Innovation is a key determinant of long-term growth, and innovation policy is one of the most potent tool that governments seek to build up new competitive advantage. Nowhere is this more true and accurate than the case for middle-income countries (MIC), knowledge creation, and technology diffusion activities are fundamental catch-up with high-income countries (HIC). However, the workings of the innovation policies are not really understood in detail and depth for the context of middle-income countries.
The instruments that are used for facilitating the effectiveness of innovation policy instruments knowledge and innovation investments, they are a bit paradoxical as they do not really translate into productivity growth.
Innovation Policy Rationale and Concepts
Innovation activities are crucial for long-term economic growth and competitiveness. However, they are often subject to market failures that can hinder optimal investment. Two primary market failures affecting innovation are:
- Weak Appropriability of Ideas: Innovators often find it difficult to fully capture the economic benefits of their innovations because ideas can be easily replicated or imitated. This reduces the incentives for firms to invest in R&D.
- Uncertain Investment Returns: The outcomes of R&D activities are highly uncertain. This uncertainty, coupled with the high costs associated with R&D, can deter private firms from investing in innovation, leading to lower investment levels than what would be socially optimal.
To address these market failures, governments implement innovation policies aimed at boosting private sector investment in R&D and innovation.
Innovation Policy and Development Stages
The focus and nature of innovation policies shift as countries progress through different stages of development:
- Low-Income and Early Development Stages: At these stages, policies primarily aim to facilitate technology adoption and learning. This is often achieved through capital investment and technology transfer from more advanced economies. The goal is to build foundational capabilities and infrastructure that can support future innovation activities.
- Middle-Income Stages: As countries develop, the emphasis shifts towards building in-house R&D competencies. This involves fostering the ability to absorb and assimilate more complex technologies. Policies at this stage often focus on enhancing the capacity of domestic firms to innovate.
- Upper-Middle and High-Income Stages: At these levels, home-grown innovation becomes critical as cost advantages diminish. Countries need to develop their own innovative capabilities to maintain competitiveness. The focus of innovation policy shifts to supporting advanced R&D activities, encouraging high-tech industries, and fostering an environment that supports continuous innovation.
Innovation Policy Instruments in Emerging Countries
Middle-income countries (MICs) employ a range of policy instruments to support R&D and innovation. These instruments include:
- Grants: Direct funding provided to firms or research institutions to support specific R&D projects. Grants can help bridge funding gaps and reduce the financial risk associated with innovation activities.
- Subsidies: Financial assistance that lowers the cost of R&D and innovation for firms. Subsidies can make it more attractive for firms to invest in new technologies and processes.
- Tax Credits: Fiscal incentives that reduce the tax burden on firms engaging in R&D. Tax credits can enhance the financial viability of R&D investments by lowering the overall cost.
- Technical Assistance: Support services that provide firms with access to expertise, resources, and infrastructure necessary for innovation. Technical assistance can include mentoring, access to research facilities, and collaboration opportunities with academic institutions.
These instruments are designed to create an enabling environment for innovation by reducing financial barriers, mitigating risks, and providing the necessary resources and support to firms. Effective innovation policy in MICs requires a combination of these instruments, tailored to the specific needs and developmental stage of the country.
Evaluating the Impacts of Innovation Policies
Impact evaluation studies examine the direct effects of innovation policies on firm R&D investment and economic performance. While innovation policies have grown in emerging economies, their effectiveness remains limited by low overall R&D investment, the dominance of the public sector, and a lack of complementary conditions. Careful targeting and a systemic approach are needed to maximise the impact of scarce public resources.
Governments use three main mechanisms to address these failures: public R&D, IP rights protection, and policies to lower the costs and risks of private R&D and innovation. Innovation policy instruments include direct funding like grants and subsidies, tax incentives, and technical assistance. The effectiveness of these instruments depends on complementary framework conditions and baseline policies being in place.
In the early stages, policies focus on facilitating technology adoption and learning through capital investment and technology transfer. As economies grow, developing in-house R&D competencies becomes more important to absorb and assimilate more complex technologies. At upper-middle-income levels and beyond, home-grown innovation becomes critical as cost advantages diminish. Returns to private R&D investment trace an inverted U-shape, peaking at middle-upper income levels. Subsidies help address funding gaps and coordination failures in innovation systems.
However, MIC investment in R&D is low, around 0.6% of GDP compared to 2% in HICs. The public sector dominates R&D in MICs, performing 70-90% of total R&D versus 40% in HICs. The scale and reach of innovation support programs remain limited in most MICs. Indirect effects through knowledge spillovers are also important but harder to measure. Impacts vary by firm type, with young and small firms often benefiting more. Complementary policies around competition, human capital, and framework conditions are key for leveraging policy effectiveness.
Innovation policies in emerging and middle-income countries (MICs) aim to stimulate economic growth and enhance competitiveness through various mechanisms. The direct effects of these policies can be categorised into several key areas:
Increased R&D Investment
One of the primary direct effects of innovation policies is the increase in research and development (R&D) investment by firms. Government interventions, such as grants and tax incentives, are designed to encourage private-sector investment in innovation activities. This can lead to:
- Crowding-in Effect: Public funding can stimulate additional private investment in R&D, resulting in a higher overall investment level in innovation activities.
- Enhanced Capacity for Innovation: Firms that receive support are often able to undertake more ambitious projects, leading to the development of new products and processes.
Improved Firm Performance
Directly linked to increased R&D investment is the improvement in firm performance. Studies indicate that firms benefiting from innovation policies often experience:
- Productivity Gains: There is evidence that firms that invest in R&D see significant productivity improvements, which can enhance their competitiveness in both domestic and international markets.
- Economic Growth: The overall economic impact is positive, as increased firm productivity contributes to broader economic growth within the country.
Promotion of Collaborative Programs
Innovation policies often emphasise collaboration between firms and public science and technology institutions. This collaboration can yield several direct benefits:
- Knowledge Transfer: Collaborative programs facilitate the exchange of knowledge and expertise, which can enhance the innovation capabilities of participating firms.
- Networking Opportunities: Firms gain access to networks that can lead to further collaboration and partnerships, fostering a more vibrant innovation ecosystem.
Heterogeneous Impact Across Firm Types
The effects of innovation policies are not uniform across all firms. Research indicates that:
- Young and Small Firms: These firms often experience different impacts compared to larger, established firms. Innovation policies can be particularly beneficial for smaller firms that may lack the resources to invest in R&D independently.
- Sector-Specific Outcomes: The effectiveness of innovation policies can vary by industry, with certain sectors responding more positively to specific types of support.
The direct effects of innovation policies in emerging countries encompass increased R&D investment, improved firm performance, promotion of collaborative programs, and varying impacts across different types of firms and sectors. These outcomes highlight the importance of tailored and targeted innovation strategies to maximise the benefits of public investment in innovation.
Addressing Declining Private Investment
The recent decline in private sector investment, especially within manufacturing, poses a significant challenge to India’s economic trajectory. Investment plans fell 15.3% in 2023-24, with foreign investments dropping nearly a third. Manufacturing saw a stark 40% decrease in proposed investments, from ₹19.85 lakh crore in 2022-23 to under ₹11.9 lakh crore this fiscal year. This reduction, which diminished manufacturing’s share of new investments from 54% to 33.8%, threatens to impede innovation, technological advancement, and productivity growth.
Despite this, India's economic performance in FY24 has been robust, following impressive growth rates of 9.7% and 7.0% in the preceding years. Headline inflation remained largely under control, though some food items saw higher rates. The trade deficit narrowed, with the current account deficit around 0.7% of GDP, even registering a surplus in the last quarter. Ample foreign exchange reserves and sustained public investment have set a positive stage for private-sector investment.
Non-financial private-sector capital formation expanded vigorously in FY22 and FY23, with strong rebounds in machinery and equipment investments. Early data for FY24 shows continued capital formation growth, albeit at a slower rate. Foreign Direct Investment (FDI) remained robust, though slightly lower at USD 45.8 billion compared to USD 47.6 billion in FY23, reflecting global trends and challenges such as higher interest rates and geopolitical uncertainties. Increased repatriation of investment indicates a healthy market environment.
Enhancing Economic Performance
To address the challenges posed by declining private investment, especially in critical sectors like manufacturing and green technology, the government must act proactively. Initiatives like the Production Linked Incentive (PLI) scheme, National Infrastructure Pipeline (NIP), and National Monetisation Pipeline (NMP) are vital. These programs provide financial incentives and address regulatory hurdles, crucial for encouraging private sector participation.
Furthermore, tailored innovation policies are essential. Offering grants, subsidies, and tax credits can reduce barriers to R&D and innovation, particularly for small and emerging firms. This support can boost R&D investment, enhance firm performance, and promote collaborative programs for knowledge transfer.
Addressing resource bottlenecks and streamlining regulatory processes are also crucial. The government must ensure timely execution of key projects, especially in green technology, semiconductor manufacturing, and electric vehicles, to prevent delays that could hinder economic growth. Ensuring these measures will help maintain economic dynamism and competitiveness despite fluctuations in private sector investment.
IP Round-up
Domestic patent applications in India have outpaced foreign ones in FY24 for the first time, driven by sectors like chemicals, pharma, and IT. However, foreign entities still dominate in patents granted, holding nearly two-thirds of approvals. Major global firms like Qualcomm, Samsung, and Apple lead in this regard. Experts attribute the gap to inefficiencies in India's R&D capabilities, low private investments, and stagnant government spending, leading to reliance on imported machinery and expertise. WIPO data highlights that 74.46% of Indian patents in 2022 were granted to foreigners, one of the highest globally. Despite a rise in domestic applications since FY19, approvals remain skewed towards foreigners due to the higher quality of their applications and a shortage of patent examiners in India. The government is addressing this by promoting IP creation and offering incentives, such as a Rs 7,500 crore scheme for semiconductor design. Nonetheless, India’s R&D spending remains low at 0.65% of GDP, compared to higher investments by countries like China and South Korea. (Source: IndianExpress)
The USPTO has released updated guidelines on subject matter eligibility for emerging technologies, including AI-related inventions, with public comments open until September 16. The update explains how to determine if a claim involves an abstract idea and whether it integrates a judicial exception into a practical application, emphasising improvements in technology. This guidance, inspired by President Biden’s AI executive order, uses the Alice/Mayo Step 2A analysis to assess the eligibility of AI inventions, highlighting claims that enhance computer or technological functions. It includes examples of eligible AI inventions and clarifies that eligibility is based on the claimed innovation, not the involvement of AI. Previous 2024 guidance covered inventorship and the use of AI tools, highlighting the importance of human contributions for patent eligibility. (Source: USPTO)
On July 22, Multiply, a PR firm, filed a lawsuit in California federal court against Elon Musk's social media platform, X (formerly Twitter), alleging trademark infringement. The lawsuit claims that X's use of the "X" trademark for its social-media marketing services leads to consumer confusion, competing directly with Multiply's services. Multiply's spokesperson accused Musk of "shamelessly" stealing the firm's established brand identity and stated they had to defend their trademark in court. Musk rebranded Twitter to X after acquiring it last year. Multiply, which has created ad campaigns for brands like Arizona and Corona, adopted the "X" branding in 2019 and holds a federal trademark for its logo. The lawsuit claims the rebrand has confused Multiply's clients and requests the court to stop X Corp from using the "X" trademark and award monetary damages. (Source: Reuters)
The U.S. Copyright Office has introduced a new group registration option for frequently updated news websites, allowing them to register a collective work of updates with a deposit representing key portions of the site rather than the entire content. This rule, prompted by feedback from online publishers, aims to address the impracticality of submitting separate applications for each update of news websites, which can be updated hourly. The final rule includes modifications based on feedback: an alternative to submitting a complete home page and a new application form tailored for news websites. The rule also clarifies that daily home page deposits need not be identical in timing but must reflect the page’s appearance at some point each day. Requests to expand the rule to other types of websites or claims of constitutional violations were not adopted. The change is expected to enhance participation in the copyright registration system. (Source: IPWatchDog)
Union Minister for Education Dharmendra Pradhan oversaw the signing of a 'Letter of Intent' between Atal Innovation Mission (AIM) and the World Intellectual Property Organization (WIPO) in New Delhi. The agreement, which includes WIPO’s Executive Director Sherif Sadallah and AIM’s Mission Director Dr. Chintan Vaishnav, aims to promote innovation and intellectual property (IP) programs, particularly benefiting the Global South. The partnership aims to enhance India’s innovation models and spread IPR awareness at school levels, contributing to sustainable economic growth. The Indo-WIPO joint program will adapt AIM's initiatives for global use, improve IPR understanding among stakeholders, establish a network of IP trainers, and familiarise beneficiaries with innovation theories. Both organisations will collaborate on IP training and capacity-building tailored to the needs of various countries. This initiative reflects India’s progress in the Global Innovation Index and its commitment to fostering creativity and entrepreneurship. (Source: PIB)
References:
Indian Express. (2024, July 22). Indian patent applicants outpaced foreign entities in FY24, but foreigners dominate final patent clearances. Indian Express. https://indianexpress.com/article/business/indian-patent-applicants-outpaced-foreign-entities-in-fy24-but-foreigners-dominate-final-patent-clearances-9467666/
U.S. Patent and Trademark Office. (2024, July 20). USPTO issues AI subject matter eligibility guidance. U.S. Patent and Trademark Office. https://www.uspto.gov/about-us/news-updates/uspto-issues-ai-subject-matter-eligibility-guidance
Brittain, B. (2024, July 22). X Corp hit with lawsuit by PR firm over 'X' trademark. Reuters. https://www.reuters.com/legal/litigation/x-corp-hit-with-lawsuit-pr-firm-over-x-trademark-2024-07-22/
McDermott, E. (2024, July 22). Copyright Office finalizes group registration option for news sites. IPWatchdog. https://ipwatchdog.com/2024/07/22/copyright-office-finalizes-group-registration-option-news-sites/id=179152/
Press Information Bureau. (2024, July 22). Press release. Government of India. https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2035359