The innovation system in the telecommunications sector

1
The innovation system in the telecommunications
sector

• A comparative approach France South Korea
• David Flacher, Cédric Durand, Romain Lestage
• Paris 13 University
• CEPN (CNRS UMR 7115)?

2
Main issue

• Is the French institutional context favorable to
  telecommunications industry and IT development ?
• The dynamics of innovation can be explained by
  many characteristics of the environment such as
• Institutions including
• Routines, conventions, rules, types of governance
• More  established  institutions, organisations
• National and international context
• History (and thus technological path)?

3
Content of the presentation

• 1) Stylized facts divergences in terms of
  performances between Korean and French ICT
  sectors
• 2) Can these stylized facts be explained by the
  trajectories of the National System of
  Innovation (NSI)?
• 3) Do the French and Korean NSI fit well fit well
  for the development of the telecommunications and
  IT sectors?
• 4) Conclusions et perspectives

4
1- Divergence between France and Korea stylized
facts

• 1st stylized fact
• Infrastructures and usages are more developed in
  Korea than in France
• Exemple Broadband subscription in 2006 (OECD)?

5
1- Divergence between France and Korea stylized
facts

• Broadband subscription on mobile phone in 2005

6
1- Divergence between France and Korea stylized
facts

• Web 2.0 (blogs by languages in OECD countries in
  2006)?
• E-government

7
1- Divergence between France and Korea stylized
facts

• 2nd stylized fact
• Innovation (particularly hardware innovation) is
  more dynamic in the Korean telecommunications
  sector
• Exemples
• Patent registrations

• Triadic patent families (OECD)?
• Parallel patent applications in the USA (USPTO),
  EU (OEB) and Japan (JPO)? patents offices
• Induces a selection of the main innovations in
  order to lower the bias due to national
  applications

8
1- Divergence between France and Korea stylized
facts

• Innovation is more oriented towards ICT in Korea

9
1- Divergence between France and Korea stylized
facts

• 3rd stylized fact
• Equipment manufacturers are at the core of the
  Korean ICT strategy
• Exemples
• Share of ICT manufacturing in the total value
  added of manufacturing sectors (OCDE, 2008)?

10
1- Divergence between France and Korea stylized
facts

• Strong and improving position of Korea in ICT
  international trade

11
1- Divergence between France and Korea stylized
facts

• 4th Stylized fact
• France appears to be in a better position for
  services
• (with the exceptions of games, mobile TV and
  e-payment)?
• (Lee Chan-Olmested, 2004)?

12
1- Divergence between France and Korea stylized
facts

• Services exportations (OCDE, 2007)

13
1- Divergence between France and Korea stylized
facts

• In short
• Opposite paths in France and Korea in the 1990s
• France position becomes weaker in the
  international competition
• In the ICT manufacturing sector
• In the associated innovation
• In ICT exportation
• Rapid improvement of Koreas position in the same
  fields and in the diffusion of usages
• This suggests that there is a cumulative relation
  between on the one hand manufacturing development
  and, on the other hand, infrastructures
  deployment, innovation and the diffusion of new
  usages
• (it also suggests that services do not
  necessarily play a central role).
• To what extent divergence between the
  trajectories of French and Korean National
  Systems of Innovation could explain such
  divergent paths?

14
2- National systems of innovation trajectories as
an explanation

• Three historical periods
• After world war II
• State-led Innovation System (IS) in France and in
  Korea
• Since the 1980s
• Divergent IS paths in a context of economic
  liberalization
• Since the end of the 1990s
• Reconfiguration of IS in a context of
  liberalization of the telecommunications industry

15
2- National systems of innovation as an
explanation
16
2- National systems of innovation as an
explanation

• Identification of strategic sectors and Grand
  Projets
• Coordination mixing private/public entities
• Public banks, planning commission, incentives
  (loans, subventions, public orders, supports for
  exportations)?
• Grandes écoles (with high level of
  selection)/Universities
• strong public/business networks based on a common
  educational background of the elite
• CNRS (basic research) / Specific labs for applied
  research (CNET, CEA, CNES)?

• Outcome
• Constitution of world-class national champions
• Building of significant technological advantages
  for the country as a whole.

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2- National systems of innovation as an
explanation

• Autonomy (technological take off, substitution of
  importation), employment and growth
• Method
• Promotion of exportation and limitation of
  importations
• Big family owned firms (chaebols) but depending
  from the State
• Massive investment in
• Primary and secundary education (in the 1950s
  and 1960s)?
• Resarchers education (in the 1970s) through the
  creation of national institutes
• Technological catch up (but not yet innovation
  driven system)?
• Reverse engineering, partnerships (USA), specific
  equipments
• Applied research for the development of local
  solutions (substitution)?
• Restriction of FDI ? Independent management and
  push Korean firms to develop their own techniques.

• Outcomes
• Rapid industrialization (through assimilation of
  foreign technological capabilities)?
• First generation of high profile researchers and
  engineers

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2- National systems of innovation as an
explanation

• Advantages
• Long term investments
• Significant outcomes (in sectors like railway,
  airspace, electricity, telecommunications)?
• Limits
• Anticipation of changes is more difficult since
  the elite (in France) and the chaebols (in Korea)
  are not specialized enough
• SME are not really taken into account
• The system does not fit well with bottom-up
  innovation
• Small scale, flexible and decentralized types of
  innovation and of innovative firms

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2- National systems of innovation as an
explanation

• Second period since the 1980s
• In France
• Dislocation of the IS which implies
• State has lower control on the big firms
• RD public expenditure turns down (and public
  institution de-specialization)?
• Interruption of the main industrial programs
• Development of European policies (and of the EU
  market)?
• Economic situation
• Development of finance-led capitalism (relying on
  market funding and on shareholder value
  maximization)?
• Liberalization, privatization et
  internationalisation of firms ownership
• Slowing down economic growth

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2- National systems of innovation as an
explanation

• In Korea, since the 1980s
• RD is getting more and more self-governed by
  firms (in a context of economic growth)?
• Firms expenditure for RD is growing fastly
• Creation of research labs networks (including
  foreign labs) and reverse brain drain of Korean
  researchers previously installed abroad
• Institutional evolution adequate to changing
  strategy
• From learning and catching up approach
• to technological accumulation and innovation
• State remains active and voluntarist
• Public funding and fiscal incentives for the
  firms
• Important RD public programs at the
  technological frontier
• Growing public expenditure for higher education
• Public institutes
• Concerning RD strategic fields (both basic and
  applied resarch)?
• Working with private firms (ETRI)?

21
2- National systems of innovation as an
explanation

• Main outcomes
• RD expenditures (as a share of GDP) (OECD, 2008)?

22
2- National systems of innovation as an
explanation

• Patent applications (OECD, 2008)?

23
2- National systems of innovation as an
explanation

• RD public expenditure (as a share of GDP) (OECD,
  2008)
• importance of military expenditure (mainly
  nuclear ones) in France

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2- National systems of innovation as an
explanation

• Third period since the middle of the 1990s
• In France
• Deep transformation of the IS
• From a vertical (i.e. sectoral) to an horizontal
  approach
• Towards a regional (territorial) approach
• From top-down to bottom-up approach
• In Korea
• IS more and more driven by private firms
• Reconfiguration of ministries.
• Funding research more and more through projects
  rather than through lump-sum system
• Creation of  research councils in charge of
  planning, funding and assessing public labs
• Creation of technological regional clusters

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2- National systems of innovation as an
explanation

• Advantages of a de-verticalized and
  territory-oriented approach
• Fits better with applied research and patent
  applications
• Fits better with small and/or decentralized
  innovations
• Limits
• Research leading to short term profitability is
  privileged
• reduction of public researcher's autonomy gt
  restraint for creativity and initiative
• Constraints due to  Project  organization
  (administrative tasks)?
• Low public expenditure (in terms of jobs and
  lump-sum financing)?
• Possible State initiatives are more limited

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2- National systems of innovation as an
explanation

• Summarizing
• Strong divergent paths between French and Korean
  IS
• France
• Stagnation of RD effort
• dramatic reduction of state-led intervention in
  technological development
• Korea
• Growing efforts and initiatives in terms of RD
• Shift from Learning System towards Innovating
  System (defining strategic fields of
  intervention)?
• even if common trends can be pointed out
• Liberalization and growing space for private
  initiatives
• RD more and more oriented towards shorter term
  applications
• ? but Korea is resisting better to those trends

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3- Innovation systems ICT and telecommunications

• general context since the mid-nineties
• Liberalization of the telecommunications industry
• Strong ICT growth
• In brief
• The Korean IS is quite consistent
• while French IS is characterized by a
   multi-sided institutional dualism 

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3- Innovation systems ICT and telecommunications

• In Korea
• Fostering competition
• but competition is consistent with innovation
  and industrial policies
• No independent regulator of the
  telecommunications industry
• KCC depends on the Ministry of Information and
  Communications (MIC) and will be merged with KBC
  (in charge of contents)?
• Governmental agencies (depending on MIC)
  implement political priorities
• Defining policies (KISDI).
• Organizing public/private RD partnerships
  (ETRI)?
• Managing and financing innovation (IITA)?

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3- Innovation systems ICT and telecommunications

• Strategic and important orientation defined by
  the State
• For the operators
• Promotion of facility-based competition (this
  policy was helped by the high density of the
  population)?
• ?  no  unbundling of the new infrastructures
• Infrastructure allows technological
  differentiation
• Unbundling only on previous generation
  infrastructure in order to push competitors to
  adopt new techniques
• For equipment manufacturers
• Limitation of FDI during a large period
• Public investments, support for  national
  champions , incentives to develop ICT
  manufacturing sectors (See the exemple of WCDMA
  et CDMA 2000 licensing)?
• Development of local standards in order to
  protect the national market

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3- Innovation systems ICT and telecommunications
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3- Innovation systems ICT and telecommunications

• Exemples of programs
• KII (started in 1995, already ended)?
• IT 839 8 services, 3 infrastructures et 9
  technologies (in progress)?
• Large ICT education programs, research
• Aims
• Higher GDP per capita
• Employment
• Position Korea on strategic fields (for
  international competition)?

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3- Innovation systems ICT and telecommunications

• In France
• Multi-sided institutional dualism between
• a) institutions in charge of competition and
  institutions in charge of innovation
• b) national and european institutions
• c) even between contents and telecoms regulations
• a) In the mid-nineties liberalization of the
  industry
• France Télécom (DGT) is loosing its position at
  the top of an  industrial hierarchy 
• With its own advanced research center (CNET)
  and stong partnerships with equipment players
  (Alcatel et Thomson)?, research centers and
   universities 
• Creation of an independent NRA
• with the main goal of developing competition
• (considered as the way to improve efficiency)?
• This independant NRA may induce counterproductive
  effects on innovation and thus dynamic
  efficiciency. Why ?

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3- Innovation systems ICT and telecommunications

• Specificities of sectoral regulation in France
• Asymmetrical regulation in order to favor the
  entrance and the development of FT competitors
• Three ideas
• FT retail prices should be too low (? prevent
   squeezing )?
• Wholesale prices not to high (cost oriented and
  non discriminatory prices)?
• (? resale of FT services and development of
  competitors market shares)?
• Favoring  ladders of investment  climbing for
  competitors
• Progressive replication of networks
• Tools bitstream access, unbundling
• Asymmetrical regulation should then disappear
  (and should be replaced by the only application
  of competition law)?

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3- Innovation systems ICT and telecommunications

• Main outcomes
• Lower incentives to invest
• Into new infrastructures
• For the incumbent (which value option invest
  into new techniques is reduced by the possible
  unbundling of its NGN)
• For the competitors (unbundling can be a better
  solution than investing)
• Into RD
• Reduction and transformation of RD effort by
  operators (FT)
• Lower effort From 3.5 of the revenue in 1997 to
  1 in 2003 (according to OECD)?
• RD more oriented on short term applied projects
  and services
• equipment manufacturers are realizing a part of
  RD previously realized by FT
• but equipment manufacturers RD and public RD
  spending do not compensate the lower efforts of FT

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3- Innovation systems ICT and telecommunications

• The two other important institutional dualisms
• b) between national and european institutions
• This is true both in terms of
• Pro-competitive sector specific regulation
• Innovation policies
• Sprinkling european fundings dedicated to RD
• No clear industrial strategy at the EU level
  (public orders, national specializations)?
• c) between contents and telecoms regulations
• Digital dividend and convergence in the ICT
  ecosystem should induce more coordination

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3- Innovation systems ICT and telecommunications

• While in Korea
• Sector specific institutions are all depending on
  the ministry (MIC) (which can coordinate
  competition and innovation oriented policies)?
• Able to gather stakeholders around a common
  strategic vision
• The priorities are implemented through coherent
  incentives to innovate and to invest with a
  medium-long term perspective
• (with the risk of an excess of investment?)?
• This vision gathers a top-down and a bottom-up
  approach thanks to MIC coordination
• This support from MIC to innovation can get the
  upper hand on pro-competitive policies.
• Conversely, pro-competitive policies are mainly
  guided by innovation and investment logics.

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4- Conclusions et perspectives

• Divergent paths in terms of performances between
  countries
• Looking for explanations in the institutional
  arrangements (at national and sectoral levels)
• Institutional consistency in Korea
• Multi-sided institutional dualisms in France
• competition/innovation
• France/UE
• Telecommunications/content
• In France, these institutional dualism reinforce
  the negative effects that results from
• the change in the governance of the IS
  (de-verticalization and bottom-up approaches)

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4- Conclusions et perspectives

• The regulator should thus
• take more into account innovation problems
  instead of only fostering effective competition ?
  
• understand that fostering competition is one of
  many other tools
• be in charge of an industrial and innovation
  policy (which is not the case for the moment)
• In France, the regulator (ARCEP) seems to be more
  and more interested by investment and innovation
  but

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3- Innovation systems ICT and telecommunications

• ETRI fields of interest