Financial Crisis Provides Opportunity, Pitfalls For Green Innovation

LAUSANNE – One should not waste a good crisis, goes the common wisdom – a piece of advice policymakers might use to spur the world closer to a green, knowledge-based economy, said a panel at the Ecole Polytechnique Fédérale de Lausanne Wednesday. The current financial crisis and an awakening recognition of the ecological crisis have presented a unique opportunity for innovation – and particularly green innovation – to take a lead role in driving future economies.

Innovation is a “unique way to manage crisis,” said EPFL’s Dominique Foray, a professor who is the director of the “Chair in Economics and Management of Innovation as well as vice-chair of an expert group of economists on “Knowledge for Growth.” At the same time, companies need “high-powered incentives” to innovate, and to develop a business based in research, development and innovation, he added. For policymakers, this means thinking about legal tools such as patents to capture innovation, or public subsidies.

Europe has an interesting role to play in the way the global economy might emerge from the current crisis. This is particularly true for Switzerland, as a place with a highly developed research and development sector but also with real vulnerability to financial market fluctuations, Foray added at the event, which took place 17 June.

But much of this also depends on how deep and how long the current recession lasts, said Professor Luc Soete, director of the United Nations University Maastricht Economic and Social Research and Training Centre on Innovation and Technology (UNU-MERIT). He set out four possible scenarios for the future, based on the speed of the economic recovery and severity of the recession.

At one extreme is the scenario of a rapid recovery (within the next three to four quarters) and an only moderate recession. In this case, there might be no change in the way the economy functions, he said. In this case, limits to sustainable growth will be expressed in the recurrence of crises; inequality and social exclusion might also be present.

On the other hand, in the case of a slow recovery a severe recession, there might be serious disruption. The economy would be marked by prevailing structural unemployment (unemployment arising from a mismatch between the skills of the work force and the skills needed in the economy) as well as a highly mobile work force of those with capabilities in newly emerging specialisations. Green concerns would govern globalisation, he said.

The importance of environmental concerns and the new specialisations would cause a shift from a natural tendency towards national competitiveness based on technological advancement towards a more global drive to knowledge diffusion.

The very nature of innovation might also change. The current financial crisis, Soete said, illustrates the “unsustainable growth nature” of the predominant innovation process, in which product improvement has been aimed at increasing quality and marketing aimed at high-income consumers. The economic fallout has clarified the “conspicuous nature of much of this consumer demand” that leads people to pay for expensive items they do not really need, such as a watch that is waterproof to 50 meters below the water.

A crisis will cause a shift towards different kinds of consumers, he said. The markets likely to grow are not in luxury goods but in low-income areas where need – and the population of likely buyers – is greater. Because these areas often lack infrastructure, because the potential consumers often lack education, and because repair facilities are likely to be scarce, then autonomy, simplicity, and sustainability of use are going to be vital to make things sell. These characteristics will eventually benefit those in developed countries as well, but making these things will require a serious investment in knowledge development.

Global Access to Knowledge and the Crisis

What this means for policy is an increased focus on technology transfer and access to knowledge, said Soete. The internet, too, has levelled the playing field as far as aspirations of consumption, and thus population rather than income is “likely to become the indicator of future market opportunities,” meaning the power of the European Union to drive demand for innovative products will decline.

“It is surprising that we’re still stuck talking in national terms” when “global access to knowledge is central in the current crisis,” he said. For developing countries to grow, they need technology. And developed countries have an interest in developing countries growing, because they need access to those new markets.

This is the central challenge to technology and innovation policy, to move from national competition to a new global view of access, diffusion, and effective use, he concluded.

An audience member from the UN Conference on Trade and Sustainable Development cautioned that technology development is often context-specific. What is developed in the global north, and subject to strong IP protection, might not be relevant nor easily diffused into the global south.

But it is key to remember, said audience member John Harwell, who is a consultant who has worked on these issues for 30 years, not to judge innovation a priori as socially acceptable or not. The One Laptop for Child project aimed at addressing a problem in the south spurred a revolution in cheap laptops in the north. The US Defense Advanced Research Projects Agency (DARPA), which created the backbone of the internet, originally was creating a military technology, and streaming video – a key communication technology – originated with pornography. So technology developed for one use can often find others.

But will all this R&D pull the world out of the financial crisis?

The connection between research and development and economic success is in and of itself not a sure bet, said Bronwyn Hall, a professor at the University of California at Berkeley who is also a fellow at UNU-MERIT.

Presenting data from a recent series of reports out of Booz Allen Hamilton, a Washington DC based consulting firm, that suggest that R&D spending does not necessarily lead to better financial success, Hall said that at first it appears “to suggest the failure of R&D to increase returns.”

But it gets more complex when the data is analysed, she said. There is “a lot of noise” due to other factors that might obscure the ways in which R&D matters, and measuring the data is difficult.

The one thing that is clear, however, is that smaller companies tend to invest in research procyclically, meaning only when the economy is strong. For larger firms, investment in R&D is often counter-cyclical – that is, can increase even in times of economic crisis – indicating that they have the ability to ride out financial pain but keep up their spending on innovation. The conclusion here for policymakers is that cash flow is a real constraint in a downturn for smaller firms.

The importance of creative talent is paramount, said Xavier Comtesse, director of Avenir Suisse, an economics think-tank. “Hiring the best” in innovation and science as well as in the finance sector is the goal for Switzerland, he explained. However, he predicted the country would likely maintain its current R&D focus on health care rather than moving into green technology, as health is a proven success case for the nation.