Innovation is the cornerstone of sustained economic growth and prosperity. We often think of innovation in terms of breakthrough inventions – but it can also be linked to organisational changes and technology diffusion. In a globalised world, in which countries and firms compete fiercely to buy and sell their products and services, innovation is a key driver of competitiveness.

The conference on Innovation and Sustainable Growth in a Globalised World (November 2008) and this volume would not have been possible without the support of Angel Gurría, Secretary-General, OECD and Danny M. Leipziger, Vice President & Head of Network for Poverty Reduction and Economic Management (PREM), The World Bank, at the time of the conference. The Editors, who were also the principal organisers of the conference, are grateful for the leading role they played in advancing OECD-World Bank co-operation in the area of innovation and growth.

In this volume, the OECD and the World Bank jointly take stock of how globalisation is posing new challenges for innovation and growth in both developed and developing countries, and of how countries are coping with them. The authors discuss options for national and global policy initiatives that can foster technological innovation in the pursuit of faster and sustainable growth.

This chapter tests the neo-Schumpeterian model of Aghion et al. with industry-level data to analyse how Brazil, India and China are catching up to Korea’s technological frontier in a globalised world. It validates Aghion et al.’s inverted-U hypothesis (industries closer to the technological frontier innovate to escape competition while longer distances discourage innovating). It suggests that for effective catch-up, distance-shortening (or innovation-enhancing) policies may be a necessary complement to liberalisation. Korea and China combined a variety of distance-shortening policies with financial subsidies to promote high-technology industries and an export-led growth strategy. Following liberalisation, they leveraged competition to spur catch-up. Brazil, which in 1980was as rich as Korea, and India, which was as rich as China, are catching up more slowly. Import-substitution industrialisation strategies saddled Brazil and India with a large anti-export bias, and unfocused attention to innovation-enhancing policies dampened global competitiveness. Post-liberalisation, many of their industries were too far from the technological frontier to benefit effectively from competition. The catch-up experiences of the BICs show that distance from the technological frontier matters and that the design of country-specific distance-shortening policies can be an important complement to trade liberalisation in promoting catch-up with richer countries.

This chapter discusses the main results of work carried out at the OECD to benchmark economic performance and policy in its member countries, in order to make policy recommendations that may improve economic performance. It examines differences in policy recommendations that have been made for countries at various levels of development, characterises the main challenges each group of countries faces, and considers the main distinctions between these countries and five emerging non-members. Product market competition and human capital reforms are found to be especially important priorities in lower-income countries, which face substantial gaps in productivity to the frontier countries.

Confronted with increasing global competition and rising research and development (R&D) costs, companies can no longer survive on their own innovation efforts. Their innovation activities are increasingly international, and they are embracing more “open” approaches – collaborating with external partners, whether suppliers, customers or universities, to keep ahead of the game. Multinational enterprises (MNEs), in particular, have increasingly shifted R&D activities across borders within their global value chain and rely on outside innovation for new products and processes. Non-OECD economies play a growing role in this internationalisation process and accounted for 40% of the growth of global R&D in recent years. Moreover, migration of talent now plays an important role in shaping skilled labour forces throughout the OECD area. This chapter examines the globalisation of innovation, its drivers and impacts, and examines how policy can draw greater benefits from the globalisation process.

Monitoring of broad innovation policy trends and in-depth country-specific reviews reveal how governments from countries at different levels of economic development and with different industrial specialisation seek to strengthen innovation as an engine of growth. This chapter demonstrates that while there is some convergence in terms of broad objectives and policy principles, the government of each country has to customdesign multi-dimensional innovation policies which need to be continually adapted to meet new challenges in the global market. In addition to a synthesis, the chapter presents insights from three country reviews to illustrate common elements and country-specific features of government strategies to promote innovation-fuelled growth.

A key aspect of the emergence of the BRICKs has to do with the use of smart innovation policies to tap existing global knowledge and adapt it to local conditions through investments in R&D and education, reliance on reverse engineering and the diaspora as well as ICT technologies. In each country, the broader economic and institutional regime has played an important role. This chapter discusses country-specific experiences to highlight that a “one-size-fits-all” technology policy cannot facilitate innovation in developing countries.

This chapter reports on results of a large-scale effort to estimate directly the extent to which different technologies have penetrated the economies of developing countries and the pace at which penetration has been changing. It finds that on average middleincome countries use technologies at about one-half the rate of intensity of highincome countries and that the pace of technological progress in these countries has been much faster over the past 15 years. However, the level of technology achieved and the pace of progress vary widely across countries with the most advanced middle-income countries about as advanced as the less advanced high-income countries. Increased access to foreign technologies, through foreign direct investment, imports of high-technology products and intermediate inputs have played a central role in the dissemination of technologies from high-income countries to developing countries. However, such flows are not in themselves sufficient. A country’s technological absorptive capacity (the level of basic and advanced technological literacy, the quality of the regulatory environment, access to finance, and the effectiveness of proactive government policies to promote technology creation and diffusion) determines the extent to which these technologies are absorbed by domestic firms and incorporated into daily economic life. Weak absorptive capacity in Latin America suggests that it is converging towards a lower level of technological achievement than countries in Europe and Central Asia.

Latin America leads developing countries by a significant margin in cumulative FDI flows to the telecommunications sector. Access to communications services has progressed very positively in the region in the past decade, accompanied by the expansion in foreign investment and innovation in both technology and service delivery. Both foreign investments – including from home-grown Latin multinationals – and mobile telephony, especially in the form of prepaid lines, have contributed to increasing the density of telecommunication services. However, service provision for relatively disadvantaged groups remains a major challenge that current investment and innovation trends have only begun to address. Two policy concerns dominate the communications sector: access to services remains very unequal – for example, only 25% of the poorer households have a phone at home – and innovations in network expansion are slow. This chapter makes a case for a stronger regulatory network, more competition and policies to support innovation.

Far from “playing catch-up”, Asian economies have been setting the pace in the development of broadband networks, both on fixed and mobile networks. Korea was an early leader in fixed broadband, and Japan has been leading in the early stages of mobile broadband deployment. Singapore is one of the world leaders in urban fibre deployment while Hong Kong, China, is a pioneer in the provision of Internet Protocol Television (IPTV). Among the developing countries of the region, China now has the largest installed base of broadband users. India has recognised the critical importance of broadband for its bourgeoning software outsourcing industry.

Improving access to communication networks in developing countries is a driver of their overall economic and social development. Over the past decade greater reliance on the market in many low-income countries has made owning and using a telephone increasingly affordable and accessible. This has helped create new sources of income and employment as well as encouraged innovation aimed at meeting local requirements. This chapter looks at some of the innovation surrounding wireless communications in developing countries and at how network effects and network externalities influence innovation in developing countries.