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3.3. Enabling an equity-friendly business environment: innovation and entrepreneurship Innovation policies and Inclusive Growth   Innovation is a driver of long-term economic growth and has an effect on the distribution of opportunities and outcomes. Innovation consists by and large of introducing new products and services in the market, or better ways of producing, marketing and distributing them. Innovation is the key driver of productivity enhancement and therefore economic growth over the longer term. However, innovation can also accentuate income disparities if technological change opens up opportunities for individuals holding certain comparatively rare skills to the detriment of those who do not possess them. Moreover, policy settings that impinge on the adoption and diffusion of innovations, such as the regulatory environment in product and capital markets, education and skills, also have a bearing on how individuals benefit from new technologies.

Innovation and innovation policies tend to impact the performance of firms asymmetrically.

Particularly in emerging and developing countries, a small group of high performance innovators -“islands of excellence” tend to co-exist with groups of poorly performing firms and an often sizeable informal economy. While the development of high-tech activities is important for economic growth, it is critical to understand to what extent policies also provide sufficient support to a wider group of innovators: they must ensure that the knowledge provided by “islands of excellence” trickle down to the rest of the economy.

Framework conditions, such as possibilities for accessing finance or tapping into knowledge networks, are particularly important for the diffusion of new technologies and for “technological followers” to benefit from cutting-edge innovation (Bas and Paunov, 2014). In developing countries and emerging market economies, adaptation of pre-existing technologies to local conditions and use of new-to-the-firm products are important aspects of technological diffusion, which can be enhanced through competition between firms.

Innovation also has a geographical dimension, by affecting the distribution of economic activity and jobs between urban and rural areas or among different neighbourhoods in cities. Typically, innovation activity is concentrated in a few regions, generally advanced metropolitan areas, often close to major universities and research centres, which creates a link between innovation and urban/regional development policy (OECD, 2011c). Because these linkages depend on country-specific conditions and complex policy interactions, more analysis is needed on the geographical dimension of technological diffusion and the effects of innovation on local residents (“territorial inclusiveness”).

Low-income countries face specific challenges for making innovation the engine of economic development. In some countries, “inclusive innovation” initiatives aim at providing poor and lowerincome groups with access to innovative products in the areas of food, health and basic livelihood. Many inclusive innovation projects consist of developing business models that could cover at least in part the costs of diffusion of innovations to low-income individuals and small businesses. At the same time, “grassroots innovations”, which are developed by the poor, have great potential for creating opportunities for individuals and households to move out of poverty. Grassroots innovations in agriculture are particularly important. A major policy challenge in this area is to create the conditions for these initiatives, which are locally based, to upscale and reach more people: it is often an issue of capacity building and removing market barriers. Success stories such as Kenya’s mobile banking service M-PESA, which now reaches an estimated 15 million users, indicate that opportunities for up-scaling exist.

Innovation policies do not necessarily reach their intended beneficiaries. In general, innovation policies are usually designed with no consideration as to their impacts on Inclusive Growth. Tax incentives are conventional instruments to foster innovation, but they tend to benefit firms that invest heavily in R&D, and exclude smaller firms and those operating in the informal sector (Figure 3.2). Government grants and subsidies also tend to benefit larger firms and particular sectors or activities, often high-tech ones, at the expense of more basic, lower-tech innovations that might benefit a larger share of the population. It is therefore important to broaden the reach of innovation policies to smaller businesses and entrepreneurs, which often engage in a broader range of knowledge-based activities that go beyond traditional R&D. These innovators also often play a crucial role in the diffusion of new technologies and in adapting them to local needs and conditions. Toner (2011) notes that much of the innovation in OECD countries happens incrementally, where shop floor workers have the discretion and potential to innovate as they ‘learn by doing’, and companies have the absorption capacity to take these innovations on and mainstream them. In such cases, managers may be more likely to reward a broader section of the workforce as profits rise and product market strategies evolve. Innovation that goes beyond R&D includes changes in institutions.

Box 3.9. The digital revolution: is it good for all?

The Digital Revolution, including the emergence of the Internet and the fundamental transformations brought about by social media, have encouraged innovation and affected the overall productivity of modern economies.

These transformations have, in particular, facilitated better access to knowledge and improved means of communication for a wider group in society, including disadvantaged groups in developing and emerging countries.

The benefits of innovation are traditionally perceived to flow disproportionately to investors in, and managers of, larger technologically sophisticated enterprises (OECD and WB, 2012). No particular skill is needed to operate a basic cell phone, but using ICT as a tool to run a business more efficiently or do research requires an investment of time and money, access to the Internet, a reliable electricity supply, and some literacy and numeracy skills. In consequence, internet penetration as a percentage of the population in North America, Europe, Latin America, Asia and Africa is around 80%, 60%, 40%, 25% and 14% respectively. Innovation can also accentuate income disparities within countries to the extent that it opens up opportunities for high-skilled individuals and closes them down for the lower and middling-skilled.ICT policies can support Inclusive Growth by helping the development of adequate ICT-based applications that support innovation activities of entrepreneurs and small businesses. A variety of ICT-based applications have brought fundamental changes to disadvantaged groups including also

disadvantaged rural communities in developing and emerging countries. They include for instance:

KACE, Kenya: Provides daily market information on 20 commodity prices, facilitates offers and bids to match farm outputs with demand from wholesalers, and facilitates links between farmers and buyers (e.g. for contract negotiations and commodity transport).

Farmers Texting Centre, Philippines: Offers an innovative SMS-based service for answering agricultural queries mainly about rice production from farmers, extension workers and other actors. Also provides technological updates on rice production and a virtual network to facilitate interactions among farmers and clients.

Fisher Friend, India: Provides timely information on local fish markets, weather, the sea, and timely and critical information for fishers. It “also increases their knowledge base by providing information on government schemes and entitlements, health services, directory services, and a marine toll-free helpline”. Collaboration between the M.S. Swaminathan Research Foundation (MSSRF), Tata Teleservices in India, Astute Systems Technology, Wireless Reach, and Qualcomm.

At the same time, not only are lower-income groups at a disadvantage with respect to access, they are also likely at a disadvantage for reaping the benefits of ICTs, notably because skills help exploit the opportunities ICTs offer and they are complementary with innovation and technical change. A wider skills base will, therefore, be key to expanding the group of successful innovators.

Source: OECD (2013j), Innovation and Inclusive Growth, OECD Publishing, Paris, and Zhenwei Qiang,et al. (2011), “Mobile Applications for Agriculture and Rural Development”, ICT Sector Unit, World Bank, Washington, DC.

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There are potential trade-offs between the positive impact of innovation on growth, and the distribution of its benefits. Traditionally, innovation policies focus on the growth impact, but consideration should also be given to supporting innovative activities and products that improve the welfare of low-income groups. Success stories such as Kenya’s mobile telephone banking service MPESA, which now reaches an estimated 15 million users, indicate that opportunities exist. Innovation policies in practice can be exclusive. R&D tax credits, for instance, which focus on firms investing in R&D and, thus, do not support those focusing on other types of innovations. They tend to support larger businesses with R&D departments over smaller ones. A lack of suitable framework conditions also affects small businesses more substantially than larger businesses, and will also hamper “industrial inclusiveness”.

Framework conditions matter for innovation and inclusiveness. With regards to information technologies, addressing “digital divides” is a critical condition for widespread impact. Adequate framework conditions that ensure the Internet is free and open are also essential. Expanding cloud computing services to provide on-demand computing services can also be an effective means to strengthen access for small-scale businesses to a critical input for their innovation performance. Similarly, providing conditions for engaging in innovation processing are critical, including access to finance, skills and other critical “enablers” of innovation.

Entrepreneurship for all

Entrepreneurship is a key conduit for inclusiveness. This is especially the case if disadvantaged social groups have the same opportunities as others to start and operate successful businesses. However, most entrepreneurs are from higher social groups: a study by the Global Entrepreneurship Monitor found that in the United States, a majority of entrepreneurs were male, wealthy, well-educated, white and born in the country (Pressl, 2013). Also, there were only 9 million self-employed women compared with 21 million self-employed men in the European Union in 2013.46 In OECD countries, most new businesses are owned by men (Figure 3.3). At the same time, there is an entrepreneurship quality gap affecting disadvantaged social groups; indicators of business turnover, income from self-employment and business survival rates are all significantly lower for women, youth and immigrants (European Commission, 2005).

Figure 3.3.

Women in OECD countries have relatively low business start-up rates

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7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Note: The new business ownership rate refers to the proportion of the population that is currently an owner-manager of a new business that has paid salaries, wages or any other payments to the owners for more than three months, but not more than 42 months Source: OECD based on data of the 2008-2012 adult population surveys from the Global Entrepreneurship Monitor Disadvantaged social groups, such as women, youth and immigrants, face barriers to entrepreneurship. Social norms, networks and welfare systems, as well as access to finance and skills for entrepreneurship, are important obstacles that call for corrective policy action (Figure 3.4). For example, for women, policy action could involve efforts to make childcare services available to entrepreneurs with young children, build female entrepreneur role models and networks, and adjust social security regimes to offer finance for maternity leave to the self-employed (Pfau-Effinger, 2004 and Achtenhagen and Welter, 2011). For youth, start-up programmes combining finance, coaching and mentoring have proved to be effective.

Figure 3.4.

In the EU, youth and women often face stronger barriers to starting an enterprise

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Source: European Commission (2012), “Entrepreneurship in the EU and beyond”, Flash Eurobarometer 354.

Access to finance and other essential business services are necessary to facilitate inclusive entrepreneurship. Facilitating access to credit for the underserved population, such as small enterprises and the self-employed can do a lot for inclusiveness but also for growth, by removing obstacles to the expansion of businesses and the formalisation of labour relations. Many immigrant groups have to rely on their own sources of finance and typically experience high rates of refusal for bank loans. They also often lack the necessary skills and networks for developing high value-added businesses (Basu, 2006 and APCE, 2002). Even the allocation of credit by non-price mechanisms, such as directed credit, grants and subsidies, often ends up favouring politically connected groups, rather than the underserved population, therefore creating distortions and inefficiencies that are harmful to growth. At the same time, it is important to provide complementary business services focused on advice, coaching and skills development to entrepreneurs and potential entrepreneurs in order to maximise their chances of running successful businesses and contributing to growth.

Entrepreneurship policies should focus on two broad objectives. These include channelling targeted support at the specific problems faced by entrepreneurs from outside the mainstream, especially in the areas of skills and finance, and ensuring that support options are accessible to all segments of the population and not just to the “typical” business or entrepreneur. In particular, key policy

recommendations include:

 Incorporating entrepreneurship support measures for marginalised social groups in active labour market policies. Schemes such as the Ich-AG ("Me-inc") in Germany have offered monthly allowances to unemployed people who start businesses to help them cover their living expenses. Evidence shows that 5 years after business start-up 50-60% of former Ich-AG participants were still in full-time or part-time self-employment.

 Removing disincentives to business start-up in welfare systems, for example by providing child care facilities for those with young children, and helping to finance the transition from unemployment to self-employment. Spain’s Self-Employed Workers’ Statute (Estatuto del Trabajador Autónomo) came into force in 2007 and aims to give more legal protection to selfemployed people and promote equal working conditions for self-employed men and women. The law also introduces provisions for maternity and paternity leave for the self-employed, as well as childcare.

 Promoting entrepreneurship skills with entrepreneurship education initiatives, targeted advice and coaching initiatives. For example, the “Going for Growth” project in Ireland provides group support, networking and workshops for women entrepreneurs to boost their entrepreneurship skills and increase their ambitions. A key to the success of this project is the central role that experienced entrepreneurs have in encouraging and teaching participants.

 Developing microcredit programmes, including through new mechanisms such as crowd funding. One example is “Seedmatch” in Germany, which is one of the few equity-based platforms in Europe, enabling funders to invest in new start-ups and receive shares in return.

Seedmatch carries out an in-depth assessment of the business proposals, which increases the transparency of projects.

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