The example of the Innovation Scoreboard

As emphasised above, quantitative measures of innovation activity such as R&D spending and numbers of patents granted have limitations because they do not capture all innovative activities and because it is not possible to distinguish between commercially successful innovations and others. A dif-ferent and complementary insight into the innovation process can be gained from survey evidence. The EU has performed surveys in this area for some years, and the Community Innovation Survey (CIS) includes Norway in the sample.

Figure 1.3. Evolution of innovation activities in European countries

0.80

Average growth rate of SII

2006 Summary Innovation Index (SII) Trailing

Catching-up

Source:European Innovation Scoreboard 2006.

CIS data are also used as one input into the EU’s annual European Innovation Scoreboard. Their synthetic indicator, the summary innovation index (SII) puts Norway below the EU25 average in 2006 (and the EU25 average is well below the US and Japanese scores) Almost all of the countries below Norway are the newer and/or poorer EU countries. More worryingly, Norway’s performance on this synthetic indicator has deteriorated significantly over the years. Only Turkey has slipped faster, and most of the countries that were below Norway in 2006 have improved their performance (Figure 1.3). The synthetic indicator is built up from 25 individual indicators, which can be broadly divided into five categories, ranging from innovation drivers to IPR (Table 1.5). Interestingly, Norway scores high only on inno-vation drivers, for which the components include several of the framework conditions for innovation discussed below. Norway rates poorly in the other categories. It also performs poorly on converting innovation inputs into outputs.

The mediocre Norwegian results on the SII, as on the indicators dis-cussed above (which are some of the components of the SII), seem puzzling at first glance, given Norway’s undoubtedly good economic performance and the evidence from the total factor productivity data, which imply a high level of process innovation, especially in the services sector. One factor behind the low scores is that some (e.g. R&D spending) are calculated as a percentage of nominal GDP, and Norway’s nominal GDP has increased strongly in recent years due to the rapidly growing value of petroleum exports. However, this can only be a short-term and partial explanation, as R&D and other innovation investments along with other components of the SII should be expected to increase along with income.

A closer examination of the sub-components of the SII index shows that:

x Within the “innovation drivers” category, and relative to the advanced EU countries, Norway scores:

High on population with tertiary education, broadband penetration rates, lifelong learning and youth educational attainment.

Low on new science and engineering graduates.

x In the “knowledge creation” category, Norway scores:

High on public R&D spending.

Low on business R&D, and share of medium-/high-technology R&D.

x In the “innovation and entrepreneurship” category, there are not enough reporting countries to make an accurate comparison, but Norway scores below Sweden and Finland in all sub-categories.

x In the “applications” category, relative to the EU15 average, Norway scores:

High in high-technology service employment.

Low in medium-technology and high-technology manufacturing employment, and very low in sales of new-to-market products and high-technology exports.

x In the “intellectual property” category, Norway scores:

Low in each sub-category (patent applications domestically or abroad, EU trademarks – even lower than the United States – and EU-registered industrial designs).

The picture that emerges is a consistent one: Norway has supportive framework conditions for innovation, especially as regards the skills level of the adult population, which helps to explain why its productivity performance is comparatively strong, especially in services. Financial support from the public sector is also a positive factor. But innovation activity in manufac-turing has been weak. There is not much R&D spending, particularly in high-technology manufacturing, and very low sales of new-to-market products.

The low scores on patent and trademark applications also support this hypo-thesis: manufacturing firms are more likely than service firms to seek patent protection, if only because goods are easier to define and describe precisely than services.

Insofar as innovation activity is weak in Norway, the weakness seems to be in the manufacturing sector. As noted above, low spending on business sector R&D can be “explained” by the country’s industrial structure. When this is adjusted for, Norway’s R&D spending looks comparatively robust in international comparisons. The fast growth of productivity, and especially of multifactor productivity, in the private services sector implies robust innova-tion activity in this sector. It is likely that standard indicators of innovainnova-tion are less reliable for the services sector than for manufacturing.

Table 1.5. Components of theEuropean Innovation Scoreboard summary indicator Norway’s rank in brackets

Inputs – (a) Innovation drivers:

i) Science and engineering graduates as a percentage of 20-29 age group(low) ii) Population with tertiary education as a percentage of 25-64 age group(high) iii) Broadband lines per 100 population(high)

iv) Participation in life-long learning as a percentage of 25-64 age group(high) v) Percentage of 20-24 age group with at least upper secondary education(high) Inputs – (b) Knowledge creation

i) Public R&D spending as a percentage of GDP(medium-high) ii) Business R&D spending as a percentage of GDP(low)

iii) Medium-high- and high-technology R&D as a percentage of manufacturing R&D spending(low) iv) Percentage of enterprises receiving public funding for innovation(high)

Inputs – (c) Innovation and entrepreneurship

i) In-house innovating SMEs as a percentage of all SMEs(low)

ii) Innovating SMEs co-operating with other SMEs as a percentage of all SMEs(medium) iii) Innovation spending as a percentage of turnover(low)

iv) Early-stage venture capital(medium)

v) ICT spending as a percentage of GDP(medium-low)

vi) SMEs using organisational innovation as a percentage of all SMEs(low) Outputs – (a) Applications

i) Employment in high-tech services as a percentage of total workforce(medium-high) ii) High-tech exports as a percentage of total(low, including adjusted for oil) iii) Sales of new-to-market products as a percentage of turnover(very low) iv) Sales of new-to-firm products as a percentage of turnover(low)

v) Employment in medium-high and high-technology manufacturing as a percentage of total workforce(low) Outputs – (b) Intellectual property

i) EPO patents per million population (low) ii) USPTO patents per million population (low) iii) Triadic patent families per million population (low) iv) New EU trademarks per million population (very low) v) New EU industrial designs per million population (very low)

Source: European Innovation Scoreboard 2006: Comparative analysis of innovation performance, www.proinno-europe.eu/index.cfm?fuseaction=page.display&topicID=5&parentID=51.

The policy implication is that there is considerable leeway for raising the level of innovation in manufacturing, the sector that will be mostly responsible for financing imports once the oil and gas runs out. The frame-work conditions are largely in place (see section 1.2), and the combination of low levels of protection and a strong real exchange rate should be putting pressure on firms to innovate to survive and prosper. If they do and if conditions are conducive to growth, they will grow. Large firms typically spend more on innovation than smaller firms. Up to a point, this may be because large firms were once small firms that spent a lot on research, and grew bigger as a result. But another reason is that their range of activities and scale of production can justify financing a research department.

Consideration should be given to examining obstacles to firms’ growth. As in many OECD countries, SMEs receive favourable treatment in terms of public support and employment regulations. But the support should not be so generous that it discourages expansion.

It seems clear that innovation activity in private services is healthy. It is not clear how much is imitation of best practice abroad (or at home) and how much is based on new ideas developed in Norway. But this is of secondary importance. What matters is that the sector is making active efforts to reduce costs and increase sales by adopting new techniques. As in other countries, this sector is expanding rapidly in terms of job creation – despite dynamic productivity gains – and value-added. It is important for the system of loans, grants and fiscal incentives for innovation to give equal treatment to this sector. This may necessitate changes in how requests for aid in this sector are vetted, given that it is often difficult to be precise about the expected gains in type or quality of service.