Can innovation solve the economic crisis?

Loh Hu 2/18/2013

In this paper, I examine how the theory of technological innovation waves could contribute to solving the ongoing economic crisis. Primarily, my stance remains that innovation in itself is insufficient to solve the economic crisis unless there exists a matching techno-economic paradigm where national, supranational and global efforts are coordinated for a full deployment of technological revolution.

Can innovation solve the economic crisis?

Background
There has been a wide international debate on the causes and possible solutions to the economic crisis that emerged in 2007 2008 (Ranga and Etzkowitz 2012). The economic crisis sweeps across the global financial system rapidly and furiously as markets are globally integrated (Gore 2010). Hence, the responses to the global economic crisis are not only enclosed within a nations or a coalition governments approach. Rather, a global coordinated response is warranted as well. Economic stimulus packages addressing short-term and long-term problems have been adopted in most countries as well as the European Commission (Ranga and Etzkowitz 2012). Internationally, the United States of America and European Union have recently been discussing on a free-trade agreement to remove trading barriers between the two important economic powers and boost the economies (BBC News Business 2013). Globally, the G-20 group of major economies have considered proposals on international financial regulation, anti-protectionism and economic support measures at the November 2008 summit (Ranga and Etzkowitz 2012). Although important national and international resources have been pumped into the stimulus packages, with some countries introducing fiscal packages of unprecedented size, evidence of its success today is mixed (OECD 2009). Despite reported successes, the impacts of the economic crisis are still present in the world economy. In fact, the economy of some countries in the European Union is worsening (Ranga and Etzkowitz 2012). This inevitably begs the question on whether the measures taken place are effective to reverse or stop the decline. In order to tackle the current economic crisis, many experts have gathered valuable lessons learnt from the Great Depression in 1930s (Almunia et al. 2009). While the current economic crisis is comparable to the Great Depression in 1930s in the sense that both crises fall within the phase of Kondratieff winter (Gore 2010), the current economic crisis is no longer specific only to the Industrial society. Rather, it is a downturn of both the Industrial and Knowledge society (Ranga and Etzkowitz 2012). The difference in the nature of the economic crisis from that of the Great Depression has significant policy implications. Besides increasing employment, new forms of job must be created to overcome the crisis (Ranga and Etzkowitz 2012). In addition, what overcame the Great Depression then was the employment boom brought about by the destructive World War II (Romer 1992). However, the history of worlds development tells us that wars generate more problems than they can solve (Hu 2009).

Waves of Technological Innovations

On the other hand, history has shown that technological innovations infuse new vitality into the economy and boost productivity, overcoming economic crisis (Hu 2009). Based on the theory of long waves, the current economic crisis can be understood from the point of view of technological progress as the end of the 5th Kondratieffs wave: the informational technological revolution (Smihula 2009). This is not just a financial crisis, but also a period where the applications of existing innovations from information and telecommunications revolution have been exhausted and a new wave of technological innovation is needed to revive the economy (Smihula 2009). Based on the growth and price cycles in the Kondratieff long wave together with the life cycle of technological revolution (Figure 1), it is suggested that a 6th wave could reboot the global economy (Gore 2010). The idea that Kondratieff long wave dynamics can be explained by the waves of technological revolutions was first supported by Schumpeter (Korotayev et al. 2011). Looking back at history, the previous four waves have each introduced a few leading sectors which offer low-cost inputs to a diverse extension of economic activities (Gore 2010). Innovations have been the initiating driver of technological revolutions which brought about a tremendous upswing of wealth-creating potential, making available a fresh set of related generic technologies and setting in motion a mirage of innovation possibilities and economic activities (Perez 2010). From this point of view, innovation is a solution to the economic crisis.

Figure 1 (Gore 2010)

Techno-economic paradigm
However, one should note that the contours of economic growth do not correspond to a single growth cycle because technological revolution does not happen simply from an introduction of new physical technologies (Gore 2010). The long wave rhythm is not a pre-determined automatic process that runs on its own with a consistent tempo (Gore 2010). The end of the wave could last for an indeterminate period of time (Gore 2010). In addition, there could be exogenous factors as well as policies that could add pro-cyclical or anti-cyclical pressures (Gore 2010). For a full deployment of a new technological revolution, there need to be a match between the techno-economic paradigm and the new group of technologies (Gore 2010). Therefore, innovation in itself is not enough to solve the economic crisis. Innovation has to be economically and socially relevant to drive technological revolution within a matching techno-economic paradigm (Perez 2010). Only then can the selfreinforcing application of the new matching paradigm on the technological revolution shape the rhythm and direction of innovation and revitalise the whole economy (Perez 2010). It is the technoeconomic paradigm that propagates and diffuses the impact of innovations across the economy, bringing about a technological revolution. Hence, the matching construction of the techno-economic paradigm plays a crucial role in allowing innovations to solve the economic crisis. A matching techno-economic paradigm requires a multifaceted collective learning process involving multiple agents of change who are guided by the best economic, organisational and technological practice during the new technological revolution (Perez 2010). The innovation has to be relatively cost-effective and evidently cheaper with progress; it should be of inexhaustible nature, offering widespread applications that will reduce the cost of capital and labour while enhancing the output (Perez 2010). Investment and innovation are also directed by the perception of profitable opportunity spaces (Perez 2010). For example, internet has transformed the infrastructure of finance and trade. In fact, internet has permeated into almost every function of every industry. Finally, the techno-economic paradigm should include a shift towards a set of matching principles of organisational practice such that the technology innovation can be efficient and effective from the viewpoint of organisational and business logic. The new shared common sense will then achieve maximum efficiency and profitability and its diffusion provides a common understanding among the different agents that participate in the economy, from producers to consumers. Hence, the assimilation of successive techno-economic paradigm will set in motion the 6th wave of technological revolution and consequently overcome the current economic crisis.

National Systems of Innovation

In addition, the process of innovation involves a web of interconnectedness among many agents and this has been conceptualised as the National Systems of Innovation (NSI) (Perez 2010). On a national

level, NSI with strong innovative capacity can reduce the effects of the crisis (Filippetti and Archibugi 2011). During the transition towards the deployment of technological revolution, there is a need to shift the focus of the economy from paper wealth to real wealth where employment, production and social responsibility are the objectives (Perez 2009). At the same time, the financial sector should profit from the success of the real economy in a responsible and competent manner (Perez 2009). A strong NSI is capable of supporting business and public R&D, while at the same time enhancing policies targeted at stimulating job market for skilled labour. This endows a strong NSI with the ability to direct the economy into a more robust and knowledge-intensive development path (Filippetti and Archibugi 2011). For example, an economic crisis can impose severe limitations on firms capability in R&D and retard or shut down ongoing innovation projects. However, by allowing these firms the access to public funding, the risk of them abandoning these investments will be mitigated (Paunov 2012). In addition, structural factors of NSI such as qualified human resource, years of accumulated stock of formal and tacit knowledge, availability of venture capital and private credit as well as specialization in the high-technology sector can alleviate the detrimental effects of the economic downturn on firms innovation investments all across Europe. As a case in point, Finland and Sweden whose NSI are strong, utilized counter-cyclical policies during the crisis of the early 1990s (OECD 2009). The two Nordic countries employed a three-pronged approach, combining different strategies of innovation-led expansion, macroeconomic stabilization and cost-savings. Such approach helped to integrate the radical expansion of innovation with supportive reforms in macroeconomic regulation, as well as improvements in social protection and employment regulation (Ranga and Etzkowitz 2012). Consequently, the post-crisis institutional strength of Finnish and Swedish economies retains its vigour and has confronted the current crisis with evident success (Ranga and Etzkowitz 2012).

Supranational Innovation System

Besides the national level, one should consider supporting innovation at the community level. Economic crisis is no longer a nations problem; the effects of economic crisis on one country will affect another. This is especially so in a supranational union such as the European Union (EU) (Rullan 2010). Currently there is a polarization of innovation capacity across EU members (Archibugi and Filippetti 2011). This technology gap jeopardizes the EU cohesion policy as the catching up member states will not be able to benefit from innovation knowledge generated elsewhere and thereby further widening the technology gap (Archibugi and Filippetti 2011). Within a perspective of increasing integration, a stronger and cooperative innovation policy is called for at the level of European Innovation System (Archibugi and Filippetti 2011). There is a need to focus on investment in knowledge diffusion and absorption capacity (Archibugi and Filippetti 2011). Although the United

States of America faces similar internal disparities, American NSI has consolidated mechanisms for knowledge and technology transmission to support a knowledge economy (Archibugi and Filippetti 2011). In addition the American NSI system ensures coherent institutional settings across all states. For example, their standardized education system and science, technology and innovation (STI) policies homogenizes the labour market which drives knowledge diffusion (Archibugi and Filippetti 2011). These are relevant innovation policies that the European Innovation System can implement so that knowledge and human resource can be mobilized and made available across the whole of EU. A proposed innovation solution is to conduct large-scale European projects to place the EU at the frontline of scientific research and increase absorptive capacity for future technological development (Archibugi and Filippetti 2011). Therefore, supranational union such as the EU must play a role for innovation to solve the economic crisis.

Global Efforts
Apart from the supranational unions coordination efforts on innovation, a global effort for international coordination is required as well. The global crisis has resulted international trade, access to international financing and foreign direct investment to plummet and affect the global value chains which is an essential source for innovation (OECD 2009). Global value chains afford companies the technical expertise, important business connections, understanding of foreign markets, and global partners (OECD 2009). The current restrictions in investment and trade flows might impose severe penalties on knowledge transfers and innovation at the international level (OECD 2009). The fact that investments in innovation is increasingly internationalised and non-OECD member countries such as China and India are playing a progressively important role in the global innovation system, fiscal stimulus plans will often have international spill-overs (OECD 2009). However, most stimulus packages focus heavily within a national context. Stimulus packages should be coordinated internationally for areas where spill-overs are evident such as R&D and green technology (OECD 2009). Hence, national stimulus packages should steer a clear direction in international co-ordination, specifically the mechanism on how to employ international long-term projects efficiently.

Conclusion
In conclusion, the current economic crisis is not simply a financial crisis where manipulation of the paper wealth can be a sustainable solution. In our current knowledge economy, innovation presents itself as the robust solution to solve the economic crisis; as long as it is embedded within a matching techno-economic paradigm and that there are coordinated national, supranational and international efforts to support the next wave of technological revolution.

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