Policies at the technological frontier.

 In recent decades, the rise of information and communication technologies (ICTs) has revolutionized telecommunications, reducing costs and improving reliability, while enabling advanced information management. This, coupled with falling transport costs and further trade and financial liberalization, along with more stringent intellectual property regimes, has favoured the emergence of global value chains (GVCs). Participating in GVCs has been viewed as a driver of economic growth, offering firms opportunities for learning and upgrading. Yet a country’s benefits from GVCs may be limited if these only offer a country low value added activities that do not encourage skill-building or moving up the value chain.

 Moreover, the low-cost labour comparative advantages of low-income economies has been undermined by capital-based technological change. In addition, the increasing globalization of the world economy and the diffusion of ICTs have swung the balance toward knowledge economies – based less on physical capital and more on intangible capital (Foray, 2004). Innovation and value creation have increasingly been taking place in the knowledge-intensive service sectors. Since the 1970s, this has been accompanied by a rise in the share of service exports (figure IV.3). In recent years, the rapid diffusion of the Internet and ICTs has fuelled the emergence of digital platforms and the transition to digital economies based on the dematerialization of production and data monetization.

Since 2010, industrial policies have seen an increasing share of interventions linked to STI-related aspects (figure IV.4). Moreover, in most advanced economies, there has been a general increase in R&D expenditure as a percentage of GDP. This has been largely driven by the private sector, but some countries have also greatly expanded public R&D allocations, such as China. In most developing countries, however, R&D figures remain too low.

STI policies, particularly for frontier technologies, introduce additional rationales for intervention beyond those for traditional industrial policies. These stem from two key sources of uncertainty, namely, one related to the results of R&D and one related to the diffusion and socioeconomic impact of new technologies (box IV.2). Given the uncertain outcomes and long-term horizons at the technological frontier, Governments need to learn partly by trial and error.

Science and technology include basic and applied research, as well as experimental or incremental development, and can be performed by universities and research institutions or by firms. Innovation is, however, predominantly performed by firms, and is related to production processes, new goods and services, marketing strategies and overall business models. 

However, firms do not operate in silos, and their innovative capacities also rely on their industrial and institutional contexts. Project grants to fund basic research are often provided through higher education or research institutions. Grants for business R&D and innovation are usually for particular challenges or to help the outputs of science and new technologies become marketable products. Both are typically provided through competitive processes that favour the emergence of new ideas and strengthen a country’s innovation potential. Interactions between academia, research institutes, industry and Government lead to policy actions that are better tailored to the needs and potential of the innovation ecosystem. With regard to meeting societal needs, the engagement of civil society helps direct technology and innovation, and can point out potential unintended consequences.