Is your country ready for open innovation?

As technologies become increasingly complex, many companies rely on open innovation to bring products to market. Governments can take measures to encourage open innovation and improve their countries’ position on the world stage

In today’s knowledge economy, competitiveness is largely based on innovation. However, as innovation becomes increasingly complex – often, several different technologies are required to get just one product ready for market – companies that do not possess all of the necessary R&D skills themselves are being forced to rely on open innovation shared with public research organisations and other companies.

Several economic studies have discussed open innovation policies and how different approaches can affect a company’s performance. From these, four distinct types of open innovation culture have emerged, with companies tending to fit into one of the following categories:

  • technology broker;
  • technology sponge;
  • technology isolationist; or
  • technology fountain.

This article transposes these categories to a country-wide level, asking whether different approaches to open innovation affect the performance of countries.

It is certainly the case that public policies and funding targeted at R&D can have a significant effect on a country’s innovation performance. But how can this be measured? ‘Innovation’ is generally defined as the successful exploitation of a new idea. For companies, this results in increased industrial activity, jobs, net benefit and turnover. The latter two factors have been taken as a measurement of a company’s open innovation performance (average return on sales) (Ulrich Lichtenthaler, Martin Hoegl and Miriam Muethel, “Is your company ready for open innovation”, MIT Sloan Management Review, Fall 2011, VOL 53, N 1; Reprint number 53109). Successful exploitation for a country should result in an increase in manufacturing added value for gross domestic product (GDP) for technology fields that have been supported by public funding and policies. Moreover, in a globalised world where the number of trade exchanges has exploded since 2000 (according to World Bank statistics, from $8 trillion in 2002 to $18 trillion in 2008), high-tech products resulting from this innovation are sold worldwide, which can positively affect a country’s global trade balance. In other words, a country’s global trade balance is a key indicator of the soundness of its public policies and the targeting of funding designed to support R&D and innovation.

Open innovation is based on technology transfer, which relies on two types of IP licensing: in-licensing and out-licensing.

We therefore propose defining the type of open innovation approach at country level based on a country’s global inflow and outflow of IP rights, and analysing whether the four categories listed above are relevant to countries – in particular, with regard to the performance of innovation, as measured by a country’s global trade balance.

The facts on in-licensing and out-licensing have been taken from the World Bank’s 2009 statistics (World Bank Statistics: Royalties and licenses fees payments, Royalties and licenses fees receipts; 1988 to 2010/2009).

Royalties, licence fee payments and receipts

Payments are the IP rights inflow – money goes out, IP rights go in (ie, IP rights absorption); and receipts are the IP rights outflow – money goes in, IP rights goes out (ie, IP rights diffusion). When positive, the difference between outflow and inflow is known as ‘IP rights leak’; when negative, it is known as ‘global net IP rights absorption’.

The study focuses principally on eight countries, all of which are world leaders in terms of innovation, GDP and patent filing: South Korea, Canada, China, Germany, Japan, the United Kingdom, France and the United States. Other countries – Austria and Singapore – are also discussed.

IP rights inflow and outflow are listed for those countries in Table 1. IP rights leak compared to GDP for nine countries is then illustrated in Figure 1

Figure 1. IP leak compared to GDP

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Four distinct types of innovation culture

Technology broker

Countries with both a high IP rights inflow or outflow (compared to GDP) and low IP rights leak (compared to GDP) are defined as ‘technology broker’ countries. A typical example is Germany. Such countries have a balanced approach towards open innovation and engage in active IP rights diffusion to other countries, while actively absorbing technology from other countries.

They tend to have an IP rights leak close to or lower than 5x 10-4 or net global absorption lower than 5x 10-4. IP rights inflow and outflow are greater than 40x 10-4.

Technology sponge

Countries with a high negative IP rights leak (ie, positive net absorption) are defined as ‘technology sponge’ countries. Examples are numerous and include Canada, South Korea, China, Singapore and Austria. Such countries always have a high IP rights inflow (compared to GDP) and low IP rights outflow. They actively absorb foreign countries’ technologies without diffusing their own technologies.

They tend to have a net IP rights absorption (negative IP rights leak) greater than 10x 10-4.

Figure 3. IP leak, global trade balance and manufacturing added value as a percentage of GDP

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Technology isolationist

Countries with a moderate IP rights leak and a moderate IP rights inflow or outflow (compared to GDP) are defined as ‘technology isolationist’ countries. A typical example is Japan, which relies mainly on internal innovation.

Such countries tend to have an IP rights leak between 5 and 10x 10-4 and IP rights inflow or outflow lower than 40x 10-4. For example, Japan’s IP rights inflow/GDP is one-third lower than Germany’s.

Table 2. Manufacturing added value by country (technology sponge countries, % of GDP)

Country

Manufacturing added value, % GDP

China

32

Korea

28

Singapore

22

Technology fountain

Countries with a high IP rights inflow (compared to GDP) and IP rights outflow are defined as ‘technology fountains’. Examples include the United Kingdom, the United States and France. These countries actively transfer part of their internal own technology, but absorb little external technology – in effect, transferring the IP crown jewels out of the country.

Such countries tend to have an IP rights leak greater than 10x 10-4.

Table 3. Manufacturing added value by country (fountain countries, % of GDP)

Country

Manufacturing added value, % GDP

UK

11

France

11

USA

13

Implications for global trade balance

One might expect that a country’s global innovation policies would have an impact on the global trade balance, in much the same way as an industrial company’s innovation policy has an impact on sales.

Figure 2 superimposes IP rights leak on percentage of GDP and global commercial balance and percentage of GDP. This illustrates that:

  • technology broker countries (eg, Germany) have a high positive value for the ratio between global trade balance and percentage of GDP;
  • technology sponge countries (eg, South Korea, Singapore, China and Canada) have high positive values for the ratio between global trade balance and percentage of GDP;
  • technology isolationist countries (eg, Japan) have a low value for the ratio between global trade balance and percentage of GDP; and
  • technology fountain countries (eg, France, the United Kingdom and the United States) have a high negative value for the ratio between global trade balance and percentage of GDP.

Table 1. IP rights inflows and outflows compared to GDP, in US dollars

Country

IP inflows (billions $)

IP outflows (billions $)

GDP (billions $) (2009)

IP inflows /GDP

(x 10-4)

IP outflows /GDP

(x 10-4)

IP leak (billions $)

IP leak/GDP

(x 10-4)

Singapore

15.9

2

250

636

80

-13.9

-556

Korea

9.0

3.2

832

108

38.46

-5.8

-46

Canada

8.7

3.4

1340

64.9

25.3

-5.3

-33.6

China

11.1

0. 43

5745

19.32

0.75

-10.67

-18.55

Austria

1.4

0.75

300

46.7

25

-0.65

-14.5

Germany

15.0

16.34

3300

45.45

49.5

+1.34

+ 5

Japan

16.83

21.7

5400

31.11

40.55

+4.87

+ 8.98

UK

9.5

12.9

2170

43.8

59.44

+3.4

+ 12.9

France

5.2

9.3

2555

20.35

36.4

+4.1

+ 16.05

USA

33.4

105

14600

22.88

71.9

+71.6

+ 44.18

Impact on manufacturing added value and percentage of GDP

Technology broker countries implement public innovation policies resulting in strong inbound and outbound innovation. Globally, these countries keep a major part of the industrial value chain (the part with the greatest added value) internal when they outsource. This maximises the global cost-competition-innovation balance. Globally, they keep a high part of the manufacturing added value as a percentage of the national GDP (eg, in Germany this is 21% and in Austria it is 20%).

Technology sponge countries absorb a large amount of external IP rights and transform these into national product manufacturing and jobs. This results in high positive trade balances and a high manufacturing added value in GDP (the World Bank’s statistics for manufacturing added value and percentage of GDP, 2010; see Table 2: manufacturing added value and percentage of GDP for three technology sponge countries).

Both technology broker countries and technology sponge countries have strong and sound industrial policies: they strongly believe that high manufacturing added value in GDP is important for GDP growth, social welfare and national employment.

Technology isolationist countries do not benefit from outbound innovation coming from other countries and, as a result, have a low value for the ratio between global trade balance and percentage of GDP (eg, Japan).

Technology fountain countries (eg, France, the United Kingdom and the United States) massively diffuse their IP rights to other countries, outsourcing a large amount of manufacturing and jobs. They then buy in the resulting products, leaving them with a huge negative global trade balance. These countries fail to keep a sufficient part of the industrial value chain internal, which also leads to a massive fall in the percentage of GDP made up of manufacturing added value (see Table 3: manufacturing added value and percentage of GDP for three technology fountain countries).

Technology broker countries and technology sponge countries generally have high manufacturing added value in GDP. Technology fountain countries generally have low manufacturing added value in GDP.

Figure 3 then shows IP rights leak as a percentage of GDP, the global commercial balance as a percentage of GDP and manufacturing added value as a percentage of GDP.

France – a technology fountain country

French IP rights leak and global trade balance are mapped against one another in order to analyse these two data streams during the period between 1995 and 2010 (see Figure 4).

Figure 4. France, IP leak and global trade balance, 1995-2011

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Before 2000, France was a technology broker country with little global negative IP rights leak (ie, IP rights absorption). The global trade balance was then positive.

Since 2003, France has become a technology fountain country, with a high IP rights leak since 2005 resulting in a huge negative trade balance.

Globally, $1 billion of IP rights leak in France has resulted in €10 billion of negative trade balance.

The same analysis was carried out for another technology fountain country – the United Kingdom (see Figure 5). The conclusion is just the same as it was for France: $1 billion of IP rights leak has resulted in €10 billion of negative trade balance.

This rule is true for all technology fountain countries.

Figure 5. United Kingdom, IP leak and global trade balance, 1998-2011

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Germany – a technology broker country

Germany had a low IP rights leak compared to GDP (5x 10-4) in 2009 and 2010, but a low IP rights net global absorption compared to GDP (-5x 10-4) in 2007 and 2008. Moreover, before 2009 Germany had always had low IP rights global absorption. In any case, Germany was a technology broker during these years and had a huge positive trade balance.

Figure 6. China, IP leak and global trade balance, 2002-2010

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China – a technology sponge country

IP rights leak as a percentage of GDP and global trade balance as a percentage of GDP are mapped together in Figure 6.

This illustrates that the global trade balance in China is about 20 times the rate of IP absorption.

Defining innovation policies

Technology fountain countries tend to have had poor industrial policies for several decades. They generally believe that the fall of industry-added value in GDP can be compensated for by the increase of service-added value in GDP. However, as stated in many reports (eg, Philippe Aghion, Gilbert Cette, Élie Cohen and Mathilde Lemoine, 2011, “Crise et croissance: une stratégie pour la France”, Conseil d’Analyse Economique), over 80% of the global worldwide trade exchanges are product exchanges – service exchanges account for less than 20%. So a positive service trade balance cannot compensate for a large negative product trade balance.

These countries also hoped that a positive IP rights trade balance (an IP rights leak) would result in a positive financial inflow. However, they failed to understand that intellectual property is not a current product. As this article illustrates, IP rights outflow results in the creation of jobs in other countries and thus a large negative global trade balance.

Technology fountain countries have also failed to understand that the global economic return for countries that exploit their intellectual property domestically (eg, through taxes paid by companies, taxes on profits, local taxes, social contributions paid by the employers and taxes paid by employees, social contributions paid by employees, income tax and value added tax (VAT)) is over 10 times greater than the return for countries from royalties.

For example, the Association of University Technology Managers’ 1999 licensing report concentrates on the economic impact of exploiting the results of US public research organisations (PROs) in the United States. The report indicates that the return for PROs is 2% of the industrial turnover of the US companies exploiting the PRO results (ie, royalties earned in licensing), as global taxes paid by the industrial companies to the country and the local US states are 14% of turnover (ie, taxes on profits, local taxes and social contributions paid by the employer). However, the report suggests that this factor of seven is extremely conservative, because it does not include social contributions and income tax paid by employees, VAT that employees pay when buying goods in the United States and all other types of tax. Globally, the ratio between taxes and royalties is certainly greater than 10.

These technology fountain countries also have strong public debts and – as stated in the Conseil d’Analyse Economique’s report – the conjunction of a high public state debt and a high negative trade balance could lead these countries to insolvency. It is therefore vital that these countries change their global innovation policies.

Moreover, Report 3805 by Gilles Carrez, issued by the Assemblée nationale; Economie-commerce extérieur on October 12 2011, estimates that the average contribution made by France’s annual trade balance to GDP growth over the last 10 years was 0.5%.

As contributions to GDP growth over the last 10 years averaged +1.5 points for internal demand and +0.7 points for investment, French average annual GDP growth (+1.7 points) was essentially driven by internal demand, itself paid partly by the growth in debt.

By contrast, technology broker country Germany had the following results:

  • The average growth of annual GDP was +1.7 points.
  • The contribution resulting from internal demand was +0.4 points.
  • The contribution resulting from investment was +0.5 points.
  • The contribution by positive trade balance was +0.8 points.

This confirms that GDP growth must be mainly driven by innovation resulting in positive (or close to zero, with investment also playing a role) trade balances, and not by artificial internal demand.

In Revitalizing America’s Entrepreneurial Leadership, Henry R Nothhaft and David Kline state that IP rights leak for the United States is 20%. They regret that intellectual property is used principally for monetisation rather than for industrial jobs and activity creation, and hope that in the future intellectual property will be used again for innovation, industry development and job creation. Some important recent developments in the United States show that the country is trying to change its global innovation policy (the America Invents Act, 2011, the America Jobs Act, 2011 and the US Supreme Court’s 2010 ruling in Bilski v Kappos (Case 08-964)). The first results of home job creation and industry reshoring can already be observed and it seems that the United States will in future abandon the technology fountain model and once more become a technology broker country. France and the United Kingdom would do well to follow suit.

Globally, there is an excellent fit between the categories defined for companies and the analysis developed in this article for countries. Countries would do well to pay attention to this analysis when defining their global innovation policies.

Action plan

The analysis offered in this article suggests the following conclusions:

  • The worst innovation model for economic entities – whether companies or countries – in terms of growth and economic wealth is the fabless model, where an entity manufactures less and less and hopes that its future will be ensured by licensing out its intellectual property.
  • The best model for open innovation is where an entity keeps the greater part of its manufacturing internal, backed by important internal R&D teams, and where the entity engages in both IP in-licensing and out-licensing in a balanced way.

 

Michel Neu is senior intellectual property expert at the Commissariat à l’énergie atomique et aux énergies alternatives (CEA)

www.cea.fr

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