Innovative Flanders: Innovation Policies for the 21st Century: Report of a Symposium (2008)

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Session I— ———————————————————— Perspectives on the Flemish Innovation System Moderator: Charles W. Wessner U.S. National Research Council THE FLEMISH INNOVATION SYSTEM AND ITS COMPONENTS Peter Spyns Department of Economy, Science, and Innovation The Flemish Government Dr. Spyns began with a description of Belgium’s unique constitutional arrangements, which provide Flanders with significant autonomy in setting policies to encourage innovation. He outlined the policymaking apparatus that includes the Flemish Parliament, the Ministry for Economy, Enterprise, Science, Innovation, and Foreign Trade, and the Department of Economy, Science, and Innovation within the ministry. Advising the Flemish Parliament and the govern- ment is the Strategic Advisory Council for Economy, Science, and Innovation (VRWI). ­Moving beyond the policymaking apparatus, Dr. Spyns listed Flanders science and technology agencies, including the Fund for Scientific Research (FWO), a grant giving agency, and the Institute for the Promotion of Innovation through Science and Technology (IWT), which he described as a “one-stop shop for technological research and innovation support in Flanders.” These and other economic agencies, advisory councils, and technology assessment institutes pro- vide a framework for a complex innovation system. 37 

38 INNOVATIVE FLANDERS Flanders has a vibrant industrial sector. An open economy situated in the heart of western Europe, Flanders’ key industries include chemicals and pharma- ceuticals, auto manufacturing, food and beverage processing, and the diamond trade (among others). Stakeholder organizations include the Flemish network of Chambers of Commerce and Industry (VOKA) and Agoria, Belgium’s largest employees organization and trade association for the technology industry. Turning next to the education and research system, Dr. Sypns, listed ­Flanders’ 7 major universities in addition to 22 institutes of non-university higher educa- tion and other associations, private colleges, and research centers. Also active in this arena are the Flemish Interuniversity Council (VLIR), which is an umbrella consultation body between the Flemish universities and the ­Belgian authorities responsible for higher education and research, and the Flemish ­Council for Non- University Higher Education Institutions (VLHORA). Bridging innovation at universities and industry are several intermediary organizations. This includes strategic research centers like IMEC for semi­ conductor and nanotechnology, VIB for biotechnology, and VITO for environ- mental technologies; 11 competence poles to bring multidisciplinary focus to research in technologies related to food, logistics, materials, and cars; 15 centers for collective research that addresses the needs of traditional industries; and 5 university interface groups. In all, while Belgium’s federal structure provides strong regional autonomy to shape Flanders’s innovation system, sustained, high level attention to innova- tion policy by Flemish policymakers has been equally (if not more) important. The result, Dr. Spyns concluded, is a “relatively well-performing Flemish Inno- vation System.” Implementing and Monitoring the Flemish Innovation System Eric Sleeckx Flanders Institute for the Promotion of Innovation by Science and Technology (IWT) Mr. Sleeckx discussed evidence that money spent by the Flanders govern- ment on innovation is providing a good return on investment. He began with some key figures, including the annual budget provided by the government of €250 million, about €90 million of which goes to R&D projects at subsidy levels of 25-50 percent. An additional €15 million goes to about 400 innovation projects of small-to-medium-sized enterprises (SMEs), €37 million to “strategic basic research,” €7 million to higher education research, and €30 million to coopera- tive innovation networks. Altogether, he said, IWT works with about 150 large enterprises per year and 500 SMEs. 

SESSION I: PERSPECTIVES ON THE FLEMISH INNOVATION SYSTEM 39 He said that the rationale for public support of innovation was that govern- ment can and should compensate for inherent market failures that hold economies back. “Subsidies alone provide a kind of leveling,” he said. “But there is more and more pressure to prove that subsidies are active drivers of innovation, so we have a firm focus on additionality.” Positive Results from an IWT Study He summarized the results of an IWT study that supports this position. The study found that: • Firms invest 100 percent more on R&D when subsidies are available. • Firms considered innovative spend 53 percent more than non-innovative firms. • For IWT funding, the effect of €1 of additional funding leads to €0.85 to €1.34 in added R&D spending at the firm level. • The injection of public funds does not crowd out private investment, and the full amount of subsidies was spent for R&D. • The impact of the program was clearer for SMEs than for larger firms. He also posed the question, “Can government intervention cause firms to change the way they do R&D in a desirable direction?” Again, the answers, especially for SMEs, had been generally positive, including a series of prelimi- nary results: • Forty percent of R&D projects would not have occurred without subsidies. • Seventy percent of firms undertake regular R&D&I projects after receiv- ing IWT subsidies. • Firms that received subsidies tend to return to the program for additional subsidies. • Subsidized projects are more ambitious and of larger scale. • The program had positive effects for SMEs in involving external knowl- edge centers. • Firms may gain limited “competence additionality” (innovation skills), but these spilled over to non-subsidized projects. • Subsidies enabled firms to undertake desired R&D sooner. • Thirty percent of product innovations and 38 percent of process innova- tions would not have occurred without IWT subsidies. Kris Aerts and Dirk Czarnitski, “The Impact of Public R&D Funding in Flanders,” IWT Studies, 54. Access at <http://www.iwt.be/downloads/publications/observatorium/obs54.pdf>. 

40 INNOVATIVE FLANDERS He said that the IWT studies indicate that “it makes sense to subsidize R&D. In fact, the results seemed almost too good, so that additional checking will be done.” In general, however, he said that IWT had found that subsidies have a “clear and convincing positive impact on SMEs.” The evidence for large firms, he said, “was not as convincing.” He then described the Cooperative Innovation Networks (CINs), by which Flanders distributes its innovation support. These networks share the following characteristics: • Ideas are generated from the bottom up: Firms propose their own projects and request the support. • IWT was then subsidizing about 110 projects—typically of 4-year dura- tion, with the option of extension. • Some 250 innovation advisers are employed to offer support to these firms, at a cost of about €25 million per year. • About 85 different organizations take part in the networks, including federations, R&D centers, employers’ organizations, and “company clusters.” Evaluating a New System Again, Mr. Sleeckx reported considerable effort on evaluation. The evalu- ation system (“RAP”) reported on what each network did, and assembled web- based reporting of activities to judge how well each project was performing. Each project defined its target values for a subset of RAP numbers, and all activities were reported three times a year; e.g., a CIN reports 15 seminars, 45 company visits, etc. CINs are encouraged to include up to four success stories in their report. “The system has been running for about 3 years,” said Mr. Sleeckx. “It is working quite well and is accepted by project leaders.” The evaluation system, he said, reduced reporting efforts, shortened follow-up time for IWT, and allowed easy identification of problems. In a next step of optimizing the reporting for the CINs, IWT asked such ques- tions as whether they are hitting their target, what are the effects, and does the company use outside advice. It was not intended as a measurement of economic benefits for companies, but a way of judging whether the CIN is providing the right services. He concluded by listing seven best practices that have been identi- fied in building up this follow up system: • Developing the right tools and standardizing them are important for monitoring. • The tools must be developed in cooperation with the firm’s players or will not be used. • The focus must be on benefits for participants. 

SESSION I: PERSPECTIVES ON THE FLEMISH INNOVATION SYSTEM 41 • Communication and behavior by the administrators must be consistent. • Changes must be introduced step by step, since they require changes in culture. • IWT must give immediate feedback to companies to prove that the data are used. • IWT must add value to the data and return them to the reporting organizations. Discussion Dr. Wessner asked whether the R&D subsidies were given as salaries, tax rebates, or other forms. Mr. Sleeckx said in Flanders both of those forms are used; IWT provides only direct grants. A questioner asked what was expected from each company. The answer was that “they have to prove value for money. The rule is that they must generate at least ten times the money they get from us, or 25 times when abroad.” A par- ticipant asked how an American company would be expected to valorize money outside of Flanders. Mr. Sleeckx said that IWT subsidizes U.S. companies only within Flanders. Dr. Myers asked for more detail about specific economic failures and whether they had been corrected. Mr. Sleeckx answered that the results are hard to mea- sure, and would be more apparent in 5-10 years. Dr. Spencer asked about total R&D spending in Belgium. This is difficult to calculate, answered Mr. Sleeckx, although the country, like the rest of Europe, is targeting 3 percent of GDP for R&D. Some 2 percent would be spent by govern- ment and 1 percent by industry. The amount now is thought to be about 2.4 per- cent, at the same ratio, with some federal money included. Current EU Innovation Policy Challenges: From Lisbon to Louvain Luc Soete University of Maastricht, Netherlands & UN Univ-MERIT Professor Soete said that he would try to give an EU policy summary despite never having been an EU official. He reviewed some general features of EU inno- vation policy, saying that the EU framework for 2006-2007 had been launched with high expectations, including a new coordination mechanism called Open Method Coordination (OMC) for areas outside the European treaty. He said that there are areas of easy reform, and areas that are more difficult. The knowledge area was one of the easy areas, including R&D and innovation. At the EU level, on the other hand, areas of reform were moving at a rate of “slow to no,” espe- 

42 INNOVATIVE FLANDERS cially in areas such as constitutional reform, budget, institutions, service direc- tives, agriculture, and patents. The EU was experiencing the same competitive pressures felt by the United States, he said, notably global competition from the BRIC (Brazil, Russian, India, China) countries, which was increasing rapidly. Troublesome policy issues grew out of the activities of some competing countries that favored growth in ways that were non-democratic or environmentally unsustainable. China, in particular, had an enormous appetite for natural resources, with negative terms of trade for the EU. The EU, in turn, had the disadvantages of an aging workforce and a shortage of knowledge workers. The Need for Structural Reforms in Europe Meanwhile, Europe had strong needs for structural reforms, including a Lis- bon agenda to deliver welfare and employment. A large percentage of EU citizens were still in need of meaningful work, and economies needed more activities that added economic value. The EU’s productivity gains were lagging, as the industrial and services structure, encumbered by too many rules and regulations, had difficulty competing with emerging nations. The current rate of develop- ment in Europe seemed at present unsustainable, not just from an environmental perspective, but also because of the demands for social care and health care for an aging population. Internally, growth was unsatisfactory. Lisbon 2006 showed the striking lack of internal growth dynamics in the EU—a combination of apparently sound macro-economic policies but few incentives for structural reforms. Without growth-enhancing policies, he said, science and engineering knowledge capital was growing too slowly, leading to the emigration of scientists and engineers, lagging public investments in knowledge, and outsourcing of private knowledge activities. He cited the U.S. economist Richard Freeman, who had written that the EU, with 70,000 PhDs, should have a 1 percent higher growth rate than the United States, which has 40,000 PhDs. A Lag in Growth Rate Instead, the growth rate was lagging the United States by several measures. He said that labor productivity in particular had become a major issue. Labor productivity for the EU-15, as a percentage of U.S. labor productivity expressed in GDP per hour, had been rising for several decades, but this trend had slowed through the 1990s. In 1998 the EU had the same labor productivity as the United States. Since then it had declined in Europe and risen in the United States.  Trend growth of annual growth in GDP per hour worked, U.S. and EU-15, 1979-2004, van Ark, with Hodrick and Prescotte, 1987. 

SESSION I: PERSPECTIVES ON THE FLEMISH INNOVATION SYSTEM 43 Trend growth of annual growth in GDP per hour worked, US and EU-15, 1979-2004 with Hodrick and Prescott (1997) filter 3.5 US EU15 U.S. 3.0 2.5 2.0 Percent 1.5 EU -15 1.0 0.5 0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 FIGURE 1  The EU productivity growth slowdown. Historically, he said, Europe had reached01 end of catching up, and GDP Proc - Fig the per hour was now declining. In addition, Europe suffered a major per capita income gap in relation to the United States.caption?? Title -put in One factor causing this gap, he said, was the slowdown in European private R&D expenditures, “which appears struc- tural.” Industry in the United States spends twice as much on R&D as the EU25 member countries, and had increased until late 1990s. That gap had narrowed somewhat, but was still there. “It is clear,” he said, “and it is a structural gap.” He then criticized the “R&D obsession” of Europe, exemplified by the B ­ arcelona target of 3 percent of GDP. This target, he said, is “too narrow, too soft, and too passive.” He did agree, however, that the core problem for the EU was one of private investment in knowledge, especially tacit knowledge. Reliance on public funds, he said, was justified in the continental and northern EU countries from the perspective of equal access and was consistent with progressive income taxation; higher education, for example, was virtually free. However, over the 1990s, the tax burden had been significantly reduced for both businesses and high-income citizens, so that almost no one would pay a rate of more than 50 percent for all taxes. In fact, he said, “free” access to public knowledge resulted in increasing inequality and crowding out of private knowledge investment, which had no incentive to invest in the universities as long as they were so generously sup- ported by public money. And even this degree of public support was insuffi- cient. For while Europe has almost exactly the same number of universities and polytechnics as the United States, every university in Europe is underfunded by approximately half in comparison with those in the United States. “The primary 

44 INNOVATIVE FLANDERS need,” he said, “is to find incentives for the private sector and individuals to invest back into the universities.” Europe as a “Unique Social Laboratory” Professor Soete moved to a more general discussion of regional policies in Europe and the emerging importance of knowledge, which he said was essential at a time of decreasing social cohesion. “In fact,” he said, “there is so much varia- tion in the regions one could argue that knowledge is a replacement for social cohesion.” He called Europe a “unique social laboratory,” and urged greater speed in the ongoing shift from traditional industry to R&D and innovation policies with a strong impact on growth, structural change, and international competi- tiveness. This was happening far later than foreseen by many economists half a century ago, who predicted that a backward post-war Europe was likely to catch up in the 1950s. Even today, he said, Europe is held back by its complex web of customs, rules, and social expectations. The recent Aho Report was especially sharp in questioning European policies and structures, including the following criticisms: • Support of industrial/R&D/innovation policies is insufficient. • Support for those policies is further weakened by insufficient industrial renewal and industrial R&D investment. • The EU policy of funding projects until the country reaches its pre­ ordained level is arbitrary and detrimental (work on a bridge stops even if it is not finished). • Europe lacks large industrial complexes. • Standards and national regulations are fragmented. From a regional perspective, he said, four situations are needed for stronger growth and development, most of which are already in place in Flanders: The period 1950-1973 has been described as a “golden age” of Europe, including extraordinarily rapid economic growth based on heavy investment and enhanced social capability for growth. It has recently been suggested that more research is needed on the quality of human capital, openness of research capacity, and the role of institutions in influencing rates of return on investments. E.g., N. F. R. Crafts, “The Golden Age of Economic Growth in Western Europe, 1950-1973,” Economic History Review, 3:429-447, 1995. The Aho Commission, chaired by former Prime Minister of Finland Esko Aho, urged Europe’s leaders to take radical action on research and innovation “before it is too late.” In a report released January 20, 2006, it proposed a four-pronged strategy focusing on (1) the cre- ation of innovation-friendly markets, (2) strengthening R&D resources, (3) increasing structural mobility, and (4) fostering a culture which celebrates innovation. Access at <http://ec.europa.eu/ invest-in-research/action/2006_ahogroup_en.htm>. 

SESSION I: PERSPECTIVES ON THE FLEMISH INNOVATION SYSTEM 45 1. High-quality human capital formation. Core elements for Flanders, he said, were universities, polytechnics, and professional training schools, including lifelong learning programs. These emphasized high quality, reduced failure and dropout rates, improving attractiveness to students from other regions, and use of exchange programs as benchmark learning tools. 2. Open research practices. “IMEC is the clearest example of this,” he said. “Texas Instruments brings eight people here, and assumes that they learn as much as they ‘leak’. This openness attracts people.” It also strengthens the research pres- ence, stimulates joint public-private initiatives, benefits from “foreign” knowledge and collaboration, and strengthens the regional research infrastructure. 3. Stronger innovation performance. He emphasized the importance of sup- porting local science spin-offs and entrepreneurs, for which Flanders has created specific policies. Flanders also strengthened innovation by linking public research institutions, teachers, and local SMEs; embedding large multinational corpora- tions in the public research infrastructure; and sponsoring public information projects to explain innovation. 4. Regional capacity to absorb innovation. He emphasized Flanders’ support for regional “beta users,” or early adopters, in helping grow the seeds of innova- tion. Capacity absorption is also hastened by procurement policies, a regional presence abroad (e.g., at fairs), a focus on regional diffusion of knowledge, and cooperation with other “foreign” regions. Professor Soete concluded that regional innovation support policies, such as those of Flanders, will become ever more critical for Europe, especially to cata- lyze social cohesion among diverse countries. He called for more EU-sponsored fundamental and strategic research for all 25 member countries and a larger role for universities and research institutes in generating and applying technology. Through interaction and collaboration, he said, these “hotspots” will learn from each other and raise underutilized growth potential across national borders. This movement was likely to spread around the world, he said, as the notion of national competitiveness becomes outdated and gives way to “a world-wide explosion of technological hotspots.”