*{INNOVATION AND GLOBAL SUSTAINABLE GROWTH
A BIAC Discussion Paper
Presented to the BIAC Consultation with OECD Ministers
May 16, 2001

Preface to BIAC Discussion Paper : Innovation and Global Sustainable Growth

PREFACE

The first version of this BIAC Discussion Paper was presented at the June 2000 OECD
Ministerial under the title "Innovation and Growth". It focused on a simple but powerful logic
stream – that it is innovation which improves productivity, resulting in enhanced living
standards through growth.

BIAC presented an expanded version of the Discussion Paper, “Innovation and Global
Growth” to Heads of Delegation to the OECD at its November 2000 Liaison Meeting. This
document included a second chapter on trade and took our original logic to another level,
asserting that it is in fact the world trading system that enables the rapid spreading of
innovation, thus proliferating the creation of wealth.

The attached paper, “Innovation and Global Sustainable Growth”, which BIAC has prepared
for its 2001 Consultation with OECD Council at Ministerial Level, adds four additional
chapters to our November Discussion Paper: sections on investment, employment and
education, technology and environment.

An introductory Executive Summary presents an overview of the main themes covered in
each chapter, and a table of contents will enable readers to quickly situate new chapters.

The common thread which ties together each chapter of this paper is in fact a question from
the business community to all OECD Ministers: In the context of law, regulation and practice
within your purview, what are you doing to enable or inhibit innovation? The answer
determines whether or not a country will be able unleash the chain reaction resulting in
Sustainable Growth.

TABLE OF CONTENTS

Executive Summary ... 4
Chapter I: From Innovation to Growth ... 9
Chapter II: From International Trade to Innovation ... 16
Chapter III: From Innovation to Investment ... 25
Chapter IV: Technology and Velocity, the Turbocharger of Innovation ... 36
Chapter V: Education and Employment, Social Innovation in a Knowledge Economy ... 45
Chapter VI: Innovation and the Environment --Learning from our Successes ... 51
· Annex to Chapter VI ... 54
Endnotes ... 65

Innovation and Global Sustainable Growth

EXECUTIVE SUMMARY

With regard to the portfolio of the Prime Minister or President, there are those who advance one policy
challenge or another as the greatest. The cogent leader knows that the greatest challenge of
governance is in the balancing of many priorities and in effecting change. While the global needs, such
as lifting billions out of poverty and husbanding the earth’s resources, call for enormous concerted
effort, their satisfaction is, to a remarkable degree, in the hands of those actively engaged in the
market-based economy where wealth is created.

Because the market economy is an engine that runs with billions of spark plugs, the innovative
capacity of each of its participants, its productive potential is virtually limitless. However, the blessing
of this human potential can carry with it the curse of fear of the change that innovation brings. To
prepare each citizen to accept and embrace change may well be the signal challenge of the century
before us.

That, because the velocity and scope of change have been increased by an order of magnitude, and
there is no hiding place, no plateau. This paper is a work-in-progress, but is intended to approach that
signal challenge from the perspective of the private sector which shares the responsibility with
governmental leadership to understand, to balance and inspire each to make her or his contribution to
sustainable growth. Our “joined up” ambitions can only advance with joined up governance, both
public and private.

From Innovation to Growth

Both business and the OECD have an interest in understanding how innovation impacts economic
prospects, and what other factors have to be in place for a sustained, economy-wide improvement in
productivity and output. The real meaning of the term "new economy" is broader than the Internet
technology itself, and has a scope that reaches everywhere in the "old economy" where new
technology is applied.

The rate and remarkable persistence of downward price movement in ICT (information and
communications technology) producing industries was one of the key factors which prepared the way
for powerful Internet technologies which in turn enable efficiency gains. It is not possible to
overemphasise the fact that this was achieved in an industry characterised by fierce competition and
internationalisation of production, where attempts to pick winners have been distinctly unsuccessful.

While the widening availability of ICT equipment itself is merely a precursor of the new economy, an
even more powerful factor is in the tremendous increase in the quality and range of business
opportunities that now become possible and viable, given the ubiquity of the former. To be able to
grow, the markets for new goods, services or ways of doing business have to be open to competition,
which would benefit from global policy compatibility.

OECD Growth Project has gone a remarkable way towards clarifying data and analytical issues which
render it difficult to make a decisive statement on what is needed to turn ICT-led innovation to growth
in productivity. But, there is a need to build the policy recommendations emanating from this project
on a number of policy pillars: Innovation policies, labour and capital market policies and conditions,
and the policies aimed at improving the quality of the regulatory framework - plus their interaction.

A rapid glance at the results of OECD's existing studies (captured in Tables 1 and 2 of this paper)
lends considerable support to the hypothesis that it is basically the juxtaposition of good indicators on
ICT-readiness, labour market adaptability and regulatory framework, that tends to be associated with
either good or improving performance in the growth of productivity and output, and especially both.
OECD could usefully develop this approach further.

Indeed, it is hard to imagine how heavy investment in ICT and even skills can lead to a widespread
increase in productivity growth, in an economy where dismantling redundant or failing economic
activities is routinely subject to negotiation with interests vested in their protection. OECD should be
careful to convey this message clearly and not inflate false expectations.

The U.S. economic deceleration in 2000 is not a reason to throw out the "new economy" baby with the
bath water of downturn. Responsible observers and analysts, such as the OECD, have never claimed
that the new factors in economic growth have eliminated the cycle.

What was observed as "new" in many analyses was a change in macro-economic trade-offs, such as
the one between output growth and inflation. Another "news" included reduced inventory cycles and a
generally higher velocity with which firms can transform their focus and strategy. Research should
focus on how those factors are altering the nature of the cycle.

And, now is the time to understand how some of the "old" well-understood policy factors such as
regulatory quality and flexible labour markets affect the ability of economies to grow in the new
technological environment.

An area which is in urgent need of attention from high policy is the quality, coverage and international
comparability of data on the inputs and outputs of new technologies and new business models,
especially in the services sector. The simple logic stream - innovation raises productivity which
raises living standards - should be the starting point for all policy deliberations.

From International Trade to Innovation

It seems largely agreed that innovation driven by information and communications technology (ICT)
enables significant productivity gains, so the discussion on widening its impact on economies relates
closely to the discussion on broadening digital opportunities, creating wealth and raising the standard
of living.

On the business side, there are ICT-based opportunities to insert competing business models in the
existing market structure. Regulatory reform in favour of increased competition in markets therefore
is a sine qua non of developing e-business and transforming the old into the new economy. Widening
the reach of international trade and investment among economies is the most effective, if not the only
practical way of opening sectors to competition, and spreading this innovation-led economic
evolution.

A common plea today from the lesser developed world is “give us trade not aid” and, while there is
still a need for aid, the billions of people who live in poverty will never exit that state without
participation in the market-based system. World trade and investment bring those instruments and
institutions necessary for the proper functioning of an economy with them when they arrive at the
border and they induce many others to complete an enabling policy mosaic. Millions of the poor have
assets that they cannot own because they have no property rights, that they cannot leverage to obtain
capital to turn their subsistence into enterprise. This element of global integration has a substantial
institutional structure; its effective operation is in its active employment.

Manufacturing having been already subject to significant trade liberalisation, from the point of view of
OECD economies, a strong push towards liberalisation of telecommunications and trade in services is
an essential element of their policies to enhance innovation, market development and growth.

Global commitment to these aspirations is best effected by a recommitment to the market-based
economy through the world trading system with its roster of previous agreements and on-going
negotiations as well as the commencement of a new Round.

From International Investment to Trade

International investment and market access are primary vehicles for the cross-border transmission of
innovation which assures growth and wealth creation in participating countries. This participation is
based on long term economic processes such as new market development, job creation, enterprise as
well as structural changes and adjustment costs. International investment liberalisation in the context
of open market frameworks is essential to the diffusion of benefits created by globalisation.

A country’s capacity for change supported by its political leadership is critical to creating the optimum
policy framework to benefit from innovation, especially as innovation and investment have a
symbiotic “win–win» relationship. Investments applying technological enhancements have enormous
impacts on services and manufacturing, and spur efficiency and productivity in these sectors, which
are mutually reinforcing.

Societal innovations such as human and social rights, education, democratic political systems and
good governance enhance the possibilities for the emergence of new ideas. Education is the most
important form of societal investment and is essential to reaping the benefits of investment at the local
level. The lesser developed countries should be encouraged to reach out for the benefits of
investments made by others through open trade and investment.

Trade and investment activities also can have a positive impact on the environment as they both
promote a more efficient allocation of resources at the same time that they contribute to economic
growth. This growth should in turn lead to increased social welfare and a reinforced demand for
improved environmental policies. International investment in innovation is an essential element in
upgrading not only the performance of local economies, but also in improving social and
environmental sustainability globally.

To ensure that this symbiotic dynamic between investment and innovation functions, two elements in
the policy framework are necessary: A transparent set of investment rules (multilateral, regional,
bilateral) for investment that provides greater certainty and stability for both investors and
beneficiaries of investment and, at the local level, a stable policy environment that enables, not inhibits
innovation and growth -- a key element in attracting FDI. A good policy environment includes nondiscrimination,
national treatment, sound financial and shareholder governance; efficient and
transparent administration, as well as a fair, predictable system of taxation.

OECD has been developing a unique set of internationally-comparable indicators on "The Role of
Multinationals" in the member countries, which are also compatible with industrial policy analysis
tools from other data sources. These indicators reveal a strong positive role for MNEs in the countries
for which data sets are reasonably complete. Member countries would greatly benefit from the
deepening of this analysis and its better dissemination at the policy level.

Investment is the deployment and management of peoples’ wealth. The public policy mosaic is
part of the platform upon which confidence in investment is built. Any policy that tries to slow
or constrain international investment will sooner or later bring about the loss of opportunities
for the creation of domestic economic wealth, and lead to a widening divide of lost opportunities.

Science, Technology and Innovation

Continual advances in science and technology may be something that our societies take for granted,
but in reality are enabled to a large extent by public policy. Technological creativity and advance are
key components of not only innovation and growth, but their sustainability in the long term. Most of
the economy consists of users of a given technology and is concerned chiefly by the breath of
application of technology outside the sector which invented it. Therefore, R&D is an incomplete
indicator for innovative capacity.

Intellectual property rights protection is a market-based mechanism for disseminating knowledge.
Pursuit of lax IPR regimes for purposes of short-term political expediency can only damage the
propensity to invest in new knowledge. Both IPR and R&D flows are strongly influenced by firm
strategies operating at the global level. National science and technology policy apparatus needs to
recognise and work in harmony with those strategies to be able to make best use of their work product.
Cross-border flows are not a zero-sum game in trade; why should they be in the movement of R&D or
skilled personnel?

Scientific inquiry, research and the generation of inventions are important in and of themselves. It is
not appropriate to harness basic research efforts to economic productivity considerations.
Nevertheless, basic research still needs to develop its own performance-based evaluation systems.
Pervasive application of technology has been historically slow in many sectors (e.g., electricity) in a
world environment which has always been characterised by mercantilism and economic rivalry apart
from brief exceptions such as the early XIXth century or the late XXth century. Economic openness
can only help accelerate the diffusion of technology and innovation.

New technologies arise and promise new productive economic opportunities under policy
environments which privilege entrepreneurship and economic liberty, messy as their initial
impact on existing institutions and societal balances may be. Benefiting from technologyassisted
sustainable growth requires a certain amount of risk-taking at the policy level. ICTs
have just been able to make it to the stage where their impact on the economy has become widely
discernible. Will "planners" allow a similar feat to arise from biological and health sciences?

Biotechnology

Scientific advances are leading to unprecedented productivity increases, while at the same time
reducing environmental impacts. As an example, biotechnology promises be a critical enabling
technology to achieve sustainable growth. On-going developments in modern biotechnology provide
the prospect of significant steps forward in mankind’s efforts to tackle a multitude of problems that
delay progress and cause human misery. These problems range from illness and diseases that levy a
phenomenal social and economic cost, to critical nutritional and environmental challenges. Whether
through increased economic development, through innovation, or through improving the health of the
population, modern biotechnology has an important role to play in sustainable development. Its
inhibitors have their collective thumb on the windpipe of billions.

Social and Environmental Sustainability and Growth

Business is at the nexus of the interlocking concepts of economic growth, environmental protection
and social development. The central focus of any business must be on sustainable growth. Any
company that wants to survive and remain competitive must strive to create shareholder value and
wealth. A business that is not profitable over time ceases to exist and cannot make any further
contributions. Competitiveness in the marketplace must therefore be a first concern.

Economic growth will therefore remain a central goal for successful corporations and societies, taking
into account the social and environmental impacts of human activities. Economic resources are
required in order to protect and take care of our environment, while at the same time meeting social
and economic needs. In a larger context, economic growth is necessary to address social needs, such
as education, health care and employment creation. Similarly, education and social safety are
prerequisites for economic activity. The concept of sustainable development assumes that the various
economic, social and environmental aspects are integrated and interdependent and need to be
considered in a balanced way, the work of Prime Ministers and Presidents.

Current OECD work on growth and sustainable development reinforces the importance of human
capital as an essential factor in guaranteeing positive economic and social outcomes. Sustainable
development and social cohesion depend critically on the competencies of our citizens. Education and
lifelong learning should therefore be considered as a key priority for meeting the challenges of a
rapidly changing environment. The success of technological and organisational innovation depends to
a large extent on the ability of individuals and societies to absorb change. Fostering entrepreneurship,
upgrading skills to match the changing labour market requirements and well-functioning and
sufficiently flexible labour markets conducive to employment creation are key to sustainable economic
growth.

Today, all companies must innovate to survive and remain competitive. Innovation and technology
contribute to economic growth and have the potential to improve human welfare as well as the
environment. Experience clearly indicates that innovation can contribute to breaking the link between
economic growth and environmental degradation. Upgrading technology is a prerequisite for more
effective use of resources and thus improving environmental performance, which becomes all the
more important in view of a rapidly growing world population. In most cases, newer technologies and
processes are both more efficient and less polluting than the technology they replace, allowing
increased production using less material and causing less pollution. At the same time, environmental
performance often presents business opportunities that enhance firm-level efficiency.

The development and application of environmentally friendly technologies and know-how are already
making a significant contribution to reducing the environmental impact of economic activities. The
spread of innovative approaches to non-OECD countries, which to a large extent happens through
foreign direct investment, will be crucial for environmental improvements worldwide. Given the right
global framework conditions, business, through free trade, is spreading the technologies, skills, and
processes that are required for sustainable development. For business to maximise its contribution
to sustainable development, it requires, among others, free and open markets, stable and
predictable policy framework and trade and investment rules, and policies encouraging the swift
dissemination of technology.

The OECD has within its Members’ grasp the elements of that enabling policy mosaic. The
inhibitors are known. Only conviction, courage and leadership can capitalise on the former and
escape the latter. The business community is advancing. After all, we are the economy. Our
pace, efficiency and effectiveness are, to a great extent, in your hands.}

*{CHAPTER III:} *partie=titre FROM INNOVATION TO INVESTMENT *partie=nil

*partie=titre International Investment, Innovation and Growth *partie=nil

The rapid growth of international investment over the last few years is the driving factor of innovation
and market access, thus leading to growth in all participating economies. Forward looking policy
decisions on national, bilateral and multilateral levels have to focus on how most of the enormous
potential can be realised by as many as possible. This chapter tries to give an overview on how
important Foreign Direct Investments (FDI) are for innovation and growth and how policy can ensure
participation at this creation of wealth. This participation is based on long term economic processes,
such as new market development, job creation and enterprise transformation (long term organisational,
quality or business model changes) as well as structural changes and adjustment costs. All these
processes are mainly enabled through investment.

Instead of finding new ways to increase access for foreign direct investments, some within and outside
government, wish to control international investment for politically-laced economic purposes,
commonly, with hollow promises to remove the down-side of risk. The losses from intervention and
resulting market distortions are significant, as economic history has repeatedly demonstrated. These
losses are the result of the inherent contradiction that innovation is impossible to predict while policy
has to be predictable to be effective. Policies that constrain international investment are likely to curb
wealth creation. At the same time, the resources and changes needed to adjust to real global
competition will not be created, leading to a widening “divide“ of lost opportunities. There is no need
to turn a contradiction into a conundrum.

We will weave together four basic concepts: innovation, enabling technology , sustainable growth and
globalisation.

*partie=titre Innovation *partie=nil

There is a symbiotic relationship between innovation and investment. That relationship is what is often
called a “win-win”. There are two important aspects of innovation, technological/organisational
innovation and societal/cultural innovation.

To be effective, technological/organisational innovation should advance at the same speed as
societal/cultural innovation as reflected in policy innovation. Unfortunately, this equal pacing can slip
out of synchronisation creating not just economic but social dislocation and unbalanced national or
regional development.

It would be self-defeating to attempt to limit technological/organisational innovation. With both
technology and markets proceeding globally, creating policy walls would be costly and totally
ineffective. On the contrary, public and private efforts should be directed at drawing parallel the two
aspects by increasing the pace of societal innovation through policy actions, such as addressing macroeconomic
policy failings, making major investments in education and increasing the diffusion of
technology.

Foreign investment, international trade and open markets represent the basic elements for delivering
and sharing technological/organisational innovation throughout the globe.

*partie=titre Enabling Technology *partie=nil

ICT/Internet innovation and its application through investment present a unique opportunity, perhaps
more achievable than any time in human history, for creating the most favourable global conditions to
move in parallel technological innovation and societal innovation. Biotechnology is another quantum
leap field of innovation that will enable enormous growth.

We have entered a phase of sustainable global growth, no longer based only on the exploitation of
traditional raw materials, energy sources and physical products, but more and more on intangible
values, information, communication, knowledge, skills, intelligence, new services and flows of
creativity and invention.

ICT/Internet is not just an innovation per se but, in its application, permits further technological,
organisational and societal/cultural adjustment to realign the speed of the two main aspects of
innovation itself.

Policy action in all countries should take advantage of the diffusion and open availability of
technologies, including ICT and Internet, for promoting societal change through investment in
education for all people, the creation of a culture of entrepreneurship, effective financial markets and
open market conditions.

*partie=titre Sustainable Growth *partie=nil

Sustainable growth is more assured if societal/cultural innovation proceeds in parallel with
technological/organisational innovation. This is true whether within a nation or between regions and
nations. On the contrary, growing misalignment between the two aspects of innovation can produce
low economic growth or decline, unemployment, social decay. Sustainability is pervasive in the
national policy mosaic. This is a matter for Prime Ministers with a national strategy joined at the top.

*partie=titre Globalisation *partie=nil

The globalisation of markets, finance, and technology is the result of that enabling
technological/organisational innovation. It is, in fact, the engine for its own diffusion and that of its
benefits. “Trade and investment liberalisation in the context of open market frameworks are essential
to the diffusion of benefits created by globalisation.” *{18} Furthermore, the spread of wealth creation
though globalisation serves to strengthen local values(culture). Globalisation and local development
are two sides of the same coin.

Matching globalisation inputs with societal/cultural innovation through the right policy action permits
government to reach a balance and a positive integration between global and local values to find the
most effective path towards sustainable global growth.

*partie=titre The Faces of Innovation *partie=nil

Very often, innovation is seen as the creation and use of new technologies. Of course, the invention of
new products and processes is a core element of innovation. However, the successful application of
innovation is also a matter of changes in organisational and workplace methods, even of society’s
perceptions. Developments in fields such as human rights and social norms, political systems and
governance, education, property rights, customer behaviour and demand creation are all elements of
social innovations. Furthermore, “increased social welfare in turn generally reinforces demands for
improved environmental policies.” *{19} The capacity to adapt to change, call it societal innovation, is
necessary to cope better with the challenges with which a society is confronted.

Technological and societal innovation are complementary processes and a prerequisite for
development. Seen in a broader perspective, the acceptability of innovation relies on changes in
society. One of the greatest challenges for political leadership in the decades to come is that of
inspiring the acceptance of change. In business, we are convinced that those companies that are not in
a constant state of change are doomed. Business leadership sees the challenge as one of inducing a
culture of change, a challenge no different that that for government.

From a policy perspective, this means a legal and regulatory array that is sufficiently non-prescriptive
that the economic players can react to change quickly.

The patterns of societal and economic change differ to a large extent from country to country.
Globalisation is not to be understood as the “harmonisation” of culture or business. On the contrary,
globalisation, the spread of the democratic, market-based economy, is an opportunity to participate in
global capital deployment and division of labour, while preserving those differences and serving
national goals. Thus, innovation becomes the process of assimilation of factors of societal and
technological development under local circumstances. This is a world of choice that opens up new
opportunities of development for all.

*partie=titre The Economics of Innovation and Growth *partie=nil

The rapid changes brought about by Information and Communication Technology (ICT) are generally
perceived as the most important factors in innovation. Investments applying ICT innovations have
enormous impacts on both the service and manufacturing sectors. For example, in the service sector,
ICT applications enhance productivity for a broad number of operations including implementation of
transaction systems (i.e. for financial services including monitoring), research and development,
education and training, knowledge management, transportation services, internal and external
communications, retail services, engineering – including environmental, and the management of
supply processes, inventory, and procurement networks.

Manufacturing operations are equally enhanced by ICT applications, for example in the development,
design, implementation and production of processes and products, facilitation of improvements in
quality management and control, and development of improved inventory management. Key is the
availability of data in rapid feedback cycles to production floor operators, permitting more decisionmaking
at the operational level, raising productivity and reducing waste. Flexibility in manufacturing
permits the tailoring of product to customer needs, as well as rapid shifts in models or configuration on
the same production line.

In addition, a wide range of comparative data, enables a real time make of buy choice, spurring
efficiency.

Importantly, the productivity benefits resulting from the application of ICT to both services and
manufacturing sectors are mutually beneficial and reinforcing. Improvements in data transmission
speeds, capacity and methods have increased the linkages between firms, effecting virtual mergers of
operating capacity. It is the foreign affiliates of these transforming firms that bring the benefits of
change with them as a part of their investments.

Information compiled by the OECD suggests that multinational enterprises are playing a significant
role in the OECD area economies. Time series analysis with the scarce data available suggests that
internationalisation of manufacturing is generally on the increase in the time period covered (generally
1992 to 1998) (See Table 3.1 below). *{20} The share of foreign affiliates in production and/or
employment has seen important increases in Finland, Hungary, Ireland, Sweden and United States.

The data on the economic role of MNEs are incomplete for many countries which makes a rigorous
cross-country analysis difficult. But, this very interesting data base and related analysis in the OECD
needs to be completed and, above all, priorities as a work product need to be disseminated by the
Organisation.

One way or another, most of these economies are highlighted in the OECD Growth Study has having
experienced significant positive growth impact from innovation in the 1990s. There are sharp declines
in the shares of foreign affiliates in production and employment in several OECD economies such as
Japan or Germany and slow progress in France. These economies are also at the bottom of the league
in terms of MFP growth in the 1990s. More detailed and sectoral analysis may be necessary to
determine the exact direction of causality, but it is clear that openness to investment and ability to
attract it go hand-in-hand with an innovative economy.

Overall, ICT plays a central role in reducing information and transaction costs and in increasing factor
utilisation in most sectors. These gains in productivity enable the production of better products at
lower costs and with more efficient use of natural resources. Competition in open market economies
and investment in innovation lead to endogenous growth of productivity per capita and of GNP,
creating new sources of wealth. Thus, competition is a driving factor of all innovation.

Note that all of these inputs of technology-based innovation imply a freedom of movement of ideas
and methods within the enterprise and, most important, rapidity of action and change. There are a
thousand ways that a regulatory forest can slow the spread of these innovations. There is a price for
every one of them. Relatively few are worth paying. Where competition reigns and consumers rule,
government should reduce them to the minimum. Investment makes the transformation local.

At the end of the day, it is the generation of a cadre of local investors that brings sustainability to the
growth induced by foreign direct investment and lifts people out of poverty.

*partie=titre Impact of Investments on Societal Innovation *partie=nil

Although the invention of the compass and of seaworthy ships was important, it took crews to explore
new passages: New ideas and perceptions precede any innovation. This gives rise to the question why
some societies are creating more innovations than others. The complementary nature of technological
and societal innovation gives some answers. Societal innovations such as human and social rights,
education, democratic political systems and good governance enhance the possibilities for the
emergence of new ideas.

For example, technologies such as the Internet cannot be used for innovation if personal access is
restricted for political reasons. Or, if lack of education prevents access to ICT in many remote areas,
that will be an important factor reducing digital opportunities or exaggerating a divide that existed
long before there were digits to blame. Governmental policy must address long term effects and
encourage investments in societal innovation that benefit the local context. Without question, the most
important form of societal investment is in the provision of access to education to prepare the
workforce.

The shaping of the market economy in every country and internationally is also part of societal
innovation. The establishment and spread of the market-based world trading system through the
liberalisation process over the last two generations has set loose a unprecedented, dynamic increase in
wealth.

*partie=titre The Internationalisation of Innovation *partie=nil

Recent economic history has proved that larger, cross border liberalisation of markets spurs innovation
locally, leading to higher productivity and endogenous growth. Because labour division and degree of
specialisation are enhanced in these markets, the scope of innovation has been growing. The key to
international labour division in these newly innovative markets is access to technology and human
capital formation. Foreign direct investment is a strategic factor for both.

For example, Table 3.2 *{22} below depicts the additional contribution of MNEs in OECD economies. In
all countries foreign affiliates account for a share of production higher than their share in employment.
This suggests that MNEs bring in higher productivity technology and management. In order to be
more precise, such data should be checked at a detailed sectoral level, which could also provide insight
to the question of whether MNEs systematically have higher labour productivity in the same activity?

In all countries, multinationals account for a higher share of the wages paid to workers than their share
in employment. This is mostly because they are concentrated in higher value added sectors.
Multinationals do not simply “snatch” the more productive labour from local companies. They
contribute to the development of leading sectors in the economy in terms of productivity and wages.

Foreign direct investments, including mergers and acquisitions, are efficient and effective vehicles to
safeguard intellectual property rights in markets with intense competition and short technological
cycles. Investments reduce the internal costs of adjustment to a new competitive model. Cross border
licensing and joint ventures ensure the access to modern processes and products, which access is
necessary to improve global productivity.

In many countries, local business partners of foreign direct investors form the core for local economic
development, including the entrepreneurial activities of former employees of investing firms who,
once trained, establish their own businesses.

FDI brings not only access to technology that is a prerequisite to take advantage of innovation, it also
creates new clusters of economic activity, due to the fact that few investors operate in isolation. These
clusters of investors, direct suppliers and buyers, have a multiplier effect on local business, consumers
as well as on public finances. The demand for skilled labour leads to improvements of educational
institutions, which is the basis for the formation of future productive citizens. A long term diffusion of
technology internationally is only possible if the formation of human resources takes place locally.

Most important, this economic activity brings hope and motivation to communities. Business people on
the ground, making these investments, see and experience the transformation of society when the
education system has before it jobs to fill.

*partie=titre International Investment in Innovations and Sustainable Global Growth *partie=nil

We assert that investment in innovation itself is a sine qua non for sustainable global growth, whether
on the social, economic or environmental plane. Investments in innovation and resulting growth are
needed for sustainable (stable) social systems and are an important factor in contributing to economic
development. Technology transfer and diffusion as well as local human capital formation increase
relative competitive advantages of the host countries. New demands lead to investments in innovative
(“sustainable“) technologies which need the incentive of large global markets.

The development impact of investment goes beyond its monetary value and includes positive side
effects such as the transfer of environmentally friendly technology and know how, improvement in
employee well-being with the implementation of better pay and efficient management practices.

“Evidence shows that trade and investment activities will usually have a positive impact on the
environment. This is because trade and investment promote both a more efficient allocation of
resources at the same time that they contribute to economic growth. The result should be increased
social welfare, which in turn, generally reinforces demands for improved environmental policies.” *{23}

Innovation and international investment increase variety. As all investment is local, new possibilities
arise for international labour division and specialisation that empowers local economies reach out for
the potential of international markets. This is especially the case for “remote“ regions which are
provided new market opportunities through the lowering of transaction and information costs.

In sum, international investment in innovation is an essential element in upgrading not only the
performance of local economies, but also in improving social and environmental sustainability
globally.

*partie=titre Policy Issues *partie=nil

With regard to international investment, innovation and sustainability, government policy has its most
profound effects in the long term. However, very often in policy discussions, negative short term
effects of investments receive more stress than the long term benefits, which are commonly a great
deal higher than the short term effects. Because investment in innovation depends on an open market
economy and open society, interventionist approaches seldom form part of forward-looking policy.

Over the last few years, there has been a noisy pressure to simply stop liberalisation instead of finding
new ways to open up the access for trade and foreign direct investments. Local economic problems are
attributed to “globalisation“. Of course this is the opposite of the truth and it is clear to most
governments that the “noise” has other motivations than a focus on increasing prosperity.

As noted, the societal and economic losses from this interventionist approach are enormous, as
economic history has repeatedly demonstrated in OECD, transitional and developing countries.

Hence, any policy that tries to slow or constrain international investment will sooner or later bring
about the loss of opportunities for the creation of domestic economic wealth. But, the need for
adjustment will not vanish. On the contrary, it will increase. At the same time, the resources required
later to make adjustments will not be there because of missed opportunities. Thus, the constraints lead
to a kind of adjustment trap. This adjustment trap is even more harmful, the longer and the more
deeply government policy has intervened.

*partie=titre The Case for Rules *partie=nil

In other OECD fora, we have presented our case with regard to investment rules. As you know BIAC
was a vigorous supporter of the OECD effort to launch a set of rules for investment and continues to
believe that the goal of a “world trading and investing system”, consistently robust, is simply common
sense. The source of all these commercial transactions is the private sector, companies. Within each
company, the balance of trading and investing is a matter of resource allocation.

To have one side of the balance governed by a clear, transparent set of negotiated rules and the other
side dependent on ad hocery does not make sense. In an era in which investment was equated with
exploitation by many countries, such a failure of multilateralism could be explained. Now, the benefits
of investment are better understood, and the contrast in terms of development between those countries
that have welcomed investment and those that have not has never been more vivid. We believe that it
is also increasingly well understood that investment brings with it a broad range of societal benefits
with few negatives.

The OECD, the World Bank and various other centres of facts and analysis have poured out the
categories: consumer choice, competition to bring down prices, diffusion of technologies, management
know-how, employment, fiscal contribution (both direct and through employee payments), high
standards in employment practices, a level of sophistication in environmental management systems,
international corporate governance, etc. There is a small investment footprint in TRIMS and a
significant presence within the GATS. That we move forward is imperative, bilaterally, plurilaterally
or multilaterally.

We have been asked how those countries that genuinely remain dubious as to the benefits of
investment might be persuaded. We believe that those are relatively few, and it is more than curious
that they are unconvinced by the facts and analysis. There may also be a number of countries that see
the negotiating process as an opportunity for high stakes leverage to win concessions in other areas.
While the very nature of the negotiating process may make this unavoidable, those countries need to
understand that resistance to investment is a poor choice. Trade transfers wealth, but relatively slowly.
Investment spurs the pace significantly.

*partie=titre A Look Ahead *partie=nil

National policy will become even more important for investment and growth. All policy decisions
have to fulfil the criteria of transparency, non-discrimination, and predictability. Since investors have a
long term perspective, a stable policy environment is a key element in attracting FDI. These should be
policies that enable rather than inhibit innovation and growth.

A well-communicated, sound macro-economic policy facilitates investment decisions and draws
inward investment.

Investment is intimately linked to trade, and policies for liberalisation should support both the supplier
and customer chains of the investor for goods and services.

There must be compatibility with an open, truly competitive market economy. Innovative processes
are most beneficial without interventionist distortions. Prescriptive regimes that are not technology
neutral will inhibit the potential for incremental productivity improvements.

Recent experience clearly shows that privatisation can be a key to stimulate innovation in domestic
markets. The rate of innovation is increased, creating new businesses, new markets and jobs.

Domestic, bilateral, regional, and multilateral policies should enlarge access to markets. Especially,
the transition and developing countries are in need of an open world trading and investment system.

Every dynamic change in an economy leads to adjustment costs. Policy should enhance the ability to
cope with necessary changes, from bankruptcy to labour market adaptability, and not pursue policies
which try to prevent the inevitable with the expenditure of scarce resources.

A good policy environment includes non-discrimination, national treatment, sound financial and
shareholder governance, efficient and transparent administration as well as a fair, predictable system
of taxation.

While the private sector provides economic growth, public investments in infrastructure, education,
and research are complementary and supporting.

Investments today are seldom directed solely at local markets but must produce competitive offerings,
goods and services, that can move easily from the point of manufacture or creation to the ultimate
customer over an adequate infrastructure. Indeed, investment is frequently made in the distribution
channels themselves to connect over the physical or electronic infrastructure.

One of the first questions on the mind of an investor deals with the quality and motivation of the
labour pool. The quality of pre-school, primary, secondary, tertiary and life long learning educational
capacity will drive the success of investors in the future. In addition to the quality of “output“ in
pedagogical terms, the common thread is one of a propensity to embrace change.

Social policy, whether education, labour market or health care, creates the necessary human resource
environment for sustainable growth and development.

Corruption, lack of transparency, undemocratic governments or unstable policy decisions do not
attract FDI. Hence, the economy will grow below its potential. There is no more common, fatal barrier
to the movement of investment than poor governance. Remember, those resources are someone’s
savings. Nothing is more reckless than subjecting those savings to unnecessary or excessive risk. The
costs of either inadequate or burdensome government are never “lost“. They remain within the
business algorithm and, with regard to many countries, are better avoided. Marginalisation is the
result.

*partie=titre The Crux of the Matter *partie=nil

Investment is the deployment and management of wealth, peoples‘ wealth. Whether cash, equities,
debt instruments, intellectual property or other vehicles, individuals put their savings at risk for a
return that yields growth. At a minimum, those returns are a race with inflation. For most, they are
intended to be a path to prosperity.

There are really no such entities as impersonal “institutional“ investors. All non-governmental wealth
is owned by people. All government wealth was taken from people through taxation. Government
policies that intentionally curb investment and limit growth are an attack on peoples‘ savings and
hopes for prosperity. Capital is no abstraction, and there is no way to shift the impact of policy
choices away from real people.

Growth is not a luxury but an imperative. The search for investment opportunities is a quest for
growth. The potential for sustainable returns is to a large degree a function of the policy mosaic within
both the home and host countries. Only the most aggressive investor can seek and support very high
risk. For those with fiduciary responsibility for other peoples‘ money, a national policy environment
that drives up risk is usually an impenetrable barrier to that which might constitute dramatic potential.
A poor policy mosaic is self-defeating in that it obviates an opportunity for that country, especially a
developing country, to participate in the growth sought by the investor.

As we have said, an inhospitable macro-economic and policy environment is a barrier to the transfer
of myriad externalities such as the diffusion of technology, management skills, employment and its
accompanying tax revenue, training, improved environmental conditions, the deployment of
intellectual property and the spread of innovation.

For many countries, getting these basic policies right requires significant societal innovation in
managing the inevitable dislocations of change and preparing the population for future economic
activity. Here enters the value of an open door for innovation and investment in the public sector as
well as private enterprise. The delivery of social services, especially education, can be dramatically
improved through active embrace of technological and organisation innovation, again, on the path to a
more effective diffusion of economic benefits.

Indeed, a first class education is the greatest benefit that can be bestowed, a blessing to which, little
more than initiative needs to be added for a productive citizen.

Liberalisation alone will not automatically bring a rush of investors, but without it, few will take the
step. Privatisation alone will not ensure competitiveness, but without it, productivity improvements
and increased standard of living will prove elusive. Investment unlocks closed markets by bringing
real competition and, while perhaps shaking local firms, brings the competition that is necessary to
transform them and the market itself to join the global marketplace. To leave that local market
unchallenged by real competition is to doom it to isolation. Investment is the tool that opens the door.

In addition, it is no matter of chance that those who take the pulse of an economy search for indicators
of confidence, from that of the consumer or industrial purchaser to that of the other takers of risk, the
holders of equity and debt. The economy is largely expectations expressed in money, peoples‘ savings.
To the extent that people put their savings at risk, economic growth can, has and will continue to drive
the advancement of other aspects of sustainable human welfare. The public policy mosaic is part of the
platform upon which confidence is built. Growth is the Grail.

Investment, through growth, enables innovation that increases productivity and raises the standard of
living. The enhancement of living standards is the very purpose of government.

*{CHAPTER IV:}*partie=titre TECHNOLOGY AND VELOCITY, THE TURBOCHARGER OF INNOVATION*{24} *partie=nil

There may be a tendency in our discussions of economic growth and innovation to take for granted
some parts of the process that make innovation possible. For example, a wide range of public policy
and attitudes - from the education of scientists to the financing of research and development -
determine the pace and direction of the scientific output that underpins technological innovation.
Therefore, the policy maker who is focused on promoting and sustaining innovation and growth
should not at any moment allow the outcome of education, science and technology policies to escape
his vigilant attention.

Policy linkage from scientific output to technological invention to innovation and growth is built on a
number of premises, which have partly been discussed in the foundation chapters of this paper.

First, economic growth is not everything in economic policy. Equity issues, quality of life, etc. matter
a great deal and are linked to the growth issue. However, without growth, little else happens,
especially at the lower end of the income distribution scale.

Second, whereas innovation is not necessarily the only source of growth in any given year or even a
decade, it is the main source of sustainable growth in the long term. Continued innovation is also
essential if societies are to be able to deal with other aspects of their sustainability, such as
environmental improvement and other aspects of quality of life. Ad absurdum, were there to be no
innovation at all, the growth of output would come to a halt at the end of the last remaining product
cycle. The growth of multi- (or total-) factor productivity in turn is unmistakably a sign of learning
how to do things better with existing, replacement or fewer inputs, which we equate with innovation.

Third, while the specific origin of the current focus on growth was to explain recent divergence in
growth performance and to link it to various potential determinants, this has opened a useful avenue of
research re-focusing our attention on the sources of growth in general, and not only during the recent
divergence. This is useful because the change in performance may not only result from changes in the
status of determinants. The impact of given institutional or other factors on innovation, productivity
and growth may be changing in itself. Thus there may be changes in the outcomes (e.g., innovation)
while the determinants remain more or less unchanged (e.g., the way universities and industry interact)
in a country.

Why some factors that did not strongly affect economic performance in the 1960s or '70s may do so
now is something that needs to be studied and clearly elucidated. Some of this may have to do with
the fact that an increasing number of OECD countries have approached the older industrialised
countries in terms of economic and institutional structures, and have thus lost the ability to grow by
simply "catching up" and “leapfrogging” (with a good deal of copying and technology transfer
involved). This last aspect is particularly important in the context of generation and diffusion of
technology, which is the subject of this chapter.*{25}

*partie=titre Technology generation vs. its use *partie=nil

There is a tendency in policy discussions to equate innovation with research and development (R&D)
and then to treat all R&D as being of a similar nature and part of a linear sequence of events from
scientific discovery to new technology, whether performed in academia, public institutions or by
industry. This is understandable but can be very unhelpful.

Part of the difficulty is one of terminology: and if we recognise innovation as successfully enabling the
introduction of something new into the market place (or indeed eliminating something that has become
obsolete), we can go a long way towards overcoming this. Equally, we can fall into the trap of
overemphasising the things we can measure. R&D is clearly a powerful driver of innovation, but every
dollar spent on R&D does not affect innovation and growth in the economy as whole in the same way.
Policy makers should be careful not to rely too heavily on R&D policy analysis simply because they
have a relatively well-understood methodology for tracking certain aspects of that indicator.

Most of the economy consists of users of a given technology. In the context of the growth discussion,
the important questions are frequently about the breadth of application of a technology outside the
sector that originally produced it. This process of technology diffusion involves considerable research
and testing by innovating enterprises, but it may not always be clear that this is a recognisable R&D
effort with separately earmarked expenditure carried out by autonomous units within the enterprise.

Many policy questions remain insufficiently analysed due to too heavy a focus on basic R&D. What
level of R&D is necessary and sufficient for adapting, adopting and productively using a proven
technology? Which policies affect the propensity of enterprises to make that expenditure? Are such
expenditures reported in way that is captured by R&D statistics? How does all of this relate to
organisation and managerial innovation within the firm - which is probably not revealed by traditional
R&D methodology? In this context, capital expenditure as such in "new" or newly adopted
technologies may be an equally relevant indicator of technology and innovation diffusion in the
economy in comparison to R&D as such.

The following analysis may illustrate the limits of using the available R&D data as an indicator of
productivity-enhancing innovation. Figure 4.1 (below – page 42) plots changes in MFP growth in a
number of OECD economies between the 1980s and the 1990s against changes in R&D intensity
across the same period.*{26} While there may appear to be a positive general correlation between the two
variables, policy makers need to consider additional observations. Firstly, and most importantly, there
is simply too large a number of countries which combine a similar amount of change in R&D intensity
across the two decades under consideration with very different amount of change in MFP growth
(observe the vertical congregation of countries at around 0.2 percentage points of change in R&D
intensity, with changes in MFP growth ranging from -1.6 percent for Spain through +1 percent for
Australia.). Secondly, a group of countries congregated in the upper right quadrant of the Figure
(Canada, Australia, Ireland, Denmark, Finland, Sweden) suggest that fairly comparable performance
in improving MFP growth was attainable by a group of countries with a widely different changes in
R&D intensity.

There is a need to refine the analysis concerning research-intensity and productivity. Much more
attention needs to be devoted to factors which affect the application of technology. This point is very
important since in a given technology all countries are not likely nor need to be technological
powerhouses, and in any case, they cannot all be world leaders. Quite to the contrary, their principal
benefit from that particular technology is likely to come from mastering its diffusion and use. This
however, does not stop most developed countries from attaining a leading role in some technologies.

*partie=titre Intellectual property rights *partie=nil

Once attention is focused on the diffusion of technology, as distinct from its invention in the first
place, the question of intellectual (or industrial) property becomes a major factor in the productivity
and growth discussion. Intellectual property right (IPR) is a not a mechanism for hiding knowledge.
Quite to the contrary, IPR is a device for ensuring the dissemination of knowledge embodied in a
product or process. The handling of this right is therefore a central policy tool in the so-called
knowledge economy.

Unfortunately, much current attention in IPR policy debates is wrongly focused. The perceived
opposition between strengthening IPR protection and enhancing technology transfer is a false
dichotomy. It is confusing to present the policy challenge as a "balance" *{27} to be struck between
promotion of innovation vs. diffusion of knowledge by means of circumventing IPR protection. Quite
to the contrary, the combination of a time-limited protection from copying and an obligation on the
inventor to make public the invention can represent in itself the balance that is being sought.
However, the form of that balance does depend on the nature of that invention. Hence:

· Strong and effective IPR protection is a particularly powerful incentive for firms to invest in
generating new technology in sectors where the returns to technological investment are very long
term and involve high risks and where the invention may be easy to copy.

· That in turn is the effective way to promote the diffusion of knowledge in the long term. IPR
protection is a market-based mechanism for disseminating knowledge.

· Policies and approaches which appear to favour spread of a given stock of knowledge by means of
relaxing IPR protection discipline can only form a strong disincentive to investment in knowledge
in the longer term. Besides, firms in many product categories have the option of not using IPR
protection, keeping inventions secret, and avoid having to share knowledge.

· That, in turn, is likely to make collaborative partnerships among firms or between them and public
entities such as universities and government laboratories even more difficult to build, which would
further depress the generation of knowledge in the society.

OECD could usefully contribute both to the IPR and growth debates by illustrating (cross-country
bench-marking) the link between IPR protection and knowledge generation and knowledge
dissemination through international transfer of technology and know-how. The Organisation could
also shed further light on technology diffusion issues by joining up its analysis in this area with an
analysis of the ways in which cross-border R&D is related to general conditions affecting a country's
receptivity to international investment.

*partie=titre Cross-border dimension of IPR and R&D *partie=nil

Preliminary evidence in a recent OECD study *{28} casts a measure of much needed light on the
international dimension of R&D and innovation, and shows that strong R&D performance is closely
associated with a high level of R&D activity by foreign enterprise affiliates and research bodies. It is
intuitive that some key parts of the R&D process should tend to concentrate in centres of excellence,
because of the general S&T resource endowment, availability of financing and intellectual crossfertilisation
that these centres make possible. However, it would be of interest to study how that is
correlated with centres of excellence in terms of IPR protection both in letter and spirit.

Indeed, given that most economies are small with respect to the total world economy, most discoveries
are learned from the Rest of the World. However, with the need to have greater openness to
knowledge and technology flows from abroad in order to benefit from the internationalisation of
R&D, the issue of compatibility between IPR regimes and the affordability of widespread IPR
protection becomes a central policy issue for productivity growth.

Policy advice in this area should emphasise a firm commitment to existing international treaties, while
simplifying procedures as much as possible.

*partie=titre Technology and growth *partie=nil

All scientific inquiry and technical progress does not have to aim at productivity growth. For instance,
countries need to develop and perfect technologies to minimise risks from natural hazards
(earthquakes, rising sea levels, etc.) all the time - it is an issue of survival. Investment in the areas of
aerospace and astronomy does not need to be made in the first instance with a principal eye on spin-off
inventions and insulation technology for atmospheric re-entry vehicles was not designed with a view
to develop Teflon frying pans. Less flippantly, the major breakthroughs in atomic physics 100 year
ago and molecular biology 50 years were made without any appreciation of the economic growth that
would result towards the end of the 20th century.

Such spin-offs are a bonus, the value of which cannot be calculated ex ante. There are many areas of
technology, from particle accelerators to space exploration, where the initial object of curiosity serves
to enlighten humanity and raise our face from the daily mud in which we toil. The principal policy
discussion in relation to such basic research is not about the relative amounts of public funding
allocated to them in comparison to commercially-oriented research, but the mechanisms for reviewing
the effectiveness of such research in achieving its own objectives and the objectives that society has
set in general, and this cannot not be subject to direct market-based verification. Basic scientific
research (and for that matter military R&D) requires its own evaluation process which is unlinked to
growth and productivity, but should still be performance-oriented in some longer term fashion.

What one needs to focus on is what level of funding is available for commercially-relevant R&D, how
it is financed, and how evaluation is linked to performance. Equally important as R&D, industry
depends on the availability of skilled personnel in the context of applying and using technology.

It has been clear for many years that fundamental research underpins future commercially-oriented
R&D. In recent years, it has also become clear that in some important sectors the process is not a
linear sequence of events: commercially-oriented R&D can itself be highly fundamental and/or
directly stimulate new fundamental work. Maintaining sufficient funding for fundamental research is
therefore an economic interest as well as a scientific one. However, fundamental research cannot be
evaluated in the context of economy-wide productivity. A better way to evaluate its performance is to
evaluate how open fundamental research organisations are to interaction with the private sector and to
determine whether there are hidden barriers that hamper fruitful cross-fertilisation, especially outside
geographic boundaries. (A simple example is the question of state aid for R&D, which impacts at the
interface between competition rules and national and international research and innovation policies.)

Institutions of higher learning play a dual role in terms of both providing a locus for a significant share
of R&D activity as well the generation of skilled labour force. It is observed that closer links between
university staff and the economy leads to stronger ties between basic research and patent applications.
Such closer links would also help maintain the skill output of universities in sync with the skill
markets. Concerning the valorisation of IPR emanating from public institutions, profits from them
should be able to flow back into public R&D and generate reward to their inventors.

Unjustifiable institutional barriers should be removed to enable scientists and researchers in industries
and public research institutes to work more closely in comparatively advantageous environments and
thus to develop their competitiveness based on such collaboration.

*partie=titre Technology, time and policy *partie=nil

In discussions on the impact of new technologies on the economy an argument frequently raised states
that there is a natural limit to how fast the use of a technology can spread. The slow diffusion of
electrical and electromechanical technologies and associated products during the twentieth century is
often given as a typical example.

The argument is well taken in the sense that one always has to remain humble and cautious with
respect to the question of how a new set of technologies may affect productivity in the whole
economy. While we must refrain from excessive technological determinism, we also need to clarify
how policy can affect the rate of diffusion. A comparison between the electrical technologies and the
more recent ICTs opens an interesting insight into the role that might be played by openness in
technology diffusion.

Most of the principal scientific discoveries in the area of electrical technologies accumulated
especially in the last decades of 19th century, and partly in early 20th. This was an era characterised
by increasing economic nationalism, isolationism in economic policy, rising trade barriers, economic
blocs (e.g., British Imperial Preference, U.S. Smoot-Hawley Tariff Act of 1930s and their
equivalents), competitive devaluations and beggar-thy-neighbour policies in every manner of ways -
not to mention two World Wars in which most of the countries sitting around the OECD table were
engulfed.

Would the speed with which electrical technologies and associated products diffused been the greater
if the world economy had been characterised between 1880 and 1940, as it was in the early 19th
century, and was going to be in late 20th century, by increasingly freer trade and a wide range of
economic co-operation organisations (such as the OECD)? Almost certainly.

The international openness dimension is only one of the reasons why we may expect a faster diffusion
on innovation today then 50 years ago, together with shorter products cycles and other aspects of
business management that mitigate for higher velocity. However, the OECD could help identify the
points where policies for openness interact more specifically with policies for innovation and growth.
Presently, policy discussions in the areas of science, technology and innovation tend to be conducted
within a closed autarchic economy mindset. This is partly understandable in the sense that many
science and technology and innovation policy authorities typically have few international
responsibilities. But, now that innovation has been recognised as a central policy issue in economic
growth, and it has long been known that our economies are largely interdependent, it is incumbent
upon the OECD to highlight the cross-border aspects of innovation.

Highlighting the international scientific and technological interdependence is a particular
responsibility for the OECD Committee on Science and Technology Policy. Highlighting the
interrelationship between scientific and technological policy and economic openness is a responsibility
for the OECD as a whole.

Another openness question relates to the public preparedness for innovation. The process of discovery,
evaluation and application creates opportunities but involves uncertainties and risks, and takes place
against a backdrop of expectations and concerns. Superficially, it seems that too much or too little
openness may be inappropriate in achieving the optimal rate of diffusion and successful innovation. A
trivial example is that an unwelcoming public may seem to set back the widespread application of
biotechnology. The underlying issues are of course more sophisticated, but it is clear that the question
of openness needs to be explored in rather more than its economic dimension.

Specifically, the OECD could help deepen our understanding of how openness is correlated with
successful outcomes in various issue areas including:

· Cross-border R&D; its importance and impact on national innovation; is there really a dichotomy
between investing in national innovation and purchasing foreign technology?
· International movement of skilled labour force; how real is the threat of "brain drain"?
· Trade in technology-intensive services (e.g., telecommunications services); how this relates to the
diffusion of advanced technologies and business models?
· Societal views towards technology and the mechanisms that are used to prepare people for change.
"New technologies" and the challenge of balanced policy

Two new technology clusters attract particular attention: ICTs and biotechnology. Both benefited
from significant government funding at basic research level. But, their recent explosive growth in
utilisation was carried out in a commercial environment, in a way driven by the private sector, in ways
not anticipated by the original public research - it is fair to say this at least in the case of ICTs and
Internet in particular.

In the post embryonic phase such new technologies may need, above all, an institutional environment
which privileges entrepreneurship and economic liberty. That may be messy but is also creative. That
requires risk-taking at the policy level.

Thankfully, that has been largely the case in the context of ICTs up to now, hence the current intense
impact from Internet.

Can we expect a similar post-embryonic evolution in other nascent technologies such as
biotechnology? Or, are some sectors of biotechnology already so stifled by non-scientific political
considerations that its dynamism will be constrained? The next Section focuses on the innovationeconomy
linkage in the particular context of biotechnology and outlines business' views regarding
policy in this area.

*partie=titre Biotechnology and Innovation *partie=nil

Innovative technological change has raised living standards, improved quality of life and enabled
mankind to combat hunger, disease and environmental degradation. Innovation, comprising
technological progress plus other forms of new knowledge, may account for more than half of all
growth.*{29} Biotechnology is one of the emerging technologies that will fuel such innovation.

Genetic modification technology facilitates improvements across a broad range of human activities
more rapidly, more precisely and for a broader range of attributes. On-going developments in modern
biotechnology provide the prospect of significant steps forward in mankind’s efforts to tackle a
multitude of problems that cause misery and delay progress for so many people globally. These
problems range from illness and diseases that levy a phenomenal social and economic cost, to critical
nutritional and environmental challenges. Biotechnology benefits existing sectors, as well as creation
of new areas of work for small, medium-sized, and large companies alike.

However, technological innovation raises new challenges for society which demand different policy
responses as societies adapt to new technologies. These choices take place in different contexts and
priorities that are defined by a country’s level of development. Managing the uncertainties of
innovation through rigorous risk assessment and risk management, built on a foundation of sound
science, and including transparent consultation with representatives of all members of society, ensures
the most beneficial societal choices will be made with respect to technological innovation.

*partie=titre Biotechnology and Sustainable Development *partie=nil

Whether through increased economic development through innovation, or through improving the
health of the population, modern biotechnology has an important role to play in sustainable
development.

Business is committed to implementing the concept of sustainable development by fulfilling industry’s
primary role as a vital driver for realising the vast potential benefits of biotechnology in a way that is
increasingly in harmony with environmental needs while providing human and social benefits, now
and in the future. Business strongly supports sustainable development and the protection of human
health through its own actions and high standards of care. It is convinced that liberalised trade,
biotechnology advances and effective environmental and health protection can be mutually supportive
contributors to these objectives.

*partie=titre Biotechnology and Sustainable Agriculture *partie=nil

All agricultural production represents a change to the natural ecosystem in order to provide food and
fibre in a productive and cost-effective manner. To be sustainable, production systems must prove
their ability to maintain a certain level of productivity while minimising the threat of long-term
damage or degradation to the environment or resource base.

Modern biotechnology is one new and important tool for the agri-food industry. It facilitates the
improvement of a broader range of attributes in plants and food products and achieves this more
rapidly and precisely than in the past. Industry sees biotechnology as offering real potential to
contribute to meeting the needs of an ever-growing world population for affordable and wholesome
foods produced in an environmentally sustainable way.

Business supports rigorous testing and comprehensive regulatory systems, according to generally
accepted scientific principles, to ensure the safety of new products. In return, agri-food businesses
expect to be able to operate in a stable environment, regulated by a framework of internationally
agreed rules based upon recognised scientific and economic principles. The implications of the use of
modern biotechnology are global, so it is at this level that discussion must take place and balanced and
responsible policy responses found.

*partie=titre Biotechnology and Human Health *partie=nil

Biotechnology can also significantly improve the health care provided to society. For developing
countries, access to vaccines and basic health care can be improved by modern biotechnology through
innovative and lower cost delivery systems, such as banana-based vaccine processing. For developed
countries, the ability to increase quality of life through targeted products is an important benefit not
only for the aged in society, but also in relation to economic growth and sustainability.

The November 2000 OECD Workshop on Biotechnology and Ageing recognised that biotechnology
can aid in the identification, treatment and prevention of diseases and disabilities, improve health and
enhanced quality of life of senior citizens; decrease the burden of care provision, and reduce the
economic burden of ageing on society. Governments should ensure that their policies, especially
intellectual property rights, continue to facilitate the innovation necessary to achieve these benefits for
society.

*partie=titre Specific Policy Recommendations *partie=nil

BIAC recommends the following activities be undertaken at the OECD to help facilitate innovation
and sustainable growth in biotechnology:

· Develop and disseminate a statistical picture of the sectors that supply biotechnology-related
goods and services. A similar undertaking has been completed on the ICT sector.

· Strengthen international co-operation and information sharing, especially among
intergovernmental organisations, on the full range of biotechnology applications.

· Undertake cost/benefit analyses of the various policy options under discussion, including
processed food labelling.

*{CHAPTER V:} *partie=titre EDUCATION AND EMPLOYMENT, SOCIAL INNOVATION IN A KNOWLEDGE ECONOMY *partie=nil

Throughout the series of chapters of the BIAC paper, the magic of our central premise is its focus on
the individual, in concert, human capital. Human ingenuity conceives markets and innovates to serve
them. New technologies hold the promise for higher economic growth. However, to fully realise these
gains, skills must be upgraded to match the changing labour market requirements, individuals must be
mobilised to seize business opportunities and firms must adapt their organisational structures.

The quality of human capital is a key contributor to innovation and economic development and is
becoming all the more important in the context of the knowledge society. As trade in services and
information grows, the new economy will increasingly call for employees with new skills and
competencies beyond those in the traditional economy. Therefore, an efficient education system,
adapted to the needs of the labour market, and the improvement of skills and employability are crucial
to continued economic growth and increased employment.

At the same time, the uptake and diffusion of ICT and its applications, such as e-commerce, have a
direct impact on business routines. As globalisation proceeds, open markets, competition and the free
flow of goods, services, new technologies, capital and knowledge are creating a new economy in
which the speed at which transactions are taking place and information is being communicated
throughout the world creates new demands on business practice, work organisation and labourmanagement
relations.

The new economy is much more than the generation of new technologies. It includes the widespread
diffusion and adoption of these technologies, the development of new skills in the work force and the
use of new forms of work organisation, which affect both traditional and new businesses. As ICT has
penetrated all sectors of the economy, one might speak of a “renewing of the economy” rather than
create a separation between “old” and “new”.

*partie=titre The Growing Importance of Skills and Competencies in the Learning Process *partie=nil

The emergence of the knowledge economy means there is greater focus upon and recognition of the
notion that people and their skills are the key to international competitiveness and sustainable growth.
At the same time, it implies an increasing pace of change, for which new competencies must be
acquired. To better adapt school programmes to the needs of the employment market, a careful
analysis of the skills required for specific sectors/jobs and their broad commonalities is an essential
step, which can be facilitated by close co-operation with the business community.

The impact of the present development of the New Economy goes beyond the IT-sector and its
directly-related services. In their application, new economy technologies reach everywhere in the
“Old Economy”, e.g., electronic banking, e-commerce in the retail-sector, digital printing etc. The
ability to use Information and Communication Technologies (ICT) is therefore an indispensable
prerequisite for work across the wider spectrum of business. ICT skills should be a standard set of
tools accessible to pupils from primary school on. Renewal of these skills and competencies should be
among the main pillars of lifelong learning (LLL), starting from early childhood education and
continuing throughout training in the framework of an adult’s career.

Although OECD countries have succeeded in raising educational achievement levels, there are serious
skill shortages due to the new demands of the current innovation-based business transformation. The ICT
industry per se has created many jobs and has long-term potential to continue as well as to spread job
creation to other sectors. However, the gap between demand for employees skilled in the application
of ICT to business processes and the supply of those skills is expected to rise. The skills gap imposes
costs on business in the form of lost productivity, hiring and recruiting costs and limits on growth.
Educational institutions should therefore introduce new ICT curricula targeting the common needs of
industry. Close co-operation with business to tackle the skill crisis and to help define precise skill
requirements, as well as partnership between industries and universities/technical institutions, are
essential to deliver positive results.

While ICT skills need to be given increasing weight in today's curricula, other basic skills, such as
literacy and numeracy, must remain within the foundation of the education system. In addition to the
acquisition of knowledge and the skill to handle, analyse and exploit information as well as to create
new knowledge, companies need employees with good generic skills, including the ability to organise,
to work in teams and to communicate effectively. Project work, self-activating learning and effective
use of information resources are important elements to be added to the toolbox of learning. Personal
skills derived significantly from pedagogical methods, such as a sense of responsibility, an
entrepreneurial attitude and the ability to take advantage of change are the bridges to adaptation to a
fast-moving work environment.

In addition to developing skills and competencies in initial education, the current and future labour
force will have to acquire new skills from other sources. An economy with heavy emphasis on
innovation and services requires that adults continually update their skills and competencies.
Education and training systems will therefore have to offer learning opportunities targeted to groups at
different stages of their lives, including young people, the unemployed and employees who are at risk
of seeing their skills become obsolete due to the fast pace of change. Adaptability to technological
developments will become increasingly important in work and in life in general.

*partie=titre Securing the Benefits from Lifelong Learning for All *partie=nil

Professions, old and new, are being reinvented and created rapidly, and job profiles are less stable than
some decades ago. LLL is becoming more and more important as the need for re-skilling will be
increasingly distributed throughout life. There is a broad realisation that a high-quality initial
education prepares individuals for LLL throughout their career. For this reason, it is very important
that public authorities offer a publicly-financed and high-quality initial education system as a basis for
future progress. The initial education system should enable each individual to obtain the highest
possible qualification according to his or her ability. Motivating students to accept change and
continue learning throughout their lives should be expressed as a basic curriculum principle.

Effective transition policies are essential to facilitate smooth entry into the labour market. A flexible
approach to designing pathways based on the needs of the individual, the requirements of particular
industries/job markets, as well as country and regional differences are important elements to be
considered. Short-term placements of students in industry as part of their university or technical
institute studies should be encouraged. Although it is worth keeping a framework of well defined
vocational and academic qualifications in order to have maximum transparency, those qualifications
must be responsive to the velocity of developments in many sectors, which cause changing job
profiles. The basic element of curricula should be complemented by a more flexible part to allow
schools to adjust to the needs of their changing local environment.

Both employers and employees have a major responsibility with regard to further training. Employees
need to take initiative to develop transferable skills and to be receptive to learning that is not
exclusively job- or firm-specific. Employers can provide development opportunities at the workplace
as well as firm- and job-specific training. Indeed, large corporations spend massively on internal
training and education. In addition to initial education, Government can encourage further training by
offering incentives for personal and company investment. At the same time, government has a special
responsibility for those, unemployed as well as employed, who were poor performers or never reached
the first level of vocational qualification in the initial education system.

The application of ICT is an effective way of improving cost-effectiveness of the education system
while at the same time increasing participation in LLL. Digital technologies can transform how, where
and when learning takes place. These programmes are often more attractive as they do not involve
travel and accommodation costs and are flexible with regard to timing. ICT brings to education the
capacity to reach a large audience with consistent quality of content and to target groups with specific
needs. The provision of education can also be made more flexible by opening up school facilities for
adult training and further education and by using the potential that private providers offer. The major
challenge of the 20th century was to offer good initial education to all; in the new century, our ambition
should be to achieve LLL for all.

Particular attention should be paid to the concept of “life-wide” learning, which means that schools or
formal training are no longer, if ever, the only places or ways to learn. There is a variety of places and
methods, not the least the workplace itself and at home. We see emerging new methods, such as webbased
learning, pre-school education or initial education delivered at home by cable-TV, specialised
company-courses, distance learning with support of multimedia. Opening the trading system to
delivery of these services will be key to the efficient diffusion of these skills globally. Much of the
investment in LLL has an informal character, especially in SME's, and does not manifest itself in
surveys and statistics. Better measuring and monitoring systems are required to unveil this hidden part
of personal investment. Informal learning may be difficult to define, but it promises to return
considerable value in the quest to develop productive citizens.

*partie=titre Developing Innovative Teaching and Learning *partie=nil

High-quality education systems are crucial to ensure social cohesion and sustainable economic
growth. In this respect, new technologies can make an important contribution. ICT has the potential to
transform teaching methods by giving students more control and by offering access to an
unprecedented wealth of information. Through the application of ICT, teachers can improve their
students' attention, interest and ability to retain, using activating methods. Well used, ICT enables
learners to engage more directly with the subject, through interactive systems, virtual experiments and
networking with other learners and teachers. To make full use of these opportunities, investment must
not just be in software and hardware, but in training teachers how to use ICT in the teaching/learning
process. If knowledge is wealth, its management should be as extensive, efficient and effective as any
other form of investment.

Teachers are central to the reform process, which implies that their own LLL must be assured. They
must keep in touch with developments in firms and society in general, for which they are preparing
their students. An efficient system of training and re-training is needed to equip them for these new
challenges. In order to ensure that teachers are up to date with professional developments, training
must be available on an ongoing basis, including training in non-educational environments. In
addition, Public Employment Services have the responsibility to provide feedback to those planning
and delivering initial as well as re-skilling education.

Government policy offering new pathways to the teaching profession should be encouraged. For
example, it should be possible for experienced staff to accept a teaching job in vocational education
(full or part-time), thereby sharing their practical experience with students. Although this would
require additional pedagogical training, experience and high motivation should be recognised as
important factors for successful teaching. In this context, schools and employers can co-operate by
encouraging increased mobility between enterprises and the education system, as they are both
interested in preparing students adequately for working life.

Reliable systems of accountability are needed to ensure that schools provide adequate value for money
and monitor closely the various cost elements. In addition, clearly defined standards of knowledge and
competencies are needed to measure achievements. The system must also provide incentives for better
performance to create a rewarding system for individual schools, teachers and students. Teachers
should be given the opportunity for a career which rewards good performance and offers incentives.

*partie=titre Maximising employment and income stability *partie=nil

One of the great benefits of the new economy is that it holds the promise of higher economic growth
and employment. In the new economy, the employer/employee employment relationship has been
turned upside down. Employees no longer stay with a single company for their entire career. People
entering the workforce today will work for ten different organisations and change careers at least
twice. A key to guaranteeing employment and income security for new economy employees is to
ensure that they are equipped with the skill base to easily move from one job to the next. Firms can
provide high-quality work experience and set an energising context for social development, while
employees need to consider the development of transferable skills and employability as a primary
career goal.

Companies are shifting to a smaller core workforce, which is supplemented with a contingent
workforce that has the skills needed at that moment. There needs to be a move from the old model
that relied on individual employers to provide employment and income security. Cross firm,
community-based institutions are promoting mobility, lifelong learning and other services. The
modern workforce needs such things if it is to prosper in the new economy.

In many cases, regulations that hinder the mobility of employees and prevent the rapid and efficient
reallocation of labour resources must be reviewed. The ability and willingness of labour to move
across borders is a key factor for meeting localised skills shortages and maximising employment.
Governments have to create an environment conducive to the acquisition of skills and competencies.
The emphasis should be on increasing skills levels while at the same time allowing for increased
mobility of labour.

*partie=titre Changes in work organisation and business practice *partie=nil

The new ICT-based technologies require more flexible labour markets. New companies start up and
existing companies reorganise. Companies must invest in new working methods and introduce new
organisational techniques. Governments will have to develop comprehensive public strategies that will
make it easier to carry through organisational reforms in the workplace and beyond that can encourage
growth in the use of ICT.

In the new economy, global companies are focusing on their core business. As business structures are
becoming more decentralised, the role of corporate headquarters is shifting from command and control
to company governance and high-level operating policy. For decades, many international companies
pursued a highly decentralised approach with regard to operations outside the home country. The
intent was for operations outside the home country to be seen as national companies or local citizens.
At the same time, a company might have had a more centralised approach in the home country.
Today, many operational aspects of companies have been devolved to local operating entities in home
and host countries. However, a centrally directed world-wide strategy is often in place within
companies, including for example, company financial reporting, currency management, marketing and
sales, environment and safety-health applications, production rationalisation, research efforts, and key
managerial assignments.

Dual income families are becoming the norm, which is driving the need for more flexible work
arrangements that allow for better balance of work and family. These work arrangements include parttime,
temporary, freelance, homework, job sharing, and tele-commuting. Flexible working time
patterns initiated decades ago have become more widespread and diverse. For example, the long
existing 12 hour shift schedule of the flexible work week, with the number of days worked each week
varying from week to week, has expanded in design and extent of application, such as to utilisation of
a work week of four 10 hour days. Flexibility in some companies has allowed employees help shape
their own hours, such as hours that overlap with operations outside their home country or to meet
family needs.

With the increased application of technology and telecommunications in the new economy, employees
can be located anywhere in the world. A company headquartered in one country can have employees
working for them in multiple countries half a world away. Home country operations are directly using
employees in various countries for computer programming and software development. The movement
from country to country of some employees, such as in technical, research, marketing and managerial
work, serves to strengthen a local entity’s workforce regarding skills, knowledge and technology
transfer. At the same time, there is increased international competition in the recruitment of highskilled
employees.

*partie=titre Labour relations in the new economy context *partie=nil

Labour relations’ laws and practices are very different from region to region. Many new economy
companies are “union-free” as employees find greater benefit in individually negotiating contracts
with their employers to maximise their personal benefits. There is a general trend among the whitecollar
workforce away from unions while at the same time an increase in the unionisation of the
service sector, civil service and educational institutions. Labour is ever intensifying its demands to
partner with management in setting the direction of the company, especially on business decisions that
impact on employment. In some OECD countries, for example, there is a trend toward industry level
bargaining, and some industries are seeing the rise of global co-operation agreements with labour.

The new economy requires a more flexible, decentralised approach to “managing” the industrial
relations legal framework. In today’s varied workplaces, rigid regulations quickly become
unworkable. Nonetheless, throughout OECD countries, there has been an increase in regulations in
recent years. In 1998, the International Labour Organisation adopted with no dissenting votes a
precedent setting ILO Declaration on Fundamental Principles and Rights at Work applicable to all 174
ILO member nations. The Declaration commits all ILO members to “respect, to promote and to
realize…the principles concerning fundamental rights” that is the subject of seven fundamental ILO
conventions. The Declaration represents a solemn commitment of the 174 ILO member nations to
seek to achieve the goals and objectives, but not the detailed legal requirements, of the fundamental
ILO conventions.

*partie=titre Fostering entrepreneurship and job creation *partie=nil

A key element in the sustainable growth equation is ensuring that individuals actively participate in
the labour market and seize business opportunities. High administrative barriers and overly
complicated regulations in the registration of new businesses add to the cost of firm creation and
discourage start-ups. The creation of new businesses must be possible at competitive costs and involve
regulations which are not overly bureaucratic. Governments have an important role to play in easing
regulatory burdens and removing fiscal barriers. At the same time, educational systems promoting
favourable attitudes toward seizing business opportunities and accepting risks can make an important
contribution to encouraging entrepreneurship. Ensuring a good environment for new companies is
important to growth and should be given increased attention by governments.

A sound policy framework strengthening the competitiveness of companies is an essential prerequisite
for the private sector to make its full contribution to creating new jobs, and thereby to funding social
networks in the future. Particular attention should be paid to encouraging self-employment and
improving the conditions for the creation and growth of micro-businesses and SMEs, which play a
crucial role in job creation. Economic growth and structural change, which are accompanied by
improvements in public health and reforms in social welfare, are key factors for sustainable
employment.

The OECD made an excellent contribution on how to address these problems in its 1994 Jobs Study
and subsequent follow-up reports. Job growth can only be achieved if Member states implement the
necessary structural reforms of their economies and facilitate policies which are conducive to greater
flexibility, competitiveness and job creation. Some steps have already been taken. However, these
measures frequently do not go far enough in addressing the serious structural problems that exist in
most of our countries.

A more competitive environment must be created, in which labour markets are sufficiently flexible so
that companies can match the right skills, employees and work organisations in response to changing
circumstances. Companies require flexible labour markets in order to respond to changing market
shifts, customer needs and competitive pressures. The overall public burden of taxation on both
citizens and companies will and should be under continuous pressure.

Companies and their employees must have a capacity to innovate and be prepared to invest in new
technologies and implement new organisational change. The success of technological and
organisational innovation depends to a large extent on the ability of individuals to absorb change. The
advent of the knowledge society, the diffusion of new technologies, ageing populations, increased
cross-border movement of people and ideas will define the key challenges for education policies, work
organisation and labour markets for the years to come.

*{CHAPTER VI:} *partie=titre INNOVATION AND THE ENVIRONMENT – LEARNING FROM OUR SUCCESSES *partie=nil

Working toward sustainable growth is a key challenge for the new century. Business and industry is
fully committed to advancing the complementary themes of economic growth, environmental health
and social development, which benefit all sectors of society, which are, broadly speaking, our markets.
Contributing to these objectives should be considered in the context of business opportunities, which
requires researching and harnessing innovations in product design and manufacture, management
systems, and their nexus with public policy. Increasingly complex environmental challenges will
require continuous innovation in science, technology and management systems to find
environmentally sustainable solutions that spur, not impede, economic growth.

*partie=titre Continuous improvements in environmental performance through innovation *partie=nil

Experience indicates that innovation can contribute to breaking the links between economic growth
and environmental degradation. Upgrading technology is a prerequisite for more effective use of
resources and thus improving environmental performance, which becomes all the more important in
view of a rapidly growing world population. In most cases, newer technologies and processes are both
more efficient and less polluting than the technology they replace, allowing increased production using
less material and causing less pollution. At the same time, environmental performance often presents
business opportunities that enhance firm-level efficiency.

Technology development depends on the effectiveness of the R&D efforts both in the public and
private sectors. While government efforts are key, most non-defence R&D takes place in the private
sector. There are continuous, robust industry research programmes under way in the areas of materials,
materials management, process engineering, etc., which are focused on the efficient and cost-effective
use of product inputs and natural resources. Public policies need to take into account both the potential
and the complexity of these environmental innovations, as well as of the flexibility, support and
incentive structure that encourages firms to innovate and diffuse new technology, bearing in mind that
commercial success depends upon carrying out business in value-creating ways.

*partie=titre Business opportunities through better environmental performance *partie=nil

Firms that give priority to resource productivity, process change and product innovation can achieve
significant performance gains at lower cost. A competitive firm must have as robust a programme of
cost reduction as it does in the pursuit of market share. Strategies to improve performance often also
reduce negative environmental impacts. The first point of departure is to search for ways to reduce the
use of inputs or materials and natural resources. Another focus is on the reduction of energy use.
Lower costs, driven by competition, bring prices down and can in many cases improve environmental
performance. More efficient production processes and products through innovation and a reduction in
resource use and pollution can be mutually reinforcing objectives.

*partie=titre Offer a sound regulatory framework for innovation *partie=nil

The market depends on a stable and supportive framework of public policy. Business benefits from
regulation that is predictable and consistent, but not overly prescriptive. It is critical that the regulatory
framework encourages innovation and fosters beneficial technological change. Given the economic,
environmental and social importance of innovation, regulatory programmes need to fully take into
account the effects of regulations on the development of new technologies. This can involve the
revision of a single regulation, a regulatory regime, or the improvement of processes for managing
reform. Regulatory reform to increase competition and encourage new market entrants is key to
innovation. Policies need to be flexible and incentive-based and be designed to stimulate dynamic
efficiency. Innovation policy approaches need to look for creative ways to enhance co-operation
across sectors, from research & development to commercialisation, as well as public-private
partnerships to meet particular research challenges.

*partie=titre Use market-based incentives as a tool for environmental improvement *partie=nil

Regulatory programmes that take advantage of market forces can achieve impressive environmental
results with lower transaction costs and fewer prescriptive requirements than traditional approaches.
These tools – which rely on marketplace incentives rather than direct, command-and-control
requirements to achieve environmental performance – need to be extended to a wider range of
pollution control and prevention programmes. Innovations in product design, pollution prevention and
resource management will work best in a regulatory system that builds on business's proven success in
meeting requirements through investments in science, technology and process innovation. Fiscal
policies need to provide incentives, e.g. lower statutory rates, R&D credits or deductions, for firms to
invest and innovate, thereby improving environmental performance. For instance, an R&D credit that
leads to particularly successful innovation in environmental technology, with the agreement of the
environment and finance ministers, could be raised to some multiple or transformed into an ongoing,
repetitive deduction.

*partie=titre Develop policies and strategies that focus on performance *partie=nil

Drawing on many recent innovations in environmental stewardship that have emerged from
government and the private sector, public policies should foster a culture of performance-based
management. This culture would focus on defining, measuring and rewarding environmental results
and reorienting core regulatory functions so they are driven primarily by performance goals. Policies
need to set clear, transparent goals that establish desired environmental outcomes and give business
greater flexibility in determining how to achieve these outcomes. Regulatory renewal and a
performance focus by industry to effectively track and communicate progress should also be
encouraged.

*partie=titre Support voluntary actions in environmental policy *partie=nil

Industry relies on innovation to improve production efficiency and reduce environmental impacts.
Voluntary actions represent a promising approach with respect to many environmental problems. They
are based on a comprehensive consideration of technical trends and other management-related issues
and allow those with the best knowledge about their own business to propose and execute measures
that are effective from a cost-benefit standpoint. Especially compared to other more prescriptive policy
tools, they provide a flexible framework for innovation and creativity that allows for new approaches,
the opportunity to improve environmental competitiveness and more rapid changes than would be
possible under mandatory programmes. In addition, they promote awareness of existing and new
technical management practices and encourage the dissemination and implementation of effective
technologies. Improvement in actual performance will more easily occur through private sector
initiative and invention than through imposed government constraints, which do not allow the
flexibility needed for ongoing progress. Business should be encouraged to play its part.

*partie=titre Promote environmental innovation world-wide *partie=nil

The advance of democratic governments, the rule of law, market liberalisation, and international
communication have made more vivid the linkages between environmental, social, and economic
values. These trends have created significant benefits for society through greater wealth, freedom and
mobility, increased opportunity, and improved access to products and services. Economic growth
permits higher environmental and living standards world-wide. The global diffusion of the marketbased
economy has brought with it an algorithm of value that has led to serious efforts to combat
domestic corruption and improve the implementation of existing regulations, both of which have had
significant benefits for the environment and society at large. As national regulations are further
developed, policies should be designed that promote innovation and the absorption of technology and
thereby reinforce improved environmental performance.

*partie=titre Encourage the transfer of environmentally friendly technologies *partie=nil

The development and application of environmentally friendly technologies and know-how are already
making a significant contribution to reducing the environmental impact of economic activities. The
spread of innovative approaches to non-OECD countries will be crucial for environmental
improvements. The main vehicle for this form of co-operation between industrial and developing
countries has been and will continue to be the private sector, through its day-to-day business activities
of technology development, foreign direct investment and technology sales and dissemination. The
development impact of foreign direct investment goes beyond its monetary value and includes positive
side-effects such as the transfer of environmentally-friendly technology and know-how and the spread
of efficient management practices. This is due to the managerial links between parent and subsidiary
and the advantages of employing comparable environmental procedures throughout a multinational
firm’s operations. Trade and investment liberalisation is therefore essential to speed the transfer and
diffusion of clean technologies. Governments should set enabling legal, fiscal, economic and social
framework conditions for private investment and technology co-operation to take place.

*partie=titre Develop new forms of dialogue and partnerships *partie=nil

Establishing a sound dialogue with those who have a stake in these issues will become increasingly
important. Efforts should be made to create public/private partnerships to meet particularly difficult
research challenges and stimulate investment in environmentally beneficial technologies. These should
include processes for business and government collaboration and supportive incentives for private
sector R&D in environmental technology. Dialogues that follow the “life chain” of products, from
producer to consumer, may create a better understanding of the range of possibilities and
consequences. Dialogue and partnership can also help to increase public understanding of complex
subjects, such as technological change, and raise awareness of the fact that a broad base of action is
needed to involve all parts of society to work towards sustainable development.

*{END NOTES
NOTES FROM CHAPTER III
17 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 1999:
Foreign Direct Investment and the Challenge of Development , United Nations, New York/Geneva, 1999, p. 9.
18 Organisation for Economic Co-operation and Development (OECD), Open Markets Matter: The
Benefits of Trade and Investment Liberalisation, Paris, 1998, p. 136.
19 OECD, Open Markets Matter, p. 96.
20 Source of data: OECD Measuring Globalisation. the Role of Multinationals in OECD Economies.
1999 Edition, Paris, 1999, and more recent data kindly provided by the Economic Analysis Division of the
OECD Directorate for Science, Technology and Industry.
Data in Tables 3.1 and 3.2 show that in all countries multinationals account for a higher share of the
wages paid to workers than their share in employment. This is mostly because they are concentrated in higher
value added sectors. However, multinationals do not simply "snatch" the more productive labour from local
companies, instead they contribute to the development of leading sectors in the economy in terms of productivity
and wages.
As data is unavailable for many countries, a rigorous cross-country analysis is difficult. This very
interesting data base and related analysis in the OECD needs to be completed and, above all, priorities as a work
product that needs to be disseminated by the Organisation. In the immediate, it would be of interest to complete
data for such countries as Australia and Denmark which occupy an interesting case in the productivity growth
discussion. In the longer term, it would be valuable to be able to carry out a similar analysis with reasonably
complete data on the whole economy, including the service sectors.
21 UNCTAD, World Investment Report 1999, p. 264.
22 Source of data: OECD Measuring Globalisation. the Role of Multinationals in OECD Economies.
1999 Edition, Paris, 1999, and more recent data kindly provided by the Economic Analysis Division of the
OECD Directorate for Science, Technology and Industry.
23 OECD, Open Markets Matter, p. 96.
NOTES FROM CHAPTER IV
24 This chapter does not seek to establish a business position on all aspects of technology creation and
diffusion. Issues in this area have been much clarified and elucidated by the OECD ministerial paper on Growth,
section on "harnessing the potential of innovation and technology diffusion". This paper in this section only
addresses issues which are additional to the OECD paper or where business views diverge from the latter.
25 The OECD could usefully enlighten the growth discussion further by elucidating why some factors may
have become more important in the current context than they were in the heyday of post-WWII growth. The
analysis on economic "catch-up" presented in the Science, Technology and Industry Outlook 2000 (pp. 123-4
and Figure 7) is a beginning.
26 This is the same as Figure III.2 in the OECD Draft Ministerial Paper on Growth (page 28),
[DSTI/IND/STP/ICCP(2000)2] April 2001. Document for Official Use.
27 See for example, OECD Ministerial Paper on Growth - Draft Booklet, page 8,
[DSTI/IND/STP/ICCP(2000)3] April 2001.
28 OECD, "R&D and Productivity Growth: A panel Data Analysis of 16 OECD Countries",
[DTI/EAS/STP/NESTI(2000)40], November 2000. Document for Official Use.
29 A survey of innovation in industry, The Economist, 20 February, 1999.}