Presentation to ERC State of Small Business Britain Conference 2017 by Caroline Paunov

1. INCLUSIVE INNOVATION
ECOSYSTEMS IN THE DIGITAL
ECONOMY
OPPORTUNITIES AND CHALLENGES FOR SMES
4th ERC State of Small Business Britain Conference
7 September 2017
Caroline Paunov

2. Digital transformation offers many
opportunities for SMEs
if the imbalances it creates are
addressed

3. Allowing SMEs to leverage opportunities matters
to inclusive growth

4. Regional patenting intensity in OECD countries (average 2011-13)
Patents per million inhabitants, TL3 regions, OECD-wide quintiles
Spatial concentration of knowledge economy
factors persists

5. The top 20% regions in OECD countries account for:
Spatial concentration of knowledge economy
factors persists
… 1/3 of tertiary educated workers
… 1/2 of countries’ patent
applications

6. 0
20
40
60
80
100
120
140
160
180
200
0
2
4
6
8
10
12
14
16
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
PCTpatentapplicationspermillioninhabitants
Top1%incomeshare(beforetaxes)-OECDGDP
Top 1% income share Total PCT patent applications
ICT PCT patent applications Mechanical engineering PCT patent applications
Chemistry and metal PCT patent applications
Digital innovation and the top 1% income share
Top 1% income share and PCT patent applications for selected OECD countries,
1987-2009
Source: The World Top Incomes Database, http://topincomes.g-mond.parisschoolofeconomics.eu/ (accessed on 15 July 2015) for the 1% income share data; OECD Patents
Statistics for PCT patent applications.
Note: The statistics are based on a GDP-weighted average for the following 13 OECD countries: Australia, Canada, Denmark, France, Germany, Japan, Netherlands, New Zealand,
Norway, Sweden, Switzerland, the United Kingdom and the United States. The selection is based on data availability over the 1987-2009 data period. The data annex provides
further information.

7. Opportunities for SMEs in the digital
economy
Imbalances affecting SMEs
What can policy do?
1
2
Structure of the talk
7
3

8. Source: Guellec, D. and C. Paunov (2017) Digital Innovation and the Distribution of Income, Contribution to the
NBER CRIW Conference on Measuring and Accounting for Innovation in the 21st Century.
Sources of opportunities

9. 9

10. • i. Digital innovation  New products and
processes based on software code and data
– Digital non-rivalry of knowledge makes the market
production different from tangible goods
– Winning idea can easily be supplied to market with low
costs of dissemination of digital goods
• ii. Entry barriers are lower
-> “scale without mass”/ “cloud computing”/
platforms
10
Disruption is more important with the digital
economy

11. iii. Radical innovation opportunities to challenge
incumbents arise from digital technologies
Emerging digital technologies
ICT applications
E-commerce E-learningE-health
Big data analytics
Blockchain
Artificial intelligence
E-government
Internet of Things

12. 12
Market opportunities arise across the
innovation-intensive economy
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Estimates of selected sectors’ betas relative to the entire financial
market for US firms over 2008-12
Source: Guellec and Paunov (2017) based on data by Aswath Damodaran (2015), computed from data from Bloomberg, Morningstar, Capital IQ and Compustat.

13. iv. Opportunities for catching up are also higher
0.000
0.002
0.004
0.006
0.008
0.010
0.012
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Coefficient
Quantiles
Firms in small agglomerations
Firms in big agglomerations
Source: Paunov, Caroline, and Valentina Rollo. "Has the Internet fostered inclusive innovation in the developing world?." World Development 78 (2016): 587-609.
• Firm performance gains from IT-enabled knowledge
spillover opportunities
 based on 50,013 firm observations from 117 countries
in 2006–11

14. Market opportunities for SMEs in the digital
economy
Imbalances affecting SMEs
What can policy do?
1
2
Structure of the talk
14
3

15. Source: Guellec, D. and C. Paunov (2017) Digital Innovation and the Distribution of Income, Contribution to the
NBER CRIW Conference on Measuring and Accounting for Innovation in the 21st Century.
Imbalances

16. Digital non-rivalry & markets
 knowledge production is subject to massive
economies of scale: the more products sold,
the lower the average cost
 market concentration
16
“Winner-take-all” markets

17. Resulting market power
creates rents  the
traditional & necessary fuel to
innovation (Schumpeter)
Innovation and “winner-takes-all” dynamics
Current context is one of
increased concentration
(& less investment): Evidence
on growing winner-take-all
markets for the United States
(Autor et al., 2017; De Loecker
and Eeckhout (2017).

18. 18
Market concentration in the digital economy
Distribution of the 100 largest firms in terms of sales among the top R&D firms within the software and
computer services and heavy industries sectors in 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
64
67
70
73
76
79
82
85
88
91
94
97
100
Software & Computer services Heavy industries
Number of firms in decreasing order of sales
ShareinsalesofleadingR&Dfirms
Source: EU (2016), EU R&D Scoreboard 2016.

19. 19

20. • Business strategies allow
retaining rents for a
period of time: economies
of scale and scope, network
economies, big data
• Capital and networks to
upscale and sell
innovations render
acquisitions effective but
may challenge dynamic
competition
20
Advantages for incumbents

21. Market opportunities for SMEs in the digital
economy
Imbalances affecting SMEs
What can policy do?
1
2
Structure of the talk
21
3

22. 1. More competition market conditions result
with fewer opportunities to exploit network
effects, less platform dominance, fewer leading
technical standards and better data
2. Critically depends on policy: anti-trust,
entrepreneurship and IP rights re-
designed for the intangible economy
3. Avoiding possible biases towards large players
in policy support tools
22
Policy imperatives

23. • Building support for SMEs with competitive potential
by offering funding, advice and technology
support
• Examples of inclusive innovation policies in support:
– Korea: Centres for Creative Economy and
Innovation
– Ireland: Competitive Start Fund for Female
Entrepreneurs
– Lithuania: European Progress Microfinance
Facility Programme
– China: Innovation fund for SMEs
23
What specific innovation policy approaches
can support wider opportunities?

24. 24
Korea: Centres for Creative Economy and
Innovation
• Objective: Promote business start-ups
and innovation by SMEs in all
provinces
• Policy instruments:
– Business consultation services
for start-ups
– Creation of networks (linking
SMEs and innovation actors)
– Assistance in R&D and
marketing, among others

25. Ireland: Competitive Start Fund for Female
Entrepreneurs
• Objective: Empower
(women-led) start-
ups that face financial
constraints to launch
new competitive
products internationally
• Policy support:
– Equity investment
of up to EUR 50,000
– Mentoring

26. • Digital transformation offers
many opportunities for SMEs
if the imbalances it creates
are addressed
• Policy needs to ensure
innovators are rewarded for
innovations while market
conditions provide
opportunities for challengers
• This policy approach supports
growth & inclusiveness
Conclusions

27. 27
Further ongoing project of the OECD Working
Party on Technology and Innovation Policy (TIP)
Objective
Define how
innovation policy
frames and
instruments should
adapt to the digital
transformation
More on the project
https://innovationpolicy
platform.org/TIPdigital

28. Project’s website at:
http://oe.cd/inclusive
Innovation Policy Platform page:
https://innovationpolicyplatform.org/
inclusive
Open and inclusive innovation:
https://innovationpolicyplatform.org/
TIPdigital
Contact:
Caroline Paunov:
caroline.paunov@oecd.org 28
Further information

29. Inclusive innovation policy toolkit
Policy cases from
Chile, China,
Colombia,
Germany, Hungary,
India,
Ireland, Israel,
Japan, Korea,
Lithuania, Mexico,
New Zealand, South
Africa,
United States, EU-
wide programmes
Programmes to support women
entrepreneurship
Programmes to support integration of
minority groups in productive activities
Programmes to foster
productivity in lagging areas
https://innovationpolicyplatform.org/inclusivetoolkit

30. • OECD (2017), Making Innovation Benefit All: Policies for Inclusive
Growth
• Digital Innovation and the Distribution of Income (2017), Contribution
to the NBER CRIW Conference on Measuring and Accounting for
Innovation in the 21st Century (with D. Guellec)
• "Has the Internet fostered inclusive innovation in the developing
world?." World Development 78 (2016): 587-609 (with V. Rollo)
• “Inclusive Innovation Policies: Lessons from international case
studies”, OECD Science, Technology and Industry Working Papers,
2017/02, OECD Publishing, Paris (with S. Planes Satorra)
• “Innovation and Inclusive Development: A Discussion of the Main
Policy Issues", OECD Science, Technology and Industry Working
Papers, No. 2013/01, OECD Publishing, Paris.
30
References