Understanding R

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Understanding RD and innovation in services
evidence from South Africa
Michael Kahn Centre for Science, Technology and
Innovation Indicators SPRU, University of
Sussex 13 June 2008
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• Understanding RD and innovation in services
  some evidence from South Africa
• Presently, in terms of economic productivity and
  competitiveness the economy is classed as
  efficiency driven. Government now seeks to
  promote a shift toward a knowledge-based economy.
  Among other actions this demands the growth of
  knowledge-intensive service activities (KISAs).
  Thus far the nature and scale of KISAs, including
  RD in services are poorly quantified and
  understood.
• We examine RD and innovation in the services
  sector using the national RD (Frascati) and
  Innovation (CIS4) surveys, and a dedicated set of
  interviews, the latter carried out with the
  countrys leading transnational service sector
  firms.
• Some features particular to South Africa are
  noted and recommendations for policy are offered.

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South Africa some quants

• GDP 250 billion (20 of continental GDP)
• Johannesburg Securities Exchange world 12
• Services 69 GDP Manufacturing 19 Mining 7.
• Exports equivalent to 30 GDP
• GNP/c PPP 13 000
• Gini (income) 0.59 Gini (inc.welfare) 0.35.
• High unemployment /- 25
• HIV prevalence (18-45 yrs) 21
• Poorly quantified 2nd Economy

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Becoming open
5 Retailers in World Top 250
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South Africa Innovation Policy

• Innovation systems approach
• Department of ST National Advisory Council on
  Innovation
• Blind funding of HE research publication
  incentive
• State laboratories linked to line Departments
• Grants competitive Innovation Fund
  Technological Human Resources for Industry
  Programme Support Programme for Industrial
  Innovation
• Biotechnology Regional Innovation Centres
• RD Strategy (2002)
• 150 RD expenditure tax deductible (2007)

Supply side measures little differentiation
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Services RD and Innovation

• Service sector 69 of GDP
• Frascati 6th Ed RD in services not always
  organised as formally sometimes goes
  unrecognised
• RD in and of itself is a service activity
  (Gault)

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Miles, 2003 Services viewed as innovative
laggards so that few services were
recognized as exceptions to this rule by the
relatively few researchers who have examined the
services economy Yet RD consulting, technical
testing, and analytical services comprise 10 of
BERD Convergence of innovation activities in
manuf/services since both use ICT platform Uses
CIS2 data for berd/turnover financial services
0.14 wholesale 0.08 insurance and
retail ZERO
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Service sector BERD ()

Source Benchmarking study (pending)
Financial services and CROs
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Gallaher, Link and Petrusa (2006) standard
concept of RD did not resonate well within
the financial services industry. None of the
firms interviewed indicated that they conducted
activities in either basic or applied research.
Only largest retail banks did RD Customer
demand main driver of innovation External rather
than internal sources of innovation Metric RD
exists in IT where cost of maintenance to cost of
purchase is at least 3070 in favour of new
technology
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Mosoni-Fried e.a.(Hungary) Difficulty of defining
and measuring services sector RD that constitute
what are termed hidden capacities Only
largest retail banks did RD Evangelista (6 of
EU 15) CIS data confirm that RD activities play
only a marginal role in services while less
formalized activities such as marketing, the
acquisition of know-how and other disembodied
technologies are much more important
Australia Services RD from 10 of BERD to 40 in
twenty years
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Djellal e.a. (SPP, 2003) Modify Frascati
definition Include the term design Recognize
that new knowledge includes behaviour of economic
agents and that of productive organizations,
Applications include goods, services, methods
or organizations.
A mixed bag of evidence approaches
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From the RD Surveys

1 !!!
NEGATIVE/ZERO LOW
MEDIUM
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GERD /-GBP 1 billion
BIG FIVE
BIG TWELVE
BIG FIVE
The top quintile perform 86 of business RD
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D I V E R S E RD A C T I V I T Y
SocSci/ Humanities R1,5bn
Blue Skies R1,3bn
Environment R0,8bn
Manufacturing R0,8bn
Chemicals R0,7bn
Min/ Nat. ResourcesR1,5bn
Medical R1,0 bn
Agric R0,8bn
Clinical Trials R0,7bn
Energy R0,7bn
Defence/ Aerospace R0,9bn
Software/ ICT R1,5bn
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BERD Sources of funds, 2002

Source Benchmarking study (pending)
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Researchers (FTE)/1000 labour force, 2003
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Lessons learnt

• RD Surveys are labour intensive
• Quality of response depends on interaction
• Reliability of response requires respondent
  continuity
• Services particularly difficult to pin down
• Low response rate to items on collaboration

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From Innovation Survey 2005

• Based on OECD/Eurostat Oslo Manual recall Oslo
  3rd Ed expanded definition of Innovation to
  include services products
• Covers mining, manufacturing, services
• Stratified random sample from Statistics SA
  business register
• Stratification difficulties near census of
  largest firms random sample of smaller firms
  with heavy weights
• Good for macro comparisons
• Good quality microdata

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Sample

• Represents activities of 31,397 firms
• Represents 1625 large firms
• 653 Manufacturing
• 971 Services

Primary response rate 37.3 Non-response
rate 85
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65 large Manufacturing innovative 54 Large
Services (plt0.001)
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RD and Innovation
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Services Industry

• Services products new to market are 7.5 of
  t/over
• Industry products new to market are 15 of
  t/over
• Services intra mural to extra mural RD 32
• Industry intra mural to extra mural RD 31
• Services innovation R15.2 billion
• Industry innovation R12.8 billion
• BERD from Innovation Survey /- 5 of RD Survey
• Services 35 BERD (RD Survey 27)

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Lessons learnt

• Innovation survey data on RD is often unreliable
• Lengthy survey encourages superficial responses
• Number of usable responses by sector and size may
  fall at the limit of statistical validity lt20
• Services particularly difficult to pin down
• Knock and drop inadequate

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Thats why we do case studies

• World class firms both agents and objects of
  takeovers
• 60 billion t/over median 21000 employees
• Huge African footprint how?
• Do major services firms have large RD spend?
• Study eighteen banks (5), insurers (5), retailers
  (6), logistics (2)
• Probe and identify the whole RD value chain

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Findings 1

• Difficulty understanding what counts as RD
• Some focal point for RD Half with RD division
• Dispersed nature of RD
• Projects with extended value chains
• Low collaboration with public RD
• Collaboration with foreign peers and suppliers

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Findings 2

• Extensive I S branded and legacy systems
• Do SA firms conduct RD for IS in same way as
  international peers?
• Early adopters
• Sanctions era Build or Die
• Present Build and Buy
• Research fields mathematics, software,
  econometrics, actuarial sciences, psychology

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Findings 3

• First followers have RD dept leaders dont!
• Low number of researchers only 12 PhDs
• No concern with skills shortage
• KIBS in extended value chains
• Sources mainly own people, then competitors
• Financial services rely on internal sources
  retailers more diverse tradition of reverse
  engineering
• Focus on system software development.

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Summary

• Strong leadership organized strategic
  innovation (Sundbo and Fallouj, 2000)
• All gt30 years history ? sanctions experience
• All (bar 1) are domestic firms only one FDI
  purchase
• KIBS internal external, more external than
  Industry (Broch and Isaksen, 2005 Innovation
  Survey 2005)
• Significant RD spend.
• Banks berd/interest 0.3
• Insurers berd/premiums 0.1
• Retail berd/turnover 0.3
• Banks, insurers and retailers NON-ZERO (c.f.
  Miles)
• Generally different behaviour to other country
  cases internal/external ratio may be 5050

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So where to?
Africa
Africa GDP/capita 2624
Source KAM
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www.gapminder.org
Africa GDP/capita 2624
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Toward a Knowledge-based Economy

• Ten Year Innovation Plan
• Human capital development
• Knowledge generation and exploitation (RD)
• Knowledge infrastructure
• Enablers to address the innovation chasm
• Five grand challenges
• Space ST
• Farmer to Pharma
• Global (climate) Change
• Energy security
• Human and Social Dynamics

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OECD Review of South Africas Innovation Policy

• the relatively small share of industry and
  the large services share are atypical for a
  middle-income country, and (the) output shares of
  both mining and manufacturing have fallen
  consistently, continuing a trend that started
  during the 1980s. This phenomenon which
  contrasts the development pattern of other
  countries has been interpreted as a sort of
  premature de-industrialisation.
• OECD Review of South Africas Innovation Policy
  (2007)

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• Some issues
• Innovation system over focused on State
• HERD growth must match BERD growth may have
  reached constraint ceiling
• Services RD especially in ICT not appreciated
• HR crisis, AIDS, the engineering gap and growth
  in GFCI
• HR constraints limit broadening of economy away
  from resource-intensive and services the hollow
  middle persists.
• Resources stretched too thinly ? rare to find
  critical mass
• Implementation gaps/Implementation by default
• Specialisation differentiation
• Policy formulation capacity

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International Panel on Growth (Harvard Group)
(2008)

• bulk of the increase in domestic demand
  consumer durables and in non-tradables real
  estate, finance and services. Investment in
  tradables has been rather flat growth does not
  appear to be externally sustainable.
• Eventually, domestic demand will have to grow
  more slowly than GDP in order to re-establish
  external balance will bring down growth in
  non-tradables the country will need rapidly to
  increase its exports.
• 1960 and 2004, the real value of exports grew by
  34
• c.f. Argentina 169, Australia 238, Botswana
  1887, Brazil 385, Chile 390, Israel 730,
  Malaysia 4392, Mexico 1277, New Zealand 120

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The Art of the Possible
TECHNO-NATIONALISM
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Policy Issues

• Problem of supply vs. demand side policy
• Services misunderstood failures of direct and
  indirect incentives
• Innovation Plan equates services with STS
• Services pulls high quality graduates
• Software development potential unrecognised
• RD and ST Services under-counted

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Thank you
National RD Survey http//www.hsrc.ac.za/CCUP-RnD
-7.phtml
Innovation Survey http//www.hsrc.ac.za/CCUP-59.ph
tml
Centre for Science, Technology and Innovation
Indicators mkahn_at_hsrc.ac.za 27(0)828549777