking into account both the short- and long-term needs of the most vulnerable members of the international community.

The organizations within the United Nations family, including the UNECE, seek to promote exactly this type of philosophy in the international policy debate on the responses to the current global crisis. 

Finally, I would try to go back to the question proposed in the title of our today’s session, namely “When will tomorrow start?”

I am confident that if we do things right, if we do things jointly through cooperation and mutual support, if we look at the current crisis not as a problem but as opportunity to unleash new measures fostering knowledge-based green economy and development, we can start building tomorrow's foundations by innovating today. Tomorrow has indeed already started and who will miss this chance will loose its competitive edge and its future position in the world with all the adverse impact on its people and their needs, their secure future.

Thank you for your attention.