The OECD Observer
January 1999, No. 215

 

Business and Industry Policies for Knowledge-Based Economies
By Graham Vickery

 

Businesses today operate in a globalised, competitive environment, where they have to deal with constant change and endless pressures to adapt. Government policies have to respond to these new business realities. How?

New scientific discoveries, constant restructuring of whole industries, volatility in financial markets, the emergence of the stakeholder society with its demands for more transparent corporate governance, and the advent of electronic commerce are just some of the varied challenges facing business and governments.

Globalisation is one of the main drivers of change and, at the same time, one of its principal results. Declining costs for computing, communications and transport undoubtedly underlie globalisation’s development, and market liberalisation and public sector reform have also been crucial. Central to globalisation is firm-level innovation and the search for productivity improvements and international competitiveness. It is reflected in more cross-border operations, higher volumes of trade and foreign investment, increased collaboration and joint ventures, and ever more sophisticated patterns of production and marketing.

To survive and prosper in this new environment, many firms have had to re-organise and become more responsive to change. They have had to build trust and responsibility. This has been achieved internally on the one hand, by flattening hierarchical structures and delegating responsibility in order to mobilise skills more effectively, and externally on the other, by building durable networks as a fundamental part of maximising value-added in output. The benefits of these networks are evident in the automotive industry, particularly in component manufacturing and sub-assembly. Flexibility has become the key word. Smaller units have always predominated in services, and in manufacturing the average number of employees in work places has been declining in the majority of OECD countries. In fact, the average establishment size in terms of employment in manufacturing is estimated to have fallen by about 10-12% in Canada, the United Kingdom and the United States since the early 1980s.

One reason for the success of smaller businesses is their ability to adapt rapidly to new circumstances. Though individually they may experience more turbulence in their life cycles than larger firms, collectively they are important generators of new jobs. They are also an important conduit of ideas and innovations in the knowledge economy.

The growth of small businesses has led to the emergence of a new market in knowledge-intensive services for manufacturing, as firms seek new ways of managing and extending their strategic resources. These services—including consulting, IT and R&D—have an estimated turnover of around $1trn in OECD countries today. Their increasing importance has underlined the fact that intellectual capital—whether in R&D, technological innovation, managerial and worker training, work-place organisation and market knowledge—can make the difference between success and failure.

 

The New Role of Policy

How have business and industry policies changed in this dynamic new global environment?

For a start, governments have moved away from the old protectionist and reactive approach of attempting to save or protect domestic industries and jobs against the tide of globalisation and liberalisation. Many past practices, such as those of targeting established sectors and firms, or attempting to pick future winners, have been largely abandoned. Instead, policy is increasingly setting itself the task of creating general conditions which encourage entrepreneurship and innovation, the development of new products, new ways of marketing and producing, even encouraging the birth of whole new activities.

Today, the primary concern of policy is to provide the conditions necessary for healthy competition and enhanced business performance globally. That means assuring an environment which encourages innovation and risk-taking, while at the same time providing a flexible, yet stable, policy framework. Governments are more concerned with encouraging efficiency in markets than intervening directly in them. This also means looking outwards, taking into account the liberalisation of trade and investment, and new openings in capital and product markets, rather than adopting a purely domestic orientation.

Within this broad movement, government attention has turned to the quality of research, the supply of skills, the availability of strategic services and the provision of efficient communications, transport and other business infrastructure. Companies investing internationally seek not only new and enlarged markets, but also simple rules on corporate start-up and operation, and understandable, consistent and reliable regulations. This is illustrated by the preponderance of international investment going to OECD countries (over 70% of total global inflows) and by the extent to which the more open OECD economies have benefited from those flows. Moreover, the globalisation of capital and business has led to downward pressure on corporate tax rates, even in traditionally high tax environments.

There have been four major shifts in the knowledge-based economy since the early 1980s which governments have had to take note of. The first is in R&D and innovation, which firms increasingly depend on for their competitiveness. OECD firms now spend around 1.8% of their business gross domestic product on R&D, with the industry-financed share increasing by some 30% in the last 15 years. Governments have become more selective and focused and their share of financing business R&D has dropped to around 10% of the total (see Observer No. 213). A major priority of government-backed research must be to enrich the global knowledge base by backing science and technology in universities and research institutions, encouraging exploration of uncertain and untried scientific and technological areas, and training future employees. Facilitating the diffusion and application of knowledge is another priority. Governments can encourage this by providing an appropriate legal and institutional framework for the knowledge-based economy, to underpin the commercial use of intellectual property, for example.

A second shift in the knowledge-based economy has been the growing acceptance of the principle of a ‘learning society’. Most governments are now grappling with how to implement life-long learning. Indeed, the last issue of the OECD Observer dedicated its special report to the question. Improving vocational and technical training is necessary in most countries, while increasing mobility between vocational/technical and conventional academic studies is desirable. All countries could benefit from enhancing the links between business and education.

A third new development is reflected in attempts by OECD governments to improve their policies for small businesses and to unblock the bottlenecks which they frequently encounter. Measures recently introduced include: improving access to finance, technology and innovations; developing human resources and management capabilities; promoting networks and alliances; and encouraging the diffusion of best business practice.

A fourth important shift which the knowledge-based economy has brought about, and one which has accelerated the pace of globalisation, is the acceptance by governments of the virtues of privatisation and market liberalisation and of the need to reduce unnecessary public-sector intervention. Most governments now believe that their influence is best deployed to increase flexibility and encourage innovation and competition.

 

Implementing Policy

These shifts in emphasis are taking place only slowly. Much lip-service is paid to the challenges of globalisation and the need to expand the knowledge base and its application, but governments have been slow to reflect new realities in their policy priorities for business and industry. True, OECD governments all face different circumstances which have a bearing on policy design and implementation. Yet there is no denying the need for new policies and some common principles are discernible which will help governments to build them.

The first job is to improve policy design and delivery. This means clearly identifying policy objectives, defining the rationale for policy actions, and setting them in a flexible, though robust, policy framework. From the outset policy makers should think about how to bring business and other interested parties into the process. And once the framework is in place, policies should be monitored and assessed constantly to improve them and to provide feedback into the policy-making process.

Increased co-ordination between national, regional and local authorities in the design and implementation of policies and programmes is another important component of any successful strategy. Co-ordination improves the scope of policy, and helps to reduce duplication and inefficiency. Although collaborating and networking are established practice among private firms, OECD governments are only now emphasising them in their relations with business associations, financial institutions and public and private bodies. This is evident in new initiatives to help small businesses, such as the Canadian Technology Network, where industry associations, research organisations, governments and educational institutions work in partnership to provide intelligence on technology and crucial business services. Similar initiatives have been taken elsewhere, for example, in Finland and the Netherlands.

A third step is to find ways of making business and industry polices work alongside other policies. Policy formulation is a holistic exercise, and policies can no longer be viewed in isolation. For instance, education and training are increasingly important in industrial and economic policies. In addition, seeking a balance between policies promotes social cohesion and growth. In practical terms, that implies co-ordinating policies aimed at the generation of wealth with those whose focus is more social.

Finally, learning from the experience of other countries is always important, but never more so than in these times of change. International comparisons help governments to identify where reform and improvement are most urgent, and where particular measures might succeed or fail. There is a wealth of experience in different countries on improving policies and the overall business environment. The value of sharing such experiences should never be under estimated. After all, when it comes to business policies in the global knowledge economy, governments too must be ready to learn.

 

OECD Bibliography

Technology, Productivity and Job Creation: Best Policy Practices, 1998 (http://www.oecd.org/scripts/publications/bookshop/redirect.asp?921998051E1)

Corporate Governance: Improving Competitiveness and Access to Capital in Global Markets, 1998 (http://www.oecd.org/scripts/publications/bookshop/redirect.asp?921998041P1)

STI Review, No. 21, ‘Public Support to Industry’, 1998 (http://www.oecd.org/scripts/publications/bookshop/redirect.asp?901997211P1)

Spotlight on Public Support to Industry, 1998 (http://www.oecd.org/scripts/publications/bookshop/redirect.asp?701998021P1)

John Dryden, ‘Realising the potential of global electronic commerce’, The OECD Observer, No. 214, October/November 1998 (http://www.oecd.org/publications/observer/214/Article6_eng.htm)

Vladimir López-Bassols, ‘How R&D is Changing’, The OECD Observer, No. 213, August/September 1998 (http://www.oecd.org/publications/observer/213/Article4_eng.htm)

‘Industrial Performance and Competitiveness in an Era of Globalisation and Technological Change: Meeting of the OECD Industry Committee at Ministerial Level’, The OECD Observer, No. 210, February/March 1998 (http://www.oecd.org/publications/observer/210/obs210e.htm)

Changing Workplace Strategies: Achieving Better Outcomes for Enterprises, Workers and Society, OECD/Government of Canada, 1997