Innovation policy and industrial policy. Speaking with different voices?

Prof. Michael Kahn, University of Stellenbosch, mjkahn(at)sun.ac.za

Introduction

The interaction between innovation policy and industrial policy is a neglected topic, yet is an essential part of triple helix frameworks (Etzkowitz and Leydesdorff, 2000) .

Innovation policy covers the policy space from ICT, through research, industry, education, culture, finance, health, security, knowledge exchange and the geopolitical. Loosely understood, industrial policy, covers all government interventions in the market economy.

In South Africa, innovation policy resides in the Department of Higher Education, Science and Technology; industrial policy resides in the Department of Trade and Industry. The former is a national competence; the latter a competence shared with the provincial level. Local government has little to say on either. Over the past decade, the term ‘innovation’ has come to embody the new, the forward looking, the competitive. South Africa’s Ten-Year Innovation Plan (DST, 2008) was charged to effect transformation towards a knowledge economy.

Local industrial policy goes back a century to the import substitution period that followed the World War I surge of industrialization. As of 1995, when the WTO was finally ratified, South Africa opened its economy, and deregulated.

The Constitution of 1996, laid the rules for the post-apartheid order, whose early years saw rising economic growth and numerous programmes of redress taking shape. Local companies, previously trapped within South Africa, now transformed themselves into trans-national corporations. This flood did not however result from structural economic change, so that raw commodities continued to dominate the export basket (DTI, 2018), with little shift in the volume of high-technology exports, while medium-technology products gained traction through the later expansion of the manufacture of OEM automotive goods. Over the twenty-five years of democracy, industrial competitiveness has fallen, due to institutional erosion, the high burden of disease, and inadequate schooling, so that her ranking in the annual Global Competitiveness Index has plummeted from 40^th in 2005 to the present rank of 61^st. There has been widespread loss of confidence in institutions, macro-economic stability, and financial probity. The country finds itself languishing behind middle-income peers that it formerly outperformed.

Innovation systems and all that

The Department of Arts, Culture, Science and Technology (DACST, 1996) introduced the conceptual framework of a national system of innovation (Edquist 1997; Freeman 1987) ‘to be central to the empowerment of all South Africans as they seek to achieve social, political, economic and environmental goals’ (idem: 8). The Department adopted a catholic definition: ‘a national system of innovation can be thought of as a set of functioning institutions, organisations and policies which interact constructively in the pursuit of a common set of social and economic goals and objectives’ (DACST, 1996: 20). Box 1 provides a summary of the outputs of the 1994 NSI.

Box 1: The 1994 national system of innovation

Kahn (2013; 2019) describes the pre-1994 innovation system as reflecting a tacit social contract through which the state supported the free scientific inquiry for the ‘Republic of Science’ in exchange for support of its war goals of self-sufficiency. That NSI included sectoral systems of innovation (Malerba, 2002) in mining and metallurgy, chemicals, viticulture, telemetry, armaments, pulp and paper, and health.

The White Paper of 1996 adopted a definition of innovation that privileged basic and applied research, an orientation made explicit in the National R&D Strategy (DST, 2002) that advocated the linear model of innovation as theory of change. As Godin (2005) argues, the linear model is remarkably durable as a theory of innovation. With some nuances the five missions of the R&D Strategy were then replicated as the five Grand Challenges of the Ten-Year Innovation Plan (DST, 2008).

Both Strategy and Plan seek to exploit the Geographic Scientific Advantage of unique seas, skies, flora, fauna and earth. Hence the determination of the Plan to ‘beneficiate’ platinum, titanium and fluorine. Both Strategy and Plan celebrated excellence, with R&D receiving new incentives, but neither was situated in the deep structure of the economy with its binding constraints. Since both stress the importance of R&D, it is reasonable to make a first assessment of their impact by examining country research outputs (Box 2).

Box 2: Research outputs, 2017

The most obvious achievement is that South Africa’s world share of whole count publications rose from 0.40% in 1996 to 0,88% in 2016, a level close to the 1% target of the Plan.

Over the same period, as is true for other systems of similar size, international collaboration rose to 50% of all publications.

Box 1 displays the Relative Activity Index (RAI) that for a given research area measures the national proportion of whole publication counts in relation to the global proportion. The high RAI recorded in the health cluster is a consequence of attention given to HIV and tuberculosis, while the high score in astronomy to large extent arises from participation in international Big Science projects rather than through research conducted using local telescopes, both optical and radio.

By contrast, the two research areas that seek to exploit mineral-based advantage, namely those for titanium refining and fabrication, and platinum catalysis, fall short on the RAI measure, suggesting under capacitation, especially for titanium research that stands at 0.84.

According to the Twenty-Year Assessment of the NSI (Kahn, 2017), the stretch targets of the TYIP have not been attained.

Box 3: The post-1994 national system of innovation

On its own, innovation policy cannot re-orient the economy, the more so since policy has constituted science push, rather than favouring use-oriented applied research. This emphasis reflects the deep path dependence of the way that science is conducted in the country as a seemingly apolitical pastime that contributes to individual and national prestige.

Middle income trap

South Africa is not unique in finding itself in what is labelled the ‘middle-income trap.’ However, South Africa may be unique in having reached the doorstep for take-off, but for having failed to progress through the doorway. The ANC government instituted its own version of macro-economic adjustment through the GEAR Strategy of 1996, that was then followed by a refined strategy for accelerated growth. Post the global financial crisis with its associated questioning of the Washington Consensus, long-avoided industrial policy has gained new currency (Mazzucato, 2015; Raworth, 2017; Collier; 2018). South Africa has joined this new approach.

There is a wide typology of industrial policies. Intervention may cover the entire manufacturing sector, or be focused on particular sub-sectors. In all cases industrial policy is crafted in its own context of monetary, fiscal, trade, competition, labour, procurement and environmental policy, and of course, technological change. The Department of Trade and Industry Industrial Policy Action Plan (IPAP) covers almost all sub-sectors.

During the years of grand apartheid, industrial policy involved import substitution, as well as measures to give substance to the myth of separate development, through subsidies for the operation of ‘border’ industries. These were intended to exploit the potentials of scale resulting from the concentration of Africans into homeland territories. These were chaotic times, of sanctions and sanctions busting, rent-seeking, and adjustment. Hirsch (1993) notes how attempts to circumvent onerous tariffs led to a rule book that responded to sectoral interests that in due course became second in complexity to that of Nepal. Industrial policy echoes this interest group pressure by trying to offer something to the interest groups of each sub-sector.

Post 1994 came accession to the WTO and changes in tariff structures, the reduction of domestic military procurement that reduced demands on manufacturing, increased labour bargaining power, the opening of opportunities for firms to trade globally, and of course, competition from China. DTI industrial policy expressed in the IPAP series is shaped by the above context.

The most recent IPAP iteration declares that ‘industrial policy aims to increase the economy’s ability to produce more, and more complex and high value-added products with greater efficiency’ (IPAP 2018/19-2020/21). The thirteen IPAP sectors for attention are automotive; textiles and leather; metal fabrication, capital & rail transport; agro-processing; forestry cluster; plastics; chemicals & pharma; mineral beneficiation; green industries; business process services; marine manufacturing & services; aerospace & defence; electro-technical & white goods.

Bar the exigencies of a war economy, driving coherent and effective policy across all of these divergent sectors, each with their own interest group is a long call. Add demands for active redress, inclusion, and hopefully ‘green,’ and the policy maker is faced with the nigh impossible. Drawing on the work of Bosiu, Goga and Roberts (2018), IPAP notes that industrial policy is further limited by what it views as sectoral concentration in Communication Technologies; Energy; Financial Services; Food and agro-processing; Infrastructure and construction; Intermediate industrial products; Mining; Pharmaceuticals; Transport. Dealing with this unwelcome situation adds to the complexity.

The latest IPAP frankly acknowledges shortfalls in localization, mismanagement of the state-owned corporations, policy discord regarding the substitution of gas as feedstock, as well as the start-stop independent renewable energy sector and mineral exploitation in general, all compounded by high administered charges for power and transport. Unfortunately, it does not query the assumptions underlying the IPAP and how effective or ineffective it has been.

IPAP is both a specialization and scale strategy, the former resting on skills availability, modulated by redress concerns.

It is beyond the scope of this paper to go into detail for all sectors, so comment will be limited to IPAP perspectives on Beneficiation (commodities), Defence/aerospace, and Innovation and technology.

The connection with innovation policy arises from the IPAP specialization goal of converting natural endowment into marketable products. The lead-in to this sentiment is found in the statement that ‘South Africa is by far and away the dominant producer of Platinum Group Metals in the world.’

What then the prospects to turn natural advantage into competitive advantage? For a start, the price of platinum is determined on the London Metal Exchange – the fact that one refines platinum does not mean that the local cost to industry will be below the world price. In order to gain competitive advantage, industry, together with researchers, needs to find unique, patentable solutions for platinum catalysis that will increase fuel cell efficiency. Useful indicators of this potential reside in the volume and quality of platinum catalysis research that is under way. The volume and impact of local research into fuel cell technology has an h-index that is slightly higher than expected; the RAI is 20% below the world average level. The scale of effort is simply too small to expect major breakthrough.

The final word is left to Hausmann, Klinger and Lawrence (2008: 1): ‘There is no reason for countries like South Africa to focus attention on beneficiation at the expense of policies that would allow other export sectors to emerge … Quite simply, beneficiation is a bad policy paradigm.’

The second sector for comment is defence/aerospace. Under the authoritarian conditions of the apartheid years, South Africa’s military industries, employing some 130 000 personnel; as of 2017, employment in defence industries had fallen to a mere 15 000. R&D spending (including WMD) fell seven-fold from its 1990 peak. Bitzinger (2015) now classifies South Africa as a Tier 2b weapons developer alongside Brazil and South Korea. The Tier 2 countries—Brazil, Indonesia, Israel, South Africa and Australia—are those for which autarky in weapons systems has proved to be ‘unattainable, unsustainable, or unimaginable from the outset’ (ibid: 4).

As IPAP correctly states, lack of clarity regarding defence procurement, insufficient state funding, and international sales subject to the vagaries of foreign policy, do not allow for coherent industrial planning. These challenges force the industry to look beyond defence as a means for expertise retention. The IPAP aerospace and defence interventions read as piecemeal and cannot attain critical mass in any one entity.

The IPAP transversal focus area ‘Innovation and Technology’ must receive specific attention. This twenty-page section of the IPAP was wholly contributed by DST. This attribution begs the question: does the section represent DTI or DST policy, or both? The section commences with a schematic that is avowedly linear model in concept. The main body of the DST input reads as aspirational, broad-brush intents on the part of the DST seasoned with the goal of turning ‘resource advantage into chemical and materials advantage.’ What is surprising are the suggestions in the Key Action Programme for the diffusion of locally developed technologies from the defence and security, social infrastructure and health, ‘to leverage further local technology development.’ It is difficult to reconcile this approach with the weak showing of these three sectors. The IPAP-Innovation discussion struggles to balance the macro and micro levels, and at best offers weak signals to the private sector.

Synthesis

The above analysis suggests that innovation and industrial policy require a rethink. In practice, DST innovation policy translates into policy for science, while DTI industrial policy manifests as piecemeal.

It behoves to note the limited roles and responsibilities of local and provincial government as stipulated in the Constitution. Freedom of action to enable innovation ecosystems is circumscribed. Innovative ways to unlock these constraints are core to generating the innovation ecosystems that many would wish to see in operation. Unlike China, where provinces generate their own taxes and channel revenues to specialist zones such as fuel cell or battery development, the provinces act as financial transfer agencies. Constitutional reform will not come easy, but is necessary.

From the industrial perspective, the South African export basket remains oriented toward commodities and OEM products that have low intangible content, or whose IP is foreign-owned.

A second aspect of path dependence is the continuation of the two legs of the science system – ‘own’ science, with the second of state-funded Big Science (Kahn, 2019) via Big Science astronomy projects, and globally through nuclear physics, astronomy and health projects such as the Global Burden of Disease. Path dependence maintains the gap between academia and industry.

Even so, fixation on path dependence does not do justice to the innovation capability of the public sector and offshore economy. None of these activities are captured in OECD-type innovation surveys, or indeed by IPAP.

How to then to generate competitive advantage? These were the questions that the 2004-2008 Harvard group addressed. Rodrik (2006: 24) ascribed local economic failure to ‘under-performance of its non-resource tradable sector, and of manufacturing in particular.’ Hausmann and Klinger (2006) and Hausmann, Klinger and Lawrence (2008) argue for re-orientation toward the export of manufactured goods al la the Asian tigers. Since then, Hausmann has nuanced his diagnosis, highlighting the importance of acquiring and retaining diverse ‘know-how,’ that depends on many factors, of which education is but one.

This is a restatement of the value inherent in the specialization and clustering of related skills. The conditions for these to be fulfilled are myriad, and involve all levels of government. Fundamentally, innovation happens where people are situated, so that local conditions must support these activities (Cirera and Maloney, 2017). As noted earlier, a re-appraisal of the competences conferred on provincial and local authorities is needed. Cirera and Maloney also caution against doing R&D for its own sake, as this is unlikely to bring about the breakthroughs that industrial competitiveness demands. A culture change that valorizes use-oriented applied research is needed.

In conclusion, the transition that South Africa, and the world as a whole must grapple with is fundamental to our existence. It is not just 4IR or DIR, or renewables. It is the full weight in the Anthropocene Era, of the actions that we the living take. Schot and Steinmuller (2016) call for a total recasting of innovation policy. Similarly for industrial policy. Neither confronts sustainability in its full import.

References

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Bosiu T, Goga S, and S Roberts 2017. Concentration, profits and investment: Let’s focus on the structure of the economy, not “cash hoarding”. Industrial Development Think Tank: Policy Briefing Paper 11. University of Johannesburg

Cirera X and W F Maloney 2017. The Innovation Paradox. Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. Washington: The World Bank

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Kahn M J 2013. Rhetoric and change in South Africa’s innovation policy. Science, Technology and Society 13 (1), 95-122.

Kahn M J 2017. Performance Analysis of the SA National System of Innovation, National Advisory Council on Innovation, Pretoria. http://www.naci.org.za/wp-content/uploads/2010/01/Performance-Analysis-Report.pdf

Kahn, M J 2019. The contract between science and society: a South African case study. Science and Public Policy 46 (1), 116-125 https://doi.org/10.1093/scipol/scy042.

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Schot J and Steinmuller W E 2016. Framing Innovation Policy for Transformative Change: Innovation Policy 3.0 (Draft), University of Sussex, Lewes

Published by the Triple Helix Association – ISSN 2281-4515

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Innovation policy and industrial policy. Speaking with different voices?