Part 4: Social Market Economy: Universities, research institutions as catalysts of an innovation eco

It is not pure knowledge economies, but innovation economies

Modern economies are called ‘knowledge economies’ because they rely on human knowledge for economic prosperity. However, this designation describes a modern economy only partly. Instead, they should appropriately be called ‘innovation economies’. That is because as we discussed in the previous part (available at: http://www.ft.lk/article/475843/Part-3--Social-Market-Economy) knowledge or invention alone is a lame duck incapable of delivering prosperity. 

For knowledge to be effectively used, there should be entrepreneurs who would use that knowledge in viable commercial enterprises. That process is called innovation and without innovation, knowledge – however much it is advanced – will just remain idle devoid of being converted to practical use. Then, there should be two other conditions that have to be satisfied to make the duo – knowledge and innovation – contribute to national economic prosperity. 

One of them is diffusion – imparting knowledge and innovation across the economy. The other is the imitation of inventors and innovators by others in the economy on a grand scale. Accordingly, even a single invention and innovation could contribute to globe-wide economic prosperity as the Apple’s first Macintosh Desktop has demonstrated.

 

An innovation economy used ideas as raw materials

An innovation economy differs from a traditional industrial economy in several respects. First, in an industrial economy, it is natural resources, labour and capital that matter as inputs for economic activities. But an innovation economy is ruled by ‘ideas’ that are used in actual businesses that harness those inputs. 

Second, an industrial economy focuses on mass production for use by customers. An innovation economy too produces for consumers but gives priority to design and quality based on information and communication technology. Third, Industrial economies are organised as large corporations that depend on economies of scale. Innovation economies, on the other hand, are composed of small scale entrepreneurs who use networks and agents to do business. 

Fourth, the success of industrial economies is based on labour and its availability, quantity of products, low costs and ability to control organisations and markets. Innovation economies depend on talents, speed of delivery, innovation flexibility and customisation of the products for success. As such, an innovation economy is a further step forward from an industrial economy and effective user of new knowledge that is being produced throughout the globe.

 

Researchers should be linked to industry

Hence, it is vital that, if an economy is to prosper, knowledge-makers should be effectively linked to business and industry. In the past, this did not matter so much because it was the inventors themselves who put their inventions into commercial production as well. But today, inventions are made at a rate and all inventors are not entrepreneurship-savvy. This makes it necessary for outsiders who are enterprising to absorb inventions and make them available in the form of goods and services to consumers. 

Large companies have the capacity to acquire and command over inventions without the help of an outside party. But small start-ups and entrepreneurs need the services of networks and agents to get connected to funding, inventions and markets. Such innovation facilitators are called ‘innovation brokers’ who have now become an important element in a proper innovation economy system. 

 

It is not human capital per se but creative capital that matters

Thus, a country interested in creating an innovation economy should put all the four essential ground conditions in place if it is to succeed in its attempt. First, knowledge has to be created by its universities and research institutions. Then, such knowledge should be made available to prospective entrepreneurs for use in commercially viable productions known as innovation. 

Once the initial entrepreneurs become successful, that knowledge, both invention and innovation, should be disseminated across the economy to facilitate others to imitate the original inventors and innovators. To create the necessary ground conditions for this, an invention-innovation-diffusion-imitation nexus has been suggested by involving three partners of progress holding keys to success. 

The first key involving the creation of knowledge is held by academia in universities and research institutions. They are guided by ethics of conducting research and have to work on cooperative researcher networks that nourish and cross-fertilise each other. The second key involving the task of putting the inventions into production is held by industry that delivers prosperity to the nation in the first instance and to the globe subsequently. The third key involving facilities for stable and productive interaction is operated by the government. Its job is to combine three interrelated aspects of economic prosperity: technological development, political support and social and cultural orientations involving economic progress. 

These three partners together contribute to teaching and training, research and development and producing human and creative capital. It is to be noted that it is not mere human capital but creativity in human capital across all the three partners, academia, industry and government that delivers prosperity to a nation.

 

Overstretched Sri Lankan universities have been staffed with routine capital and not creative capital

Knowledge creation is the foundation of an innovation economy. But who creates new knowledge? Those are universities and research institutions. These institutions together, in any country, sit on a vast resource in the form of human capital. In Sri Lanka, human capital at universities is overstretched to teaching undergraduates who are admitted to the university system in large numbers year after year without improving educational facilities. On top of this, universities have competitively increased the number of courses and credit hours which an undergraduate should complete in order to acquire his degree qualification from a university. 

To facilitate this dual vicious circle, university academia has overstretched its capacity. The result has been pernicious. Human capital in universities has become a routine capital and not a creative capital as required by an innovation economy. Hence, it is necessary to convert routine capital into creative capital in order to promote the creation of new knowledge by them. Once they start creating new knowledge, they should be linked to industry through an effective mechanism so that what is created by them is used for the benefit of the nation as a whole. 

 

Break the research silos of Sri Lankan research institutions

Sri Lanka’s research institutions at present operate in ‘research silos’ with no connection to industry or use of their research outputs as inputs in industry. They too sit on a vast amount of human capital which is not used effectively to create new knowledge that leads to innovation by business and industry.

One has to just examine the qualifications of the researchers attached to the Department of Agriculture to gauge this point. Despite the large number of researchers in the Department, Sri Lanka still produces its agricultural produce in the same way it had produced it a century ago. Take for example rice. When other nations have gone for value-added products out of rice, such as ‘rice bran oil’, an edible oil that is rich with nutrients, Sri Lanka still processes rice in the same old manner and use rice only as the staple food of its people. 

The same observation can be made about the sectoral research institutions such as the Tea Research Institute or Rubber Research Institute or Coconut Research Institute. In the case of tea, Sri Lanka still used tea only as an edible drink. That again, by using the traditional method of brewing tea in hot water and drinking it as a hot drink. Many extracts could be derived from tea that could be used in value added products in both the perfume and pharmaceutical industries. It is an eye-opener for Sri Lanka’s tea industry to learn that tea extracts are now used in perfume industry on a large scale after getting patent rights for the same (A list is available here: http://www.fragrantica.com/notes/Tea-106.html ).

The Industrial Technology Institute or ITI is different from other research institutes. Researchers at ITI have come up with a number of breakthrough inventions in the recent past and are looking for viable and productive linkages with industry to put their findings to practical use in producing commercially viable products and services. 

 

Research should encompass all the sectors in the economy

New research by Sri Lanka’s universities and research institutions should cover research in all the three major sectors of the economy, agriculture, industry and services. There should be both intraconnection and interconnection of the research outputs produced in a given sector. Intraconnection means that a research output produced in respect of a given sub-sector, for example, use of a genetically modified crop yielding a higher output, say in rice, should lead to production improvements in other sub-units of the same sector. 

In the rice example, the yield improvement should lead to improvement of yields in other crops, say tea or coconut or fruits. Interconnection means that research done in agriculture should generate output increases in other sectors. For instance, rice bran oil formula developed in the agriculture sector should lead to manufacturing of rice bran oil in industry and marketing of same in the services. Such an approach to research is known as ‘holistic’ or ‘integrated approach to research’. That is what Sri Lanka needs at the present time.

 

Corporations are increasingly relying on outside research

The connection between the world’s industry and research has gone through a massive transformation today. In the initial period where industries were localised in the regional cities like Detroit for motor cars, Sheffield for Steel, Mumbai for Textiles, inventions were done by entrepreneurs themselves and it was hardly that facilities at universities and research institutions were utilised by industry. The same continued in the second era where government sponsored industrial parks were established. Industries were required to bring in technology and inventions to host countries and host regions. 

Today, that isolated existence of research and industry cannot sustain itself for two reasons. One is that invention and research requirements are rising dramatically in a fiercely competitive world. Hence, industries and entrepreneurs are incapable of meeting those requirements through only research done in-house. The second is that entrepreneurship has become a specialised talent and not all inventors are skilled in that talent equally. Hence, the two types of work, namely, invention and innovation, have to be separated with each group specialising only in its area of competence. Accordingly, industry has to depend on research institutions and universities for inventions and research institutions and universities have to depend on industry for innovation. This linkage is now being established in a different kind of a production model.

 

The dead Sheffield has been converted to a vibrant research town

An example for this new model is the Advanced Manufacturing Facility set up around the University of Sheffield, UK with many giants of industry and commerce being located there (available at: http://www.brookings.edu/research/opinions/2015/03/25-manufacturing-innovation-district-sheffield-england-katz-kline). 

The need for establishing such advanced manufacturing facilities has arisen due to sheer necessity: The need for competing successfully with low-wage and low-cost countries. Hence, it is necessary for advanced economies to bring out continuous innovation of production and processes involved in manufacturing. To do so, they have to engage in applied research, investment in sophisticated plant, technology and investment, automation of manufacturing processes through robotics, and developing a highly skilled workforce. All these four requirements are now met in one location where industry has been linked effectively to research and knowledge creation. 

 

Co-existence of small start-ups with giants in industry in Sheffield

Sheffield had been famous for quality steel products for decades. It was such a popular world brand, instead of calling ‘Made in England’, steel product manufacturers in Sheffield were successful in developing their own brand name, ‘Made in Sheffield’. Like Ceylon Tea, it instantly denoted quality and reliability. This was not be for long after Sheffield began to experience fierce competition from other countries that also went into the same production line such as Japan, South Korea and now China. Consequently, Sheffield lost its glamour as well as economic base. 

Now to regain that lost glamour and lost economic base, Sheffield has established an Advanced Manufacturing Park around its University which functions as the key knowledge creator. It provides advanced manufacturing companies with industrial expertise, cutting-edge machines and equipment and solutions to complex industrial issues.

More than 100 giant manufacturing companies including Boeing, Rolls-Royce, BAE Systems, Hitachi and Tata are located in Sheffield Park. Along with these giants, a large number of small and medium size start-up research developers have also been set up in the Park in an incubator facility so that they could benefit from the practical exposure they would get. In addition, apprenticeship is provided to young workers to train them on the job thereby demonstrating that, to be creative and skilled, one need not have to acquire a four year university degree.

Similar to the Sheffield Advanced Manufacturing Park, advanced research towns have been established around almost all the leading universities in USA. MIT, Washington and Boston are some examples.

 

Time for Sri Lanka to tap its dormant resource base in universities and research institutions 

Sri Lanka should now consider linking its universities and research institutions to industry, both local and foreign. For that purpose, universities and research institutions should be funded adequately in the first instances and force them to earn their living by selling their invention outputs to industry later.

Ronald Reagan managed to do this while he was Governor of California between 1966 and 1975. He cut the university funding and forced them to earn their living. The result was that state funded universities in California, in competition with private universities, began to produce new research inventions that finally led to the development of Silicon Valley in California.

Sri Lanka should not go for this type of a ‘penalty option’ waving a stick at universities but use instead a ‘carrot option’ which would incentivise them to get linked to industry. What is needed for incentivising them is to share the earnings, may be 90% by the university and 10% by the Treasury after putting rules for accountability in place. It is suggested that a special Cabinet sub Committee be set up immediately in order to identify different universities and different research institutions as ‘invention creators’ and establish industrial parks around them to put those creations to actual productions.

This is the foremost requirement today for the creation of the social market economy which is claimed to be ‘knowledge-based’, ‘highly-competitive’ and ‘private sector-reliant’.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)