Key messages to policymakers from the 2015 OECD Innovation Strategy - The Innovation Imperative: Contributing to Productivity Growth and Well-Being.

1. The Innovation Imperative – Main Messages

2. Outline
1. Why innovation matters
2. Investing in innovation
3. Research and innovation policies
4. Entrepreneurship and experimentation
5. Benefiting from digitalisation
6. Skills and innovation
7. Governance and implementation
8. Some conclusions

3. 1. Innovation is one of the main drivers of
economic growth, …
Innovation is a key driver of
growth, through:
1. Technology embodied in
fixed capital, e.g. ICT
2. Investment in
knowledge-based capital
(later slides)
3. Productivity growth due
to innovation (MFP)
4. Its impact on creative
destruction and business
dynamism (later slides)
Innovation’s role will have
to grow in future, e.g. due
to ageing populations.
Figure 1. Contributions to GDP growth
Total economy, annual percentage point contribution,
1995-2013
Source: OECD Productivity Database, January 2015, and OECD
(2015a), OECD Compendium of Productivity Indicators, 2015,
http://www.oecd.org/std/productivity-stats/oecd-compendium-
of-productivity-indicators-22252126.htm .

4. Source: OECD calculations based on data extracted from the EPO Worldwide Patent Statistical Database (PATSTAT, October 2011) using
algorithms developed at the OECD and the EPO. See OECD (2012) Energy and Climate Policy and Innovation: Bending the
Technological Trajectory, OECD Publishing. (www.oecd.org/environment/innovation)
Note: The figure shows patenting trends in selected environmental technologies compared to all sectors. Patent counts refer to the number of
"claimed priorities", by the first filing date worldwide, shown as 3-year moving averages and indexed on year 2000.
4
… a driver of green and sustainable growth, …
Trends in selected “environmental” technologies

5. Source: Based on OECD, 2014a, All on Board: Making Inclusive Growth Happen, OECD, Paris,
http://dx.doi.org/10.1787/9789264218512-en 5
… and makes direct and indirect contributions to
wellbeing (e.g. health, education and incomes)
Innovation in the OECD Framework for Inclusive Growth
Outcomesand their
distribution:
Livingstandards:
Income
Health
Jobs
Housing
Other dimensionsof
Well-being:
Education
Safety
Env. quality of life
Work-lifebalance
...
Welfare function
depending on outcomes
Production
functionorprocess,
creative
destruction
Policies
Economic
Financial
Competition
Labour
Social
Health policies
Education
Innovation
Environment.
Trade
Investment
policies
Returns onphysical ,
knowledge and human
capital,supply of jobs …
Other drivers(institutions;norms;
exogenous factors)
Demand for products and
services, opportunities
and well-being
Policies affecting the
productionprocess,
e.g. economic,
innovation or
environmental.
Policies directlyaffectingwell-being,e.g. education, innovation, health,social,
and tax policies.

6. Business investment in knowledge-based capital (KBC) and in tangible
assets in the United States (% GDP, 1972-2011)
6
2. A growing share of business investment is
related to innovation …
4%
6%
8%
10%
12%
14%
16%
18%
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Investment(%ofadjustedGDP)
Investment in KBC
Investment in tangibles
Source: Unpublished update of Corrado, C.A. and C.R. Hulten (2010), “How do you Measure a ‘Technological
Revolution?”, American Economic Review: Papers & Proceedings 100 (May 2010): 99–104.

7. Business investment in fixed and knowledge-based capital
(as % of business sector gross value added, 2013)
Source: OECD calculations based on INTAN-Invest data, www.intan-invest.net and OECD, Structural Analysis
(STAN) Database, http://oe.cd/stan, June 2015. 7
… and knowledge-based capital now accounts
for over half of all business investment.
0
5
10
15
20
25
30
35
%
Non-residential GFCF including machinery and equipment KBC assets in National Accounts including software and R&D
Other KBC assets including organisational capital and training

8. Good framework policies are associated with
investment in innovation
Source: Andrews and Criscuolo (2013), http://www.oecd-ilibrary.org/economics/knowledge-based-capital-
innovation-and-resource-allocation_5k46bj546kzs-en

9. Investment in innovation: key messages
• Business investment in innovation is more than technology
and R&D – complementarities between R&D and
other assets, and policies affecting those, e.g. data,
design, management, organisational capital, are key.
• As new KBC assets grow in importance, so do the
framework conditions affecting them – policies for
IPR and data need updating for 21st century innovation.
• Investment in innovation requires sound
framework policies, enabling resources to flow to
productive, innovation-intensive activities.
• Public investment is complementary to private
investment in some areas, e.g. R&D, education and
broadband networks.

10. 3. Governments use different approaches to
support business innovation, …
Direct funding of business R&D and R&D tax incentives,
as a percentage of GDP, 2013
Source: OECD, R&D Tax Incentive Indicators, www.oecd.org/sti/rd-tax-stats.htm and
Main Science and Technology Indicators, June, 2015, www.oecd.org/sti/msti.htm
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
%
Direct government funding of BERD Indirect government support through R&D tax incentives Data on tax incentive support not available

11. .. and give different priorities to investment in
public research, …
Public R&D expenditure by type of research system
HERD and GOVERD, as a percentage of GDP, 2013, and total HERD and GOVERD in 2007
Source: OECD, Main Science and Technology Indicators, June 2015, www.oecd.org/sti/msti
0.0
0.2
0.4
0.6
0.8
1.0
1.2
%
HERD GOVERD Total HERD and GOVERD, 2007

12. 12
… where it is not always obvious what to fund

13. Innovation and research: key messages
• OECD countries have increasingly emphasized R&D tax
incentives in their support for business innovation,
but these are not well suited to young firms and can amplify
cross-border tax planning strategies of multinational firms
• Well-designed direct support, e.g. competitive grants,
support for Fraunhofer Institutes, accelerators, etc., are
better suited to strengthening innovation capabilities.
• Need for long-term and stable investment in public research,
notably basic and mission-oriented research – avoid risk of
short term focus and fragmentation
• Important to balance breakthrough and incremental
innovation, explore new ways of making more
informed strategic choices.

14. 14
4. Business dynamism matters - young firms
create new opportunities …
Contributions of young firms to employment, job creation and job destruction, 2001-2011
Source: Criscuolo, Gal and Menon (2014), www.oecd.org/sti/dynemp.htm

15. … but scaling of young innovative firms is a
challenge in many countries …
Average size of start-ups and old firms, in persons employed, services sector
Source: Updated from Criscuolo, Gal and Menon (2014), www.oecd.org/sti/dynemp.htm
0
10
20
30
40
50
60
70
80
Employees
Start-ups (0-2) Old (>10)

16. … as resources in some countries don’t flow to
the most innovative firms
Change in capital stock associated with a 10% change in patent stock (2003-2010)
Source: Andrews, Criscuolo, and Menon (2014), http://www.oecd-
ilibrary.org/economics/do-resources-flow-to-patenting-firms_5jz2lpmk0gs6-en.

17. Strengthening entrepreneurship and fostering
business dynamism: main messages
• Enable experimentation and firm growth: Reduce barriers
to entry (e.g. red tape), growth (e.g. size-specific regulations), and
exit/failure of firms (e.g. penalising bankruptcy legislation, overly
strict employment protection legislation).
• Stop favouring incumbents - keep the unborn in mind:
Many policies favour incumbents (e.g. R&D tax credits, some
environmental regulations, incumbent subsidies that delay exit).
• Strengthen the eco-system for young innovative firms,
e.g. through enhanced access to (risk) capital, network
development, mentoring of entrepreneurs, skills development, etc.
• Reduce trade barriers, so firms can scale more easily across
borders.
17

18. 5. The spread of digital technology is now almost
universal, both in society…
Internet users by age, 16-24 and 65-74 year-olds, 2014
(as a percentage of population in each age group)
Source: OECD, Digital Economy Outlook 2015, http://dx.doi.org/10.1787/888933224896
0
20
40
60
80
100
% Total users 16-24 year-olds 65-74 year-olds

19. … and in business
Broadband connectivity, by size of firm, 2010 and 2014
(Percentage of enterprises in each employment size class)
Source: OECD, Digital Economy Outlook 2015, http://dx.doi.org/10.1787/888933224829
50
60
70
80
90
100
%
All enterprises, 2014 10-49 50-249 250+ All enterprises, 2010

20. • Foster an appropriate business environment, by:
– Fostering investments in broadband & the Internet of Things
– Removing unnecessary regulatory barriers
– Addressing market concentration & barriers to competition.
– Preserving the open Internet and the free flow of data
• Enhance trust in the digital economy, by:
– Addressing privacy and security concerns
– Improving consumer protection
• Ensure that the benefits are widely shared, by:
– Strengthening skills for the digital economy
– Facilitating adjustment
– Fostering inclusion
20
Benefiting from the digital economy: main
messages

21. 6. Skills are a major challenge for the
innovation-intensive economy …
Less than 40% of adults have the skills to succeed in a technology-rich
environment
(Percentage of 16-65 year-olds scoring at proficiency levels 2 and 3)
Source: OECD Survey of Adult Skills, October 2013, http://skills.oecd.org/OECD_Skills_Outlook_2013.pdf .

22. • Develop the skills necessary for a technology-rich
environment. Beyond subject-specific expertise, this
includes creativity, critical thinking, entrepreneurship and
communication.
• Create an environment that enables individuals to
choose and acquire appropriate skills and supports
the optimal use of these skills at work, based on the
OECD’s 2013 Skills Strategy.
• Address skills mismatches, that present a barrier to the
growth of innovative firms.
• Remove gender biases and fostering the participation of
women in science and innovation.
• Facilitate the development of linkages and networks
among researchers and innovators across countries. Ensure
that migration regimes for the highly skilled are efficient,
transparent and simple, enabling movement on a short-term
basis.
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Skills for innovation: main messages

23. 7. Governance and implementation: main
messages
• Governance: Developing a national strategy requires early and
adequate involvement of key stakeholders. Moreover, policies
makers need to ensure that the full set of government policies that
affect innovation are well aligned.
• Building trust and managing risks: Build trust in government
action and ensure the support of stakeholders for policy actions.
Develop a policy and regulatory environment that manages the risks
associated with innovation.
• Implementation and evaluation: A commitment to monitoring
and evaluation of policies, and on learning from experience and
adjusting policies over time, can help ensure that government action
is efficient and reaches its objectives at the least possible cost. Better
measurement of innovation outcomes and impacts is essential.
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24. 8. A comprehensive agenda for policies for
innovation – more than innovation policy
1. Improved policy frameworks for investment in innovation
2. Effective research and innovation policies, modelled on good
practice
3. Policies that enable entrepreneurship and foster business
dynamism – allow new firms to fail or scale and encourage
unproductive firms to exit
4. A strong digital innovation agenda
5. A broad and inclusive skills strategy
6. Focus on governance, evaluation and policy learning
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25. Contacts and further information
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@OECDinnovation
Website: oe.cd/innovation
Newsletter: www.oecd.org/sti/news.htm
Contact: Dirk.Pilat@oecd.org