s ~~~~~~Wt>P 3,25 §fUL I99 325 H=1 World Bank Discussion Papers Institutional and Entrepreneurial Leadership in the Brazilian Science and Technology Sector Setting a New Agenda Edited by Lauritz Holm-Nielsen Michael Crawford Alcyone Saliba Recent World Bank Discussion Papers No. 253 Small Firns Informally Financed: Studiesfrom Bangladesh. Edited by Reazul Islam, J. D. Von Pischke, and J. M. de Waard No. 254 Indicatorsfor Monitoring Poverty Rediction. Soniya Carvalho and Howard White No. 255 Violence Against Women: The Hidden Health Burden. Lori L. Heise with Jacqueline Pitanguy andAdrienne Germain No. 256 Women's Health and Nutritioni: Making a Diflfrence. Anne Tinker, Patricia Daly, Cynthia Green, Helen Saxenian, Rama Lakshminarayanan, and Kirrin Gill No. 257 Improving the Quality of Primary Educatiotn in Latin America: Touards the 21st Century. Lawrence Wolff, Erncsto Schiefelbein, andJorge Valenzuela No. 258 How Fast is Fertility Declining in Botswana and Zimbabwe? 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Robert Bacon No. 274 Social Action Programs and Social Funds: A Revieuw of Design and Implemenitation in Sub-Saharan Africa. Alexandre Marc, Carol Graham, Mark Schacter, and Mary Schniidt No. 275 Investing in Young Children. Mary Eming Young No. 276 Managing Primary Health Care: Implications of tile Health Transition. Richard Heaver No. 277 Energy Demand in Five Major Asian Developing Countries: Structure and Prospects. Masayasu lshiguro and Takamasa Akiyama No. 278 Preshipment Inspection Senrices. Patrick Low No. 279 Restnmcturing Banks anid Enterprises: Recent Lessonsfrotn Transitio,i Countries. Michael S. Borish,Millard F. Long, and Michel NoiA No. 280 Agriculture, Poverty, and Polity Reform in Sub-Saharan Africa. Kcvin M. Clcavcr and W. Gracme Donovan No. 281 The Diffuisiotn of Infortnationi Technology: Experience of Industrial Countries and Lessonsfor Developing Cointries. Nagy Hanna, Ken Guy, and Erik Arnold No. 282 Trade Lanws and I,istitutions: Good Practices and tihe World Trade O;ganization. Bemard M. Hoekman No. 283 Meeting the Challenge of Chinese Enterprise Reform. Harry G. Broadman No. 284 Desert Locust Management: A Timefor Chiange. Steen R. Joffe No. 285 Sharing the Wealth: Privatization throtigh Broad-based Owners/lip Strategies. Stuart W. Bell No. 286 Credit Policies atid the Industrialization of Korea. Yoon Je Cho andJoon-Kyung Kim No. 287 East Asia's Environtnent: Principles and Prioritiesfor Action. Jeffrey S. Hammer and Sudhir Shetty (Continued oti the inside back cover) 325 a World Bank Discussion Papers Institutional and Entrepreneunral Leadership in the Brazilian Science and Technology Sector Setting a New Agenda Edited by Lauritz Holm-Nielsen Michael Crawford Alcyone Saliba The World Bank Washington, D.C. Copyright C 1996 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printingJune 1996 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publica- tions, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'`ena, 75116 Paris, France. ISSN: 0259-210X Lauritz Holm-Nielsen is a senior science and technology specialist with the World Bank's Human Development Department. Michael Crawford is a science and technology specialist in the same depart- ment. Alcyone Saliba is an education specialist in the Human Resources Operations Division (Country Department I) of the Bank's Latin America and the Caribbean Regional Office. Library of Congress Cataloging-in-Publication Data Institutional and entrepreneurial leadership in the Brazilian science and technology sector: setting a new agenda / edited by Lauritz Holm-Nielsen, Michael F. Crawford, Alcyone Saliba. p. cm. - (World Bank discussion papers; 325) Includes bibliographical references (p. ). ISBN 0-8213-3653-3 1. Technology and state-Brazil--Congresses. 2. Science and state-Brazil-Congresses. 3. Research, Industrial-Economic aspects-Brazil-Congresses. L. Holm-Nielsen, Lauritz, 1945- 11. Crawford, Michael F., 1965- . 111. Saliba, Alcyone, 1958- IV. Series. T25.B8157 1996 338.98106-dc20 96-16234 CIP iii CONTENTS FOREWORD ........................................................v ABSTRACT ....................................................... vi ACRONOMYS AND ABBREVIATIONS ................................... .................... viii WORKSHOP SUMMARY ....................................................... ix WORKSHOP PROGRAM ..................................................... xii WORKSHOP PARTICIPANTS ..................................................... xv CONFERENCE SUMMARY ........................................................1 INTRODUCTION ......................................................1 INNOVATION AND COMPETITIVENESS ......................................................1 ASSESSING SCIENCE AND TECHNOLOGY SYSTEMS AND INSTITUTIONS .....................4 THE DEVELOPMENT OF SCIENCE AND TECHNOLOGY IN BRAZIL ...............................7 COMPETITIVE FUNDING ..................................................... 10 THE ROLE OF THE STATES IN SCIENCE AND TECHNOLOGY POLICY ........................ 13 EFFICIENT INVESTMENTS IN SCIENCE AND TECHNOLOGY ....................................... 16 THE FUTURE OF PADCT ..................................................... 17 ANNEXES 1: STATE AND FEDERAL TECHNOLOGY RELATIONSHIPS IN THE UNITED STATES AND BRAZIL ..................................................... 21 2: INSTITUTIONALIZING ASSESSMENT IN THE SCIENCE AND TECHNOLOGY SECTOR ..................................................... 36 3: COMPETITIVE FUNDING MECHANISMS: THE STATE OF THE ART IN RESEARCH FUNDING ..................................................... 43 4: RECENT OECD WORK ON NATIONAL INNOVATION SYSTEMS ........................... 48 5: ENCOURAGING MAXIMUM PRODUCTIVE USE OF SCIENTIFIC OUTPUT ..................................................... 58 v FOREWORD A country's social and economic well-being is increasingly dependent on its ability to develop and utilize its human resources potential fully. A sound human resource development strategy rests on equitable access to basic education, but the advanced training or "knowledge" sector is of key importance to a robust national economy that can integrate competitively into global markets. A dynamic knowledge sector also creates the expertise needed to devise local solutions to pressing social problems in areas like health, water resources, nutrition, environmental management, and education. The accelerating pace of technological change requires countries rapidly to produce, evaluate, and select knowledge. Governments today understand the advantages of a science and technology policy framework which, on the one hand, allows for maximum autonomy and creativity for researchers while, on the other, ensuring the relevance of research outputs to the needs of economic and social development. This is best achieved by coordinating, inter alia, corporate tax incentives for R&D, strong intellectual property protection, merit-based allocation of research funding, and quality science education and training to create an environment which encourages continuous innovation. This paper documents efforts of Brazilian science and technology policy makers, with the assistance of the World Bank, to elaborate such a framework. Issues of competitive funding, best practice in peer review, university/industry cooperation, and potential contributions of science and technology to regional economic growth are examined in detail. The discussion underscores the importance of involving active scientists and entrepreneurs in policy decisions. It will be useful for those in the field of science and technology policy, particularly World Bank staff and their colleagues in borrowing countries who are involved in the design, implementation, and evaluation of science and technology support programs. David de Ferranti Director Human Development Department vi ABSTRACT Scientific and technological knowledge is increasingly recognized as a keystone of economic growth and social development. This paper reviews the main components of policy reform strategies designed to increase the efficiency of investments in science and technology, with specific reference to the case of Brazil. It is a summary of viewpoints expressed by Brazilian science policy makers and their international colleagues at a workshop on S&T policy reform in Brazil, held in Washington in May, 1996. The characteristics of an effective modern S&T system are examined, along with issues inherent in implementing a system which encourages innovation. The accelerating pace of technological change poses new challenges for the sector. Rather than choose priorities, government regulatory and planning agencies must establish an environment in which the creativity of the national research community can be combined with the dynamism of the private sector. Part of that enabling environment for S&T is proper tax incentives for R&D and effective protection of intellectual property, or measures which remove legal barriers to university/industry cooperation. Public sector agencies also have a role in identifying and financing scientific solutions to problems for social development, in areas such as health, sanitation, nutrition, and water resources. Resources allocated for basic research need to be guided by active scientists, mainly through a competitive, peer review system. Similarly, "bench scientists" should take rotating responsibility for various aspects of professional science administration, from advising legislators on S&T issues to managing the monitoring and evaluation of the national scientific output. A qualified and robust research community is built up with good science education. Quality standards for science teaching and curriculum and teacher development at all school levels are as important as laboratory and equipment provision. Communication between science educators and advanced researchers contributes to the vitality of the training of future scientists. Brazil's S&T capacity is concentrated in a few of its wealthy states. International "state-of the art" science exists in certain parts of the country, while in others, S&T capacity is virtually non-existent. Greater regional equity in science and technology will add overall stability to the system. Cooperation between Federal and state agencies can optimize the resource advantages of the Federal government with the individual states' superior knowledge of local conditions. vii Reforming an S&T system to encourage greater innovation and more efficient use of resources is a complex process which requires cooperation from many actors at many levels. Cooperation among scientists, technologists, industry, educators, and science administration agencies make Brazil's science and technology sector more compatible with the size and economic complexity of the country. viii ACRONYMS AND ABBREVIATIONS CAPES: Brazilian Federal Agency for Training of High-Level Personnel (CAPES is part of the Ministry of Education and Culture) CNPq: Brazilian National Research Council FAP: Brazilian State-level Foundation for the Promotion of Scientific Research FAPEMG: State of Minas Gerais FAP FAPESP: State of Sao Paulo FAP FINEP: Brazilian Federal Agency for Financing Studies and Projects FNDCT: Brazilian National Scientific and Technological Development Fund FTE: Full-time Equivalent GEA: The International Review and Oversight Committee for the PADCT Program 1DB: Inter-American Development Bank ISO: International Standards Organization MTC: Manufacturing Technology Center NIS: National Innovation System NSF: U.S. National Science Foundation OECD-DSTI: Directorate of Science, Technology, and Industry of the Organisation for Economic Co-operation and Development PADCT: Brazil Science, Research, and Training Project (Programa de Apoio ao Desenvolvimento Cientifico e Tecnologico); PADCT I and II are the names of World Bank-financed projects to the program and PADCT III is the name of a possible follow-up operation to PADCT II. R&D: Research and Development RNP: National Research Network--Brazil's Internet Connection/System S&T: Science and Technology UNDP: United Nations Development Programme ix WORKSHOP SUMMARY This is a summary of the two-and-a-half day workshop held jointly by the Bank (LAIHR and HDD) and Brazil's Ministry of Science and Technology (MCT) between May 24 and 26, 1995. The primary objective of this workshop was to discuss the government's sectoral policies and agenda in light of : (i) international practices and lessons learned; (ii) findings from three sectoral studies recently completed under Bank- or IDB-financed projects; and (iii) the resource constraints that the sector has experienced in the past (like many others that depend on public funding). The workshop brought together a group of high-caliber decision makers and sectoral specialists, including: (i) the heads of all major Brazilian science funding and management agencies (CNPq, FINEP, CAPES and FAPESP); (ii) representatives from the Brazilian scientific community and from the private sector; (iii) international experts (including OECD and NSF staff); and (iv) IDB and Bank staff from many units (inter alia, LAIHR, LAIPS, LATAD, HDD, and FPD). The participants endorsed the main findings of the studies, which conclude that in order to move Brazilian society toward a competitive, knowledge-based economy, the government should assume a proactive role in: (i) consolidating the achievements of past policy reforms and investments; (ii) improving the efficiency of new investments and regulations; and (iii) facilitating access for the domestic research community to the pool of knowledge generated and circulated in the international science community. About the Role of the Government The debate centered on what policy reforms would most effectively reform the government's role in the sector. More specifically, it focused on why and how government can: 1. Establish a regulatory framework that: (i) encourages firms to finance and undertake more research and development, so that in the longer run the share of private R&D (now estimated at 20%) is increased significantly; and (ii) fosters dynamic cooperation between Brazil's research community and the private sector, and (iii) gives firms and research centers access to information on how effectively knowledge is produced and traded in a modern economy. For example, newly industrialized countries have successfully supported small enterprise development with matching grants for university/industry cooperation. 2. Establish competitive science research funding mechanisms that: (i) compel government agencies to devise efficient mechanisms for allocation of research funds, including adequate mechanisms for defining and revisiting priority research areas; (ii) steer, as appropriate, funding to research that addresses the social problems of the country; and (iii) x improve the focus of public financing of research. The evolution away from government funding of large projects ("big science") toward a more decentralized support of knowledge creation and innovation is advantageous to the sector. 3. Increase significantly the pool of qualified human resources in the sector at all levels. Only a multi-level approach to improving science teaching throughout the educational system, with greater emphasis on quality standards at the pre-university and university levels, can ensure the long- term supply of human capital needed by the sector. 4. Establish the systematic assessment of S&T investments, for both inputs and outputs. Science output indicators and other measures of the benefits from research are crucial to informed adjustments to S&T policy; such data should be collected according to internationally accepted standards. Likewise, the use of peer review and competitive funding mechanisms to allocate input to the most qualified researchers should continue to be adopted as standard practice, and greater involvement of international peers should be sought. 5. Rethink states' role in tailoring S&T policies to particular regional comparative advantage and economic development needs. Federal and state agency cooperation on S&T policy can optimize the federal government's resource advantages, with the individual state's superior knowledge of local conditions and superior ability to diffuse knowledge and manufacturing technology to local firmns. 6. Highlight the contributions of science and technology to social development and improved quality of life. The public sector has a role in identifying and financing research which impacts on social development and could potentially resolve critical problems in the areas of inter alia, health, sanitation, nutrition, and water resources. 7. Enhance the government's role in maintaining a national innovation system (NIS) for the maximum productive use of knowledge. Such a system ought to contain proper regulatory structures, including tax incentives favorable to R&D, sound protection of intellectual property, and a communications infrastructure which facilitates dissemination of knowledge among researchers and firms. An effective NIS would also promote the use of standard international practice in metrology and excellence in science education and training. Much work toward reform in this area has been done, but gains must be consolidated. About PADCT -- Past, Present and Future The PADCT program, which has been supported by two Bank loans, is a solid operation: it has sound objectives, an innovative design, a relatively good implementation record, and an overall satisfactory impact performance. Both the PCR of the first project and the mid-term review report of the second have documented the achievements of PADCT -- and the positive role of the Bank in shaping it. Bank support is important not only because it increases financing for the program, but also because with the Bank comes international credibility and expertise. The numerous supportive statements of the xi independent panel (GEA) -- formed by 15 distinguished (Brazilian and foreign) scientists -- represent this view. A major outcome of PADCT-I was the introduction of competitive mechanisms for setting and enforcing research priorities, including the use of internationally validated peer review systems. PADCT-II has made this research infrastructure fully operational, and brought forward the fruits of earlier investments in science capacity. But institutional development, properly considered, is a long term enterprise, and PADCT-III would be a mechanism for consolidating earlier achievements. PADCT has successfully encouraged, albeit on a limited basis, more university- industry cooperation, greater transparency and use of peer review in funding decisions, and more involvement of active scientists in determining policy directions. Through the continuation of the PADCT program, which is partially responsible for these improvements, the government hopes to consolidate and extend these gains in the future. A possible follow-up operation to PADCT-II would focus on policy options for both the science research and the technology development sub-sectors. In particular, it would seek significant improvements in the regulatory framework, the system of tax incentives for privately funded R&D, intellectual property protection, and the use of internationally accepted standards (metrology). The program would also promote basic research in fields that directly contribute to the welfare of the Brazilian population, including health research and science education at all levels. About the Workshop Itself This workshop was the culmination of the project's mid-term review, which was formally completed in the first quarter of CY94. Besides providing an effective forum for the discussion of S&T in Brazil, the workshop was a good example of (i) innovation in mid-term review and (ii) effective dialogue with policy-makers. It also was a good example of cooperation between the Center (HDD/Education Group) and a sectoral division (LA1HR), as well as between the Bank and IDB. Presentations were made by government officials and their peers in international organizations (such as IDB, NSF and the OECD Directorate of Science, Technology and Industry). Bank and IDB staff served as moderators and commentators. The two days of debate and discussion critically reviewed sectoral issues, the Bank's role as a partner for reform, and directions for future collaboration. What was perhaps most notable was the atmosphere of professional exchange among clients, Bank staff, partner institutions, and international peers. This type of candid and high-level interchange is a good illustration of how to achieve meaningful country dialogue. xii WORKSHOP PROGRAM Washington, D.C. World Bank Headquarters, Room H2-300 May 24, 1995 2:00 p.m. Welcome Stephen Ettinger, LA1RF 2:15 p.m. Introduction to the Brazilian Science and Technology Scene Marcos dos Mares Guia, BIOBRAS 2:35 p.m. Brazilian Science and Technology-The Current Policy Climate Ivan Rocha Neto, MCT 3:00 p.m. Brazilian Science and Technology-New Policies for a Global World Simon Scwartzmann, IBGE 3:30 p.m. Past and Future Contributions of Brazil's Science and Technology Sector to Industrial Competitiveness Luciano Coutinho, UNICAMP 4:00 p.m. The PADCT II Midterm Review Luiz Antonio Barreto de Castro, PADCT, and Antonio Paes Carvalho, GEA Moderator: Lauritz Holm-Nielsen, ESP xiii Annapolis, MD The Annapolis Marriott Waterfront Hotel, Ballroom South Thursday, May 25, 1995 Morning Session Policy Coordination: Integrating Federal-and State- (9:00-12:00): Level Policies to Promote the Productive Use of Science Chair: Luiz Antonio Barreto de Castro, PADCT Initial Presentation: Lewis Branscomb, John F. Kennedy School of Governrnent, Harvard University (20 minutes) The Brazilian Context: Professor Sergio Rezende, Universidade de Pernambuco (20 minutes) Question Period: (30 minutes) Coffee: (15 minutes) Policy Options Issues (20 minutes); Summary (20 minutes); Policy Work Sessions: Recommendations (20 minutes) Discussion Leaders: Luis Guasch, LATAD and Laurence Wolff, MN 1 HR Afternoon Session Institutionalizing Assessment in the Science and (2:00-5:00): Technology Sectors: Indicators and Methods that Support Innovation Chair: Lauritz Holm-Nielsen, ESP Initial Presentation: Jean Eric Aubert, OECD Directorate of Science, Technology, and Innovation (20 minutes) The Brazilian Context: Wiadimir Pirro y Longo, FINEP (20 minutes) Question Period: (30 minutes) Coffee: (15 minutes) Policy Options Work Issues (20 minutes); Summary (20 minutes); Policy Sessions: Recommendations (20 minutes) Discussion Leaders: H. Roberts Coward, SRI, Carlos Abeledo, IDB, and Thomas Eisemon, ESP xiv Annapolis, MD The Annapolis Marriott Waterfront Hotel, Ballroom South Friday, May 26 Morning Session Competitive Funding Mechanism: (9:00-12:00): The State of the Art in Research Funding Chair: Alcyone Saliba, LA1HR Initial Presentation: Daniel Newlon, Economics Program Director, National Science Foundation (20 minutes) The Brazilian Context: Lourival Carno Monaco, FINEP (15 minutes) Jose Galizia Tundisi, CNPq (15 minutes) Darcy Dillenberg, CAPES (15 minutes) Jose Fernando Peres, FAPESP (15 minutes) Coffee: (15 minutes) Policy Options Issues (20 minutes); Summary (20 minutes); and Policy Work Session: Recommendations (20 minutes) Discussion Leaders: Don Winkler, LATAD and Roman Mayorga, IDB Afternoon Session Efficient Science and Technology Investments: (2:00-5:00): Encouraging Maximum Productive Use of Scientific Output Chair: Luiz Antonio Barreto de Castro, PADCT Initial Presentation: Peter Kreyenberg, Deutsche Nationalstiftung (20 minutes) Discussion: Discussion leaders: Claudio Moura de Castro, IDB, and Carlos Braga, FPD The GEA Perspective: Antonio Paes Carvalho, GEA (20 minutes) Questions: (30 minutes) Coffee: (15 minutes) Roundtable Discussion: The Future of PADCT Discussion Leaders: Claudio Moura de Castro, IDB, and Carlos Braga, FPD (2 hours) xv WORKSHOP PARTICIPANTS From Brazil: Luis Antonio Barreto de Castro, PADCT Executive Secretary Ivan Rocha Neto, MCT Helio Barros, MCT Lourival do Carno Monaco, FINEP Wladimir Pirro y Longo, FINEP Jose Galizia Tundisi, CNPq Darcy Dillenburg, CAPES Antonio Paes de Carvalho, GEA Luciano Coutinho, UTNICAMP Simon Schwartzmann, IBGE Sergio Machado Rezende, Universidade de Pernambuco Jose Fernando Peres, FAPESP Marcos dos Mares Guia, BIOBRAS From the OECD Directorate for Science, Technology, and Innovation: Jean-Eric Aubert International Peers: Lewis Branscomb, John F. Kennedy School of Government Daniel Newlon, National Science Foundation Roberts Coward, Stanford Research International Peter Kreyenberg, Deutsche Nationalstiftung From the World Bank: Laurence Wolff, MNIHR Claudia Sobrevila, LAIRF Luis Guasch, LATAD Donald Winkler, LATAD Carlos Braga, FPD Lauritz Holm-Nielsen, HDD Alcyone Saliba, LAIHR Stephen Ettinger, LAI RF Thomas Eisemon, HDD Kin Bing Wu, LATAD Domenique Babelon, LAIPS Michael Crawford, HDD From the IDB: Claudio Moura de Castro Carlos Abeledo Roman Mayorga I Conference Summary CONFERENCE SUMMARY Introduction The workshop, entitled "Institutional and Entrepreneurial Leadership in the Brazilian Science and Technology Sector: Setting a New Agenda," took place in Washington, D.C., and Annapolis, MD, on May 24-26, 1995. The idea for the workshop grew out of a series of analytical studies commissioned by the Brazilian Science, Research, and Training Project (PADCT), and financed in cooperation with the World Bank, the Inter-American Development Bank (IDB), and the United Nations Development Programme (UNDP). These studies examine Brazil's science and technology (S&T) sector and its relation to economic performance and social development. They were extensively reviewed within Brazil, and generated considerable discussion about the direction of policy in this area. This international workshop, a follow-up to the Midterm Review of the PADCT II project, was convened to effect an exchange of ideas between policymakers and experts in science policy on Brazil's S & T needs. It examined options for improving sectoral performance in a broad range of areas, from the immediate environment that businesses face to the long-term challenges of developing human capital. Of central concern throughout the conference was how government should adapt to increase its effective support of S&T. Participants included directors of the principal Brazilian agencies with responsibility for science administration and funding, members of the international community who have been active as OECD country reviewers, and staff of the World Bank and the IDB who work in the field of S&T policy. The conference's format, a series of presentations on specific policy concerns, provoked lively debate about Brazil's performance in light of best-practice examples. This summary of the proceedings is organized by topic. It incorporates information from formal presentations, questions, discussions, and debates. Some sections are largely based on the contributions of single participants, but no part of this text should be attributed to any one person unless otherwise noted. The summary does not represent the opinion of the Brazilian Government, the World Bank, or any other organization. Appendices contain the full text of selected papers delivered at the workshop. Innovation and Competitiveness The process through which societies benefit from science is complex. The production of knowledge through scientific endeavor plays a role, as does the 2 Conference Summary employment of economically useful knowledge in new products, processes, or in solutions to existing problems. These aspects are interrelated but not the same. They do not necessarily coexist within the same society or part of society. A country that produces knowledge may not be good at utilizing it or vice-versa. When technology changes slowly, countries can divide scientific labor: certain countries produce knowledge, and others purchase it for their own purposes. The accelerating pace of technological change requires that countries select and utilize economically useful knowledge more quickly and often than in the past. Comparative advantage is increasingly dynamic and dependent on a country's ability rapidly to apply knowledge to the efficient production of goods and services. Capturing and maintaining market shares requires "dynamic competitiveness," which is achieved through a continuous process of catching up to best practice in technology. Developing countries face additional challenges and opportunities in this new scenario. On one hand, new materials and processes have decreased the demand for both primary products and unskilled labor. On the other, countries do not have to reinvent the technological wheel. Developing countries that absorb and adapt technology quickly can go from being suppliers of low-cost labor to market leaders in particular industries. Turning ideas into economically valuable goods and activities requires a critical mass of capable human capital, since it is the diffusion of knowledge among individuals that leads to advances. A critical mass of human capital cannot be built in isolation. Developing countries will not produce such capable people without integration into the global exchange of knowledge. A country is positioned to benefit most if it cooperates internationally in knowledge production, offers its knowledge as well as its products to world markets, and monitors technological changes so as to select those that can improve its competitiveness. For developing countries, it is also important to increase the use of cost-effective technologies in production while expanding the base human capital available to select and utilize such technology. A country integrates into the global exchange of knowledge through its talented individuals, who are producers of knowledge, flexible goods, and service producers, and who are capable engineers and regulators. These people are connected and supported by a functioning infrastructure. Together this network is known as a National Innovation System (NIS) (see Figure 1).' An NIS consists of institutions in the public and private sectors whose activities and interactions initiate, import, modify, and diffuse new technologies throughout the economy and society. The elements of an NIS are the organization and intensity of R&D, interrelationships among firms, the institutional capacity of the public sector for regulation and the promotion of human capital production, the macroeconiomic context, and the organization and functioning of the labor market. IFor a complete explanation of National Innovation Systems see Jean Guinet, "Current OECD Work on National Innovation Systems," OECD-DSTI (Annex 5). 3 Conference Summary Te rchniclPrormcanc Figuregulatory conext St Source: Jeand GFieOEDuDSTirms' Education and s m Organization ommuni become ine w Knowledge Generation- and DTissemination f downsrect M the pmi owctor farmet e Figure 1: The Innovation System Source: Jean Giiinet, OECD-DSTI The older, simple model of basic anied silieqresearch and commercialization has become incompatible with the complex way in which useful knowledge is commer- cialized. Therefore, govenment's traditional role as merely the provider of the public good of basic research is changing. The new paradigm for innovation has more feedback loops. Goverament spends science and technology (S&T) resources wisely by moving downstream into the promotion or marketing of useful knowledge to fis.s, while industries have greater reason to directly fund basic research activities. Efficient governments make investments in education to promote a base of human capital, while the private sector pays for the specialized skills it requires. Likewise the "big science" paradigm, where researchers work in isolation, is obsolete. An individual innovator needs access to growing numbers of complementary resources and information. Technology generation and diffusion are becoming more intertwined, making it more important for government to identify missing links in the networks, and deficiencies in technological infrastructures and regulatory and incentive structures. 4 Conference Summary With innovation looking more like a multidimensional web and less like a chain, outcomes have become dependent on the tacit exchange of uncodified knowledge through human contact. This places greater emphasis on interaction and the quality of infra- structure. Modem innovation is nonlinear. Rather than directly promoting technology transfer from basic research to industry, governments are responsible for overseeing and encouraging the interaction of elements of the National Innovation System (NIS), so as to create an enabling environment in which innovation can flourish. In summary, S&T forms a basis that is embedded in systems for producing and utilizing economically valuable knowledge. The evolving economics of innovation require governments to design and integrate educational, S&T, and industrial policies in a manner that supports the web of innovation. A successful NIS will harmoniously combine the following: 1. the regulatory framework (intellectual property rights, environmental, health and safety legislation); 2. institutional arrangements for training and deploying specialized human resources; 3. the country's macroeconomic structure and stability; 4. the communications infrastructure (telecommunications and Internet connections); 5. the organization and functioning of the labor market (flexible incentives for quality research and innovation); and 6. proper tax incentives. Assessing Science and Technology Systems and Institutions Innovation is the best use of S&T for social and economic development. Merely having S&T is not enough. The elements of innovation policy are the entrepreneur and the idea; but translated into policy, this broadens into the interface between finance, the entrepreneur, and those areas of government with responsibility in the subsector.2 Government promotes a functioning web of complex interconnections between its own branches and the global science community. Assessment creates a picture of the whole system, so that its efficiency can be diagnosed and areas for improvement can be selected. The main tools for assessment are indicators, both micro and macro. The Organisation for Economic Co-operation and Development (OECD) has developed manuals on several different types, including bibliometrics, S&T support services, and patents. Brazil should consider adapting these manuals to its particular situation, or 2This section is based on a presentation by Jean-Eric Aubert of the OECD Directorate for Science, Technology, and Industry. The full text of the presentation is in Annex 4. 5 Conference Summary developing its own regional manuals. Indicators measure both the inputs to and the output of the S&T system. But they provide useful information about S&T only when combined selectively and adjusted to measure different aspects of a system. Having such information readily available requires uniform and ongoing data collection by science indicator professionals. Assessment is an integral part of the maintenance and adjustment of an effective S&T system. Some aspects of assessment go beyond such traditional indicators to include the number of people with doctorates, the amount of R&D investment in industry, and the degree of cooperation and knowledge-sharing among firms. Audits of institutions and systems focus on removing the obstacles to innovations (taxes, customs, poor university- industry relations), and generally seek to expose and attack vested interests within a system. This works best when regularly scheduled reports on institutions and agencies are carried out, and when recommendations are followed up with enforcement that may affect an institution's prestige, funding, or both. Larger policy reviews, such as those undertaken by OECD, are another integral part of assessment. OECD uses a two-stage system. A country first produces a self- analytical background report based on the consensus of the national S&T community. This is followed by external review, an evaluation report, and a reform meeting. The process is designed to encourage professional exchanges leading to reform. The mere knowledge that assessments will take place can have important consequences for scientific institutions, especially when peer review is used and the results affect the flow of funding. Assessing an institution is quite different from assessing a government agency or an entire national system. OECD has found that even when recommended changes were not implemented, individual countries benefited from seeing what other countries had done in the sector. Such reviews often become the groundwork for policy change, even when recommendations are not directly implemented. Some unresolved issues surround assessment. The first is how much overall S&T resources should be devoted to the activity. The U.S. National Science Foundation (NSF) has had difficulty spending the one percent mandated for assessment, yet OECD experience suggests that this level is not high enough. The second is assessment's relation to funding levels and returns on investments in science. There is disagreement as to the extent to which benefits can be attributed to investments. Likewise while assessment should enable a country to analyze elements of its economic competitiveness, it may be difficult to establish the precise impact of science on economic activity. In some cases value added for specific endeavors may be calculated, but it is hard to determine rates of return to basic science or to individual scientific disciplines. OECD procedures may need to be altered slightly for developing country settings, but indicators, such as the creation of new firms, number of patents granted, and basic 6 Conference Summary trade indicators, are not affected by a country's level of development. However, specific types of assessment need to be developed for individual institutes and programs. Within these assessments neutrality must be maintained, and the politicization of assessment or control of resources must be avoided. This can be accomplished through (a) keeping the focus of assessments on cost effectiveness; (b) determining the proper mix of internal and external (other firms, not necessarily international peer review) assessment; (c) recognizing the importance of the cost of collecting, cleaning, and maintaining the required data; and (d) assessing R&D as a complex activity that calls for sophisticated research design. If these skills do not currently exist, they must be developed. Israel Vargas, Brazil's Minister of Science and Technology, has alluded to the influence of the value that society puts on S&T and scientific advancement on the sector's credibility in public discourse. Where scientific traditions are fragile, social marketing alerting the public to the importance of science to modern society facilitates informed public decision-making about S&T. In Brazil, as in many countries without long traditions of thorough S&T assessment, there are some misconceptions about the assessment process. First, there may be an ignorance of state-of-the-art manuals or practice in certain domains. Second, although traditional science-based statistics are routinely collected (such as the number of researchers or teachers), the information that could connlect this data to innovation is not. Institutionalization of data collection at the firm level ensures that data relevant to innovation is available. Assessment evaluates a program and measures its operational efficiency. The former considers the long-term health of the sector. It focuses on issues like maintaining participation in the international exchange of knowledge by funding doctoral research abroad or creating associated laboratories. The latter examines market-related indicators. The effects of macro policies, such as the privatization process and economic liberalization, may not be immediately apparent in certain measures because of the time lag. In general, output data are more important than input data because the output of an S&T system is what benefits a country. Operational efficiency goes beyond using publicly provided funds well. Private sector funding of research and the number of researchers directly connected to private economic activity give a good indication of the overall health of the system and the extent to which social benefit is being derived from the science that is being produced. Finally, assessment is part of a continuous process that establishes the overall reputation of researchers and institutions. Specific indicators of scholarly activity, such as the number of visiting scholars, the number of graduate students trained, invitations to professional conferences, and the like, can be pertinent within a system where practicing researchers are also science administrators. In such an atmosphere, the transparency of decision-making creates a cumulative reputation for excellence in research conduct. 7 Conference Summary In summary, assessment should be approached in a manner which permits: 1. the professional, ongoing collection and maintenance of relevant data, 2. familiarity with international resources such as indicator manuals and multilevel research design, 3. self-analysis by institutions and programs, 4. the transparency of research and administrative practices with peers, 5. openness to international review and awareness of international best practice in S&T administration, and 6. distinction between the short-term operational efficiency of institutions and programs and the long-term health and direction of national policy and systems. The Development of Science and Technology in Brazil :-''.. ' "--"' '.: '-''-' ' . ,'-:.. .. . . .. .. . ... . . . ..,,. .. . .. .. - .. .... . .... . . . . . ... .. County Pop GDP: RA&T)I: ~ R&D. Triary %R . .: - : - .. . .. . . . . .. --.... . .. .... -;-. (1990, (1q90 GD~~P .cIents pet, euatio fhaqe -0;-;; ; 0* fmilBous US$ (19t7) 10,000nu of age priat __ _ _ _ _ 1990)~.. . 4 U KJM Brazil 150.4 2,680 0.7% 9.3(1985) 1 19 Mexico 86.2 2,490 0.2% 7.6(1984) 15 22.3 Korea 42.8 5,400 1.8% 37(1990) 38 84.1 Sweden 8.6 23,660 3.1% 50(1987) 31 60 Canada 26.5 20,470 1.3% ** 66 41 Turkey 56.1 1,640 0.6% 13 27.7 Sources: World Development Report, 1992; NSF Science and Engineering Indicators; OECD (STUI data). Brazil has the largest S&T sector in Latin America and a well elaborated higher education system. But these entities are not sufficiently differentiated, nor do they produce according their capability. The Republic of Korea funds more than eighty percent of R&D from the private sector, while in Brazil eighty percent of funding comes from the public sector. Korea, with less than one third of Brazil's population, produces nearly 900 8 Conference Summary doctor's degrees per year in science and engineering alone,3 while Brazil produces 1,200 annually in all disciplines.4 Sweden produces roughly the same number of doctor's degrees per year as Brazil, yet has just 1/20 of its population. Throughout the 1980s, the sector was criticized for producing inferior science graduates who were not absorbed by the labor market, and for providing poor scientific support services and ineffective mechanisms for setting funding and educational priorities.5 Institutional reforms, especially with respect to funding mechanisms, struggled to take hold during the 1980s amid declining resources and an unstable economy. In Brazil, eighty-four percent of patents are granted to non-residents.6 In both Mexico and Brazil, the absolute numbers of patents per year and percentage granted to residents are stable, while in Korea the numbers for both are on the increase. Korea's success in effectively developing its S&T sector is well documented, and it is in some sense an unfair comparison. Despite the efforts made to promote endogenous S&T over the last decades, Brazil's performance ranks with Mexico's and Turkey's. It also ranks below the normal OECD percentage level of gross domestic product (GDP) spent on R&D, private sector funding of R&D, and full-time equivalent (FTE) researchers per capita. 3Human Resources for Science and Technology: The Asia Region, National Science Foundation, 1993. 4CAPES, 1995. 5Schwartzmann, 1995, and World Bank, 1995. 6NSF, Science and Engineering Indicators, 1993. 9 Conference Summary Tax Incentives for R&D: What Has Worked A World Bank review of the 1988 revisions of the tax regime intended to stimulate R&D in Brazil found that the efforts were poorly designed and unable to change the behavior of firms. New incentives that can effectively reach small- and medium-sized enterprises are especially needed. By contrast, the following OECD countries have stimulated R&D through tax incentives: Australia A150-percent tax concession for industrial R&D adopted in its industrial policy in 1985 has doubled the percentage of GDP spent on basic R&D. Denmark Businesses can deduct 125 percent of the expenses they incur when participating in a number of international research programs. Foreign researchers who work in Denmark are taxed at a concessionary rate. France Tax credits allow firms to reduce their tax bills by as much as 50 percent of their annual increase in R&D expenditures. These expenditures have proved particularly popular with small- and medium-sized firms. Spain Enterprises that have made capital investments in R&D for new processes and products can deduct up to 30 percent of intangible investment and up to 45 percent of investment in capital goods. Source: Science and Technology Policy: Review and Outlook, 1994, OECD. 10 Conference Summary Competitive Funding Transparent funding agencies promote strong overall S&T systems not just through administrative efficiency, but also through the institutionalization of professional standards. These are created and maintained through peer review processes at all levels of decision-making. Under such a system scientists, not government officials, make decisions about science. When funding agencies use "rotators" (scientists actively engaged in research who will return to their institutions after a determined period in administration) as journals and institutes do, it encourages professional attitudes and an identification of administration with the scientific community. Competitive funding may vary in degree of structure and voting rules. Drawbacks include conservatism in funding decisions, a susceptibility to faddishness, and bias against young The Agency for Training of High-Level Personnel (CAPES) of the Ministry of Education and Culture CAPES is the coordinating agency for graduate education in Brazil. Since its creation in 1951, its mission has been to ensure the quality of human resources for the university sector of Brazilian education. The agency provides grants and fellowships in Brazil and abroad for individuals preparing for careers in university teaching and research. CAPES also accredits and grades all graduate programs in terms of overall quality, provides direct support to two-thirds of the graduate courses in the country, and supports the creation of additional courses. CAPES supports roughly 15,000 graduate students annually in Brazil (two-thirds studying for master's degrees and one-third studying for doctor's degrees), and 1,500 abroad. This represents 40 percent of graduate fellowships within Brazil (the remainder are funded by the Brazilian National Research Council (CNPq)). researchers. Special grant programs can be designed to counterbalance these tendencies. Peer review recommendations are part of a reasoned dialogue, in which the judgment of the individual program officer is also quite important. This process effectively funds researchers and research, but makes minimal contributions to the maintenance of infrastructure, which sustains science generally. Some strategic research, especially as related to scientific infrastructure, is justifiable. Government laboratories and centers of excellence may produce lower quality science with higher overhead costs from the lack of competition. It is doubtful whether centers of excellence are an effective means of revitalizing a system with declining infrastructure and quality. CAPES, CNPq, and the Brazilian National Research Council (FINEP) are working more closely to support graduate programs in science. The capacity exists to pro- I I Conference Summary duce the number of doctor's degrees that Brazil needs, but quantity is not the only consideration. Where these scholars work may be more important than how numerous they are. Currently, universities absorb almost all holders of doctor's degrees, leaving none for the private sector. Comparison with countries like Sweden and Korea shows that an economy the size of Brazil's could produce many more doctor's degrees and absorb them in the productive sector. Likewise, government support for overseas doctorates is neither good nor bad in itself. The question is what use is made of these people once they are trained. The quality of candidates should be evaluated through trace studies of the labor market performance of graduates. Permitting the migration of qualified professionals from abroad may be a more effective means of increasing human capital. FINEP: The Agency for Financing Studies and Projects FINEP is a public corporation that acts both as a conventional research foundation and a development bank for technological innovation in Brazilian industry. It supports both scientific research and technological development. FINEP also functions as the Executive Secretariat for the National Scientific and Technological Development Fund (FNDCT), which provides grants for infrastructure, buildings, and equipment in the S&T sector. FINEP makes awards on the basis of evaluation by its own staff, with limited ad hoc participation. Funding has provided large-scale institutional support to engineering and research centers at institutions such as the Federal University of Rio and the Catholic University of Rio. Successful S&T systems generally disperse funding at various levels through competitive mechanisms. Systems must be individually tailored to: 1. ensure the administrative efficiency of government funding agencies, 2. create a professional culture in which key decisions about the direction of science are made by active scientists, 3. target specific priorities through special programs, and 4. integrate with the education and training system to support general science infrastructure and the appropriate types and quantities of graduate and basic education needed. 12 Conference Summary Brazilian society is increasingly aware of the strategic role that knowledge production and utilization play in overall competitiveness. Industrial and service production need greater technical and professional competence to face the competition produced by Brazil's newly open economy. The country's success in this open economic atmosphere will depend on competence at all levels of the production process within and across firms. The strategic importance of knowledge pervades educational systems from the most basic level to the highest levels of research and training. No S&T policy that does not view a knowledge-production and utilization system as a continuum (an NIS) can succeed. In such a system, S&T policy has three fundamental roles: (a) to improve education and the qualification of human resources at all levels; (b) to create access to the pool of knowledge generated and circulated in the international scientific community, and; (c) to enable firms rapidly to improve the efficiency and quality of the production of goods and services through the application of technology to the production process. Recent transformations in scientific and technological systems worldwide include the greater proximity of S&T to productive activity, a greater private appropriation of knowledge and the death of "science for the sake of science," the reduction of military research, and a greater flow of salable technological information. In Brazil, science has lost out to public investments favoring more pressing social concerns. The Geisel government's model of S&T is exhausted, and viewed as remote from social needs.' The Geisel model for S&T has four main components, none of which fits with the current realities of S&T policy. In the area of technology, the Geisel model invested in large strategic projects designed to make Brazil an equal of the technologically elite. These projects were intended to diffuse existing knowledge throughout the industrial sector. Today, entrance into the technological elite is conditioned by the capacity of the productive sector rather than by the funding of "mega-science" projects. In the current atmosphere, technology is diffused horizontally rather than vertically. In the past, science has encouraged import substitution by supporting academic and post-graduate research in an environment sheltered from international competition. Planning created centralized and bureaucratic structures that are not pragmatic enough to facilitate efficient decision- making. S&T in Brazil has evolved as the policy model has changed, although not necessarily in the same direction. Both scientific production and the scientific community have grown (the latter remains relatively small for the size of the country). Public sector financial support for science has been unstable, with diminished public spending for science by the CNPq and the Ministry of Education. The CNPq has devoted a disproportionate amount of its resources to student grants rather than research funding. Overall, relations to the private sector are still weak (80 percent of the funding being public). Basic science has not been affected, nor has any level except for post-graduate research benefited. 7This section is based on a presentation by Simon Schwartzmann. 13 Conference Summary In the resulting configuration, Brazilian S&T is becoming a narrow interest group working in increasingly precarious conditions. It lacks the legitimacy to demand the resources needed to grow and complete the more significant role that the current paradigm demands of an S&T system. Several policy options are available to counteract the divergence between the requirements of a modem S&T system and the capabilities of the current Brazilian system. First, technology policy should encourage the transfer, diffusion, and absorption, of technological capacity via the following: 1. a reduction of large-scale technology projects. 2. improved government provision of technological norms (metrology) and information for industry, 3. the opening of the economy to technology available in the international market, and 4. direct and indirect incentives for technological investments by the public sector. Second, to ensure quality and output, qualified human resources in the sector could be supplied through a restructuring of funding systems. Selective, closely monitored associated laboratories might achieve such an aim. Third, basic science and science education could be strengthened . University-industry links might be prioritized in the funding of proposals. Similarly, post-graduate programs could view it as part of their mission to contribute to science teaching at all levels, to produce didactic materials, and to train science teachers. Fourth, the knowledge infrastructure could expand the national and international electronic dissemination of available media and resources, with the input of scientists who frequently use these networks. Fifth, pragmatism and flexibility based on peer review and market responsiveness could replace centralized bureaucratic planning in government institutions. The Role of the States in Science and Technology Policy The U.S. model of federal and state-level cooperation illustrates some major issues of S&T policy relevant to Brazil. In the United States, federal priorities are shifting from Cold War-inspired military research toward a greater concern with diffusion of knowledge. This mirrors a global trend in which innovation is increasingly achieved by smaller firms within technological families. Like these firms, state governments are smaller and more flexible. They can be effective instruments of S&T policy because (a) their principal concern is local economic development (of their own states), (b) they have the best knowledge of local conditions, and (c) they can cooperate directly with firms in a way that "remote" federal governments cannot. The nature of the innovation process is changing the way research is successfully commercialized. Currently large, high-technology companies have core competencies in 14 Conference Summary some area of expertise (such as electronics), but rely less on in-house laboratories for "breakthroughs" that will produce the next generation of products from which they can reap economies of scale. Instead, large firms coordinate with a family of smaller firms to apply technology to the entire product process. Knowledge is transferred among these families of firms. Smaller firms demand government services that support rapid incremental innovation, obliging states to become "retailers" of industrial extension services. Compared with the federal government, states have limited resources to support research and development (R&D) and limited access to the global pool of knowledge. They are best positioned to act as diffusers and commercializers of research, not producers or principal supporters of it. In the United States, states have the primary responsibility for higher education, yet federal government money supports the advanced research which sustains many graduate programs. The federal government is concerned with the overall quality of research, not regional equity, and therefore maintains merit standards in funding. States could use their money effectively by increasing funding for R&D in which they excel locally. They would thereby influence the selection of technology in their regions, while simultaneously tapping federal resources to aid industrial extension services, such as Manufacturing Technology Centers (MTCs). If the system worked, it would create a competitive, meritocratic system that rewards state funding for S&T. State governments would be able to individualize S&T policies to local economic conditions, and avoid subjection to a "one-size-fits-all" federal policy. This would help ensure the continued high quality of scientific output as each state seeks its own S&T niche. Equity across the states might suffer, however, as states with strong human resource bases and superior knowledge production capabilities (such as California and Massachusetts in the United States) gobble up a disproportionate share of federal money. Increasing equity across regions in Brazil is one of the objectives of the PADCT program. If states, aided by technology, are to become effective partners for local economic development, some obstacles must be overcome. Especially in the northern states, state officials have little institutional capacity to deal with S&T. A learning process is under way, and S&T's direct bearing on local economic development is not appreciated. Science is viewed as a remote activity of the federal government. This is especially apparent in the lack of interaction between state legislatures with federally funded laboratories and state universities. However, states show consistent interest in S&T policies when they affect federal funding allocations. 15 Conference Summary The CNPq has taken some important steps toward increasing federal and state cooperation by jointly funding research. It plans to expand the cofunding of visiting professorships with states. The national S&T system has tried to spawn state systems, but this has not worked well, as historically these agencies have not articulated their programs. Much of the focus remains on funding science without regard to technology or innovation. Engineers' and technologists' importance as intermediaries who translate FAPESP: The Foundation for the Promotion of Science in the State of Sao Paulo FAPESP, the State of Sao Paulo Research Foundation, is an example of inter- national best practice in competitive funding. FAPESP produces only one report per pro- posal, disburses funds directly, has low administrative costs, and turns proposals around in six weeks (as opposed to six months for NSF). FAPESP's discipline panels meet frequently. Like other funding agencies such as NSF, FAPESP is concerned with using modem electronic networks and virtual panels to internationalize the peer review process. FAPESP's budget is fixed at I percent of total state tax revenue. In 1994, this amounted to US$90 million. It is projected to rise to US$120 million in 1995. FAPESP also maintains a reserve fund, from which it funded approximately 6.5 percent of grants and scholarships in 1994. Administrative costs for FAPESP are 1 percent of total expenditures. FAPESP is composed of a twelve- member superior council, six of whom are directly appointed by the governor. R&D into industrial activity is not of vital concern to state policy making. The private sector has not been given a role in decision-making. The cofinancing of projects will not overcome these problems; a strategic plan for cooperation is required. OECD's experience with cofinancing has been positive. In Brazil, the constitution allocated federal money to the states for S&T. Also, at the federal government's prompting, mechanisms were established at the state level to ensure that certain percentages of tax revenues are spent on S&T. In many states this money is not spent; as many states lack a tradition of S&T planning and state governors have no coherent plans for the subsector. Some state agencies exist only on paper. Often, even states actively engaged in the subsector have no clear sense of mission. In Rio a state agency in charge of S&T was building schools, while centers dedicated to the training of science teachers were being closed due to lack of funds. State systems have never had to compete for federal funds, and patronage politics could subvert plans for greater state involvement in funding the sector. State and federal agencies are effective when they create an environment that encourages greater private R&D funding. Instituting a system of federal matching funds, which encourages private sector cooperation, is feasible (with some possible damage to 16 Conference Summary equity across states). Neither PADCT nor the newly created Science and Technology Council are currently encouraging a greater role for the states in policymaking or implementation. In general the aims for state and federal cooperation are to: 1. increase the diffusion of knowledge and manufacturing technology to firms, 2. increase regional equity in both S&T and general economic capacity, 3. develop institutional capacity at the state level to design and implement region- specific policies, 4. promote cooperation with the private sector in the selection and funding of R&D and technology, and 5. institute merit-based competition among states for federal S&T resources. Efficient Investments in Science and Technology In Brazil, agencies promoting and regulating S&T may have to shift their focus from the direct support of science toward the encouragement of the productive use of scientific output. Preconditions for the productive use of output include the overall stability of both a country's macroeconomic system and of S&T funding. Systems that heavily depend on public sector funding are more subject to political vagaries, fluctuating tax revenues, and macroeconomic instability. Stability is also promoted by encouraging young researchers and implementing mechanisms that guarantee adequate wages for scientists. Mexico has addressed these problems through its CONACYT and SNI Institutes. These organizations also liaise between universities and local industry, and provide information on the private demand for research. Long-term efficiency requires general support for talented individuals. A stable system funds individual initiatives, and provides open-ended funding for excellent researchers (as opposed to specific research proposals). The latter type of support works well where allocation systems are transparent, as at Germany's Max Planck Institute, or in university systems that offer sabbaticals to refresh researchers intellectually. The quality of education at all levels affects the quality of scientific output. Sound basic science and a familiarity with the moral and ethical issues surrounding science are a precondition for first-rate science. Policy makers should also have some regard for young scientists' career paths, and encourage talented individuals to enter the field by offering special incentives. The integration of young people into both the national and international scientific communities is essential to the perpetuation of functioning systems. 17 Conference Summary Strong respect for patents and intellectual property enables the scientist and the industrialist to benefit from work produced. The legal protection of intellectual property needs to structured to permit diffusion of knowledge, while protecting knowledge producers' rights. The Future of PADCT In the future, PADCT will operate in a more open, more international, and rapidly changing science environment. It will be more focused on human resource training, but will be flexible in its approach, and will seek to cooperate more with other MCT programs. PADCT will experiment with institutions that can foment private sector cooperation and reward meritorious research, and will experiment with decentralizing responsibility to a few competent state organizations. PADCT II has continued to improve performance based on the results of the Midterm Review, especially with regard to procurement. New procurement procedures did, however, slow the pace of disbursement during 1994. Disbursement was also hindered by Congress's delay in passing the federal budget in 1994 and by tax regulations, which forbade the disbursement of funds to any institution in debt to the federal government. Strengthening ties to the OECD Directorate of Science, Technology, and Industry will continue to be a high priority for PADCT. OECD's technical assistance is invaluable in establishing sound methodologies for monitoring and evaluating the sector. PADCT funds have been used to establish a database at the UJniversity of Campinas; significant expansion in evaluation indicators is foreseen. In its funding of joint university-industry projects, PADCT has taken steps to ensure that funds go to the nonprofit research institutions and do not become direct subsidies to industry. PADCT will continue to articulate rules that promote these joint projects. Industry-only funding will be considered solely in exceptional cases, such as grants to entrepreneurial researchers wishing to establish small technology enterprises in order to commercialize valuable research. PADCT's experience in negotiating public and private partnerships for R&D has given this program more experience than any other Brazilian science agency in handling intellectual property rights issues. Therefore, PADCT has an important role to play in the articulation and reform of national policies in this area. PADCT plans to implement changes in its disbursement procedures, thereby lessening bureaucratic delays. The structures used must permit timely disbursement, as well as the flexibility to interact with other government agencies. One major priority is increasing cooperation with state FAPs (state science funding agencies) to permit more decentralized decision-making throughout the program. The report of the international review and oversight committee for the PADCT program (GEA), delivered at the 11th ordinary meeting, November 1994, stated that "very clearly, PADCT was and is important for breaking down the walls of the 'Ivy [sic] 18 Conference Summary Tower' ... not only developing Brazilian S&T, but also placing it in more direct contact with the realities of industrial competitiveness through quality and technology." The report also found PADCT's support critical to human resource development in strategic areas, and to stimulating activity, through calls for proposals, in emerging scientific fields. GEA concluded that PADCT brought modest progress to Brazilian S&T during a period of severe resource constraints and public sector crises. Without PADCT Brazilian science might have collapsed. Instead, new and transparent mechanisms for funding have been instituted, new types of industry-university cooperation have been initiated, and sub- programs have been created or continued in areas of critical relevance to Brazil. In the next few years, PADCT is poised to consolidate the gains made over the past decade by concentrating its influence in two priority areas. There are two broad priority areas for a possible follow-up operation to PADCT 11 (referred to as PADCT III). First, the program should create an enabling environment for private sector participation in R&D. This requires action on a variety of levels, including review of the legal framework with specific attention given to tax incentives for private entrepreneur, to strong intellectual property protection so that the producers of knowledge benefit from its commercialization, and to the environmental impact of programs. PADCT III should consider direct government provision of support services to industry, such as MTCs, which diffuse best practice in the application of productive technologies. Along with MTCs, a comprehensive metrology program that established guidelines requiring Brazilian scientific and technological production to conform to international norms could build on previous achievements. (Under PADCT II, 400 companies have gained ISO 9000 certification from the International Standards Organization.) Likewise, a program of direct support consisting of matching grants to small-scale entrepreneurs and researchers, designed to encourage process innovations in production, would continue the trend of promoting the research most relevant to the productive sector. PADCT III's second priority should be to expand the base of qualified human capital in Brazil. This should be done directly through improvements in the research infrastructure. It should be done indirectly as well, through the promotion of teacher training for the improvement of secondary school science teaching, and through the reform of curriculum for the better preparation of university entrants who will ultimately embark on S&T careers. PADCT III should continue to draw researchers into areas and subsectors of critical relevance to Brazil. Water resources, epidemiology, and other health sciences that may directly impact on social development are vital disciplines, as are those which will have the greatest impact on economic competitiveness and development: mining, new materials, information technology, biotechnology, and the humid tropics program. In summary, PADCT III's priorities are the following: 1. To create an enabling environment for greater private participation in R&D through: 19 Conference Summary (a) sound intellectual property policy, (b) the review of the tax incentive structure for support of R&D, (c) the establishment of MTCs for the diffusion of best practice in industrial technology, (d) a comprehensive metrology program devoted to institutional international standards in industry, (e) direct support in the form of matching grants for entrepreneurial researchers and incentives for process innovation in small and medium- size enterprises, and (f) sound environmental impact protection policy. 2. To foster human capital development through the following: (a) the continued improvement of the research infrastructure, which will permit scientists and technologists greater exchange among themselves and greater access to the resources of the global scientific community; (b) support for basic science education at the pre-university level through teacher training and curriculum reform; and (c) support for critically relevant sub-programs to Brazil, which may significantly affect social and economic development. 21 Annex I Annex 1: State and Federal Technology Relationships in the United States and Brazil Lewis Branscomb, Harvard University 22 Annex I Introductory and Summary Remarks8 In both the U.S.A. and Brazil there is strong interest in restructuring federal-state relationships in science and technology (S&T). This reexamination is happening at a time of fundamental economic, technological, and political restructuring. The political drivers of this reexamination are not entirely different in the two countries; in a sense Brazil is facing the consequences of devolution of power to the states, while the U.S. is in the middle of doing so. In the U.S. the new conservative majority in the Congress is pressing for devolution of some federal authorities to the states. Republicans now occupy almost three quarters of the governorships in the states, a major erosion of Democratic political control at the state level. Conservatives assume that moving responsibilities to the states will make it easier to balance the federal budget and will result in a smaller, less socially active central government as well. In Brazil there are very large economic disparities among the 27 states, which are reflected in political tensions as well. Constitutional changes in 1989 resulted in significant shifts in power from the central government to the states through a reallocation of tax revenue authority. When the federal government share decreased from 55% to 42%, it became necessary for the states to assume more of the burden for S&T-related investments. Discretionary spending at the federal level is now reduced to 7% of the budget. Most of the states then wrote into their constitutions a fixed allocation of revenue (between I and 2 %) to S&T. Unfortunately, many of the poorer states lacked the institutional capacity, the political motivation, and the scientific resources to make effective use of these assets.' Given the huge disparities between the richest and poorest states in Brazil, there is every reason to seek a redefinition of S&T responsibilities, policies, and processes for carrying them out at state level. The recent U.S. bi-election, and the Congressional agenda that it brought into play, are perhaps the most dramatic evidence for the political shift I referred to before, but even it was anticipated by earlier signals--the Reagan presidency, the Perot candidacy, the Clinton- Gore emphasis on reinventing government. Most fundamental is a widespread loss of public confidence in the ability of central government to find effective solutions to the nation's domestic and economic problems. This is not, as many may believe, a uniquely American phenomenon. Almost every European country and Japan have experienced a similar loss of confidence in their political leadership and in the efficacy of governmental institutions. State and local governments may be the beneficiaries of this loss of confidence "This paper is a revised version of the remarks made as the introduction to the discussion of federal-state relations in S&T in Brazil. It now includes many ideas which are not the author's but rather were taken from the discussion in the seminar. The author apologizes if any of these ideas were captured incorrectly; for that reason no attribution is attempted. 23 Annex I in central governments, only because they are closer at hand and more familiar, and perhaps because less is expected of them. This political change reflects equally important changes in the world economy and the way U.S. industries are being restructured in response. These shifts in business structures are associated with shifts in the processes of innovation, on which economic performance increasingly depends. There are, however, more reasons for reexamining federal-state relations than these political concerns. I believe that the opportunities for constructive change in federal-state relations is the logical consequence of deep currents transforming the business world, having their origins in changes in national and global systems of innovation and having profound but still emerging consequences in the structure and performance of government at all levels. Both Brazil and the U.S. have faced the realities and rigors of trade in an increasingly competitive international arena. For the U.S. Japanese penetration of U.S. auto, electronics, and machine tool industries was a shock; Brazil has experienced similar challenges with the opening of its markets. If a realignment of federal and state authority is useful in addressing the world marketplace, and I believe it is, both countries may benefit from a sharing of experience and ideas. The structural changes in private industry set an example for governments to emulate. Many American firms are downsizing and concentrating their resources in core areas of the business from which they gain most competitive advantage. This requires that they increasingly out-source innovation to meet needs outside their core competence to suppliers with whom they collaborate technologically. The high-tech supplier firms are being given more opportunity to add value through their own innovation. Digital electronic networks are increasingly used to reduce the transaction costs of this decentralized, dynamic business configuration. Behind all this structural change is a fundamental change in the innovation process. In the old model for technical activity in firms, innovations had their technical origins in research laboratories. Relatively little of the firm's most advanced scientific skills were allocated to the design, production, and quality functions of the form. Central research laboratories were seen as the source of the next generation of radical innovations through which a firm might gain at least temporary monopoly advantage. Today the innovation model is one in which research skills address every phase of in the innovation process, with important weight given to process technology, to design for manufacturability, to systems design considerations that take customer satisfaction as the criterion of success. Research laboratories are in support of rapid incremental innovation, and in the wise selection of technologies which might be externally sourced. Their role is not less important, but it has changed. It looks less and less like a university laboratory. 24 Annex ) These shifts in business structure and in the ways S&T skills are used in the modem corporation reflect some very basic principles for competitive success in today's world: 1. Competitive advantage is increasingly found in knowledge, information and skill, in short in technological advantage. Japanese manufacturing industry as a whole now spends more annually on R&D than they do on capital investment in plant and equipment. 2. Decisions need to be made in those organizations where the information is most available to inform those decisions. This usually requires a significant degree of decentralization, whether it is a firm or a government. 3. All tasks need to be performed by those units of the institution (or government) that are best equipped to perform them efficiently and with strong feedback from customer satisfaction. The largest industrial firms are moving away from a strategy of vertical integration in the quest for economies of scale, and are now looking to corporate alliances in search of efficiency and innovation. 4. Transaction costs loom large in the successful mastery of these changes; new information technologies are being relied on to regain efficiencies in decentralized organizations. Information infrastructure is emerging as a major concern of government at both central and regional/state levels. 5. Decentralized organizations may be more efficient and more effective, but this more complex approach to management structure places increased demands on the quality of management at all levels. The business must be understood at a systemic level, and the interactions of all the parts must be consistent with a well understood overall objective. In governments, these decentralized structures are made even more complex than in businesses because political differences may exist between the center and the states. I have gone through this quick summary of the economic and technological transformation which we are now experiencing because I believe that private citizens intuitively grasp that central governments and states have both lagged behind in catching this wave of history. Nevertheless governments are privatizing their telecommunications monopolies, encouraging public-private partnerships for industrial development, and seeking more business-like ways of running their own operations. Socialist states around the world, even in China and Cuba, are increasingly looking to market forces to stimulate their economic performance. 25 Anne-x I The U.S. federal government is also in the process of deregulating telecommunications, experimenting with more adaptive and market-based mechanisms for environmental regulation, and privatizing those governmental operations that can be moved closer to the markets they serve. The government is truly being "reinvented." What, then, might be a changing role in the relationship of federal agencies and state government that these shifts suggest? Are there S&T functions carried out in the central government that would be more effective and more efficient if through collaboration with state governments these functions could be brought closer to the intended beneficiaries, or by combination with existing state activities could be mutually supportive and less duplicative? First let me warn against transporting the industrial restructuring metaphor too literally to the federal-state relationship. State governments suffer from many of the handicaps that give rise to proposals to downsize the federal government. Indeed many state governments are also being downsized in response to public skepticism about government and the desire to minimize the cost of government. In general, state governments are less professional and more political than are central government agencies. However state governments also have several key capabilities that should be kept in mind as we think about the possible changes in relationship that might be merited: 1. Strengths at state government level: (a) State governments are generally more accessible and are certainly more adapted to local economic structures, problems, and opportunities, which vary greatly from place to place in countries as big as the U.S.A. and Brazil. (b) Many state governments have institutions in place experienced at retailing services to a broad cross section of firms and other organizations. This experience can be applied to S&T services such as agricultural and industrial extension. (c) In most cases, state activities operate at a lower cost than federal agencies with similar responsibilities (although not necessarily at a comparable level of technical resources, or for that matter at a comparable level of immunity to political favoritism and other petty corruption). (d) State governments openly compete with other states (and sometimes cooperate with neighboring states with which they share similar 26 Annex I economic interests) in the quest for investment that can create employment. In the U.S., state governments openly engage in "industrial policies" to this end, while the federal government has failed to win political support for such a role. (e) As the diffusion of technical skill and knowledge rises in importance (in relation to R&D), the states have many of the attributes needed to support more effective diffusion. 2. Shortcomings at state level for expanded S&T responsibilities: (a) Most states, in both countries, have rather limited capacity for R&D activities in comparison with federal agencies. In the U.S. state universities do have this capacity, but their research depends primarily on federal support. In Brazil the universities are federal, weakening further the link between state governments, university research, and the private sector. (b) In the U.S., states are constitutionally required to balance their budgets, which results in periods of highly variable levels of discretionary funding from year to year. As a result many states have made investments in long-term, S&T-based activities, only to experience resource shortfalls that forced retrenchment or even cessation of these activities. In Brazil most states have constitutional set-asides for S&T activities, but many of them do not in fact invest the specified amounts in meaningful S&T efforts. (c) The 50 American states are too numerous, and they vary enormously in size and strength (the complementary feature to their local adaptability), making it necessary for federal agencies to avoid the "one size fits all" approach to collaboration with the states. In Brazil, twenty-seven states grouped into five regions are more manageable. But in both cases central government policies fail to prove sufficiently adaptable to the extreme diversity of needs of the states. 3. Advantages of central government agencies: There are positive reasons for retaining important missions with adequate resources at the federal level, quite apart from the shortcomings of the states: 27 Annex I (a) Scientific knowledge draws on global resources; international relationships are key to scientific progress. Central governments are properly positioned to support scientific interests at a global level, and to set high quality standards for the nation's science. (b) Central government agencies in both countries play a major role in knowledge creation at the national level. In Brazil, some ninety percent of national R&D is concentrated in the public sector. In the U.S. roughly fifty percent is invested by government, the majority in defense and space activities. Critics agree that both countries would be better off economically if a larger fraction of national R&D were supported by and performed in the private sector. But these federal missions make both federal governments major sources of technical knowledge. 4. Shortcomings of federal agencies: (a) Federal agencies and institutions tend to act as professional managers with a single programmatic approach to all states. They often reveal insensitivity to individual state concerns and needs. (b) Federal R&D activities often lack sensitivity to specific problems of users because they have only weak feedback from the firms commercializing the nation's research output. Functional Relationships between Federal and State Responsibilities in S&T How should one proceed to evaluate opportunities for change in federal-state relationships? Two approaches have merit. The first looks at the responsibilities of each and sorts them into three categories: Distinct, Complementary, and Overlapping. Where they are distinct there is little opportunity for change. Where they are overlapping or complementary the assignments of responsibility could, in principle at least, be changed. In any case, they should be closely coordinated. And where they are overlapping there may be an opportunity to reduce duplication to the point that they are complementary. Appendix A includes a brief analysis of the responsibilities in S&T of states and the federal government in the U.S.A., to illustrate how this analysis can be done. The second approach asks, what are the issues that need to be addressed, and how might changes in federal-state relations help address those issues? Among those issues, in both countries, are the following: 1. How can national S&T assets more effectively contribute to higher economic performance? 28 Annex I (a) Assign to the states the primary mission for the delivery of industrial, agricultural, and natural resource extension services, drawing on research at both national and state levels. The ratio of services aimed at accessing and utilizing existing technical knowledge to the creation of new technology through research would be expected to be larger in poorer states than in wealthier ones. (b) Increase private sector S&T investment through incentives to participate in joint projects with state and federal support. The states would be expected to focus more on the small and medium sized firms (SMEs), and the federal agencies at the larger firms with international markets. 2. How can national S&T facilities, located within the boundaries of states, contribute more to local development without loss of effectiveness in their federal missions? (a) When states and communities are assisted in creating training and other infrastructure to support a major federal activity in the state, they provide institutional resources that can support the development of new and additional economic activity. The U.S. experience with "Cooperative Research and Development Agreements" (CRADAs) is mixed. However, there are many cases of new businesses "spun off' from federal facilities, when policies are intended to encourage this. (b) In Brazil it appears that there is merit in a plan to give more state "presence" in nationally sponsored universities. Three approaches suggest themselves: (i) Establish Governing Boards for the universities with senior state officials and private sector executives included; (ii) encourage the states to underwrite specific schools and/or research institutes at universities in the state that are particularly relevant to regional interests; (iii) Using the constitutionally dedicated funding for S&T, provide research grants through competitive, peer reviewed, unsolicited proposals from the universities in the state, allocated to relevant fields of research by a State Research Council. 3. What is required for the poorest states to be able to benefit from S&T investments, and successfully compete against better endowed states for S&T projects funded at the federal level? (a) The key is the development of institutional capacity to plan, manage, and exploit research and other technical activities relevant to the state's 29 Annex I needs. This requires senior officials in state government with the necessary knowledge and influence, as well as the research and information diffusion organizations specific to the region. (b) Where there are small groups of capable and successful researchers, they must be specifically protected and nurtured, for they will be the mentors and role models for nurturing others. National programs to provide development support to university departments, or particularly successful laboratories, can be effective. (c) The National Science Foundation in the U.S. has been successful with a program of grants specifically intended to help university researchers in poorer states build the competence and experience to compete successfully for research support at the national level. 4. How can the diverse needs of the states be most effectively addressed through federal programs? (a) The states compete for resources at the national level, but not on an equal footing. Thus each must be encouraged to evaluate its unique situation and come forward with plans appropriate to it. For example, the federal government could provide a competition among the states to build a plan for their S&T development that engages all sectors of society in the state (especially the private sector) and that addresses needs that are specific to that states, and that does so in a way that has a good chance of success. The states that do so best in the context of their specific circumstances would receive funding to create the needed institutions to carry out the plan. (b) Mechanisms that periodically bring together representatives of each of the states, together with industrialists, scientists, and other experts from outside government, to recommend an appropriate balance of S&T resource apportionment among the diverse states has proved effective in Germany. 5. How can the pinnacles of excellence in science best be preserved, in the face of pressures to address the first three issues? (a) The best science is likely to arise where the support system is effective and has been in place for a considerable time. Thus excellence is likely to grow where it is already healthy. One should not attempt to disperse the strongest intellectual assets in the nation, but rather create 30 Annex I conditions under which new groups can arise in other places that appear able to offer the right intellectual and other support. (b) Programs to encourage excellence can be maintained side by side with others aimed at equity; they need not be in conflict, for their objectives are different. This last issue is perhaps the most difficult issue that both countries must face-- equity vs. merit in state eligibility for participating as a partner with a federal agency. Historically central governments serve to compensate for perceived inequities in the distribution of social well being in the nation, and economic differences often lay at the heart of those social inequities. For agencies to use the level of state investment, or the S&T resources states are able to bring to a partnership, as an eligibility criterion draws on an opposite principle--that federal investments can serve as an incentive, rewarding the most forward-looking and resource-rich states. The world of federal S&T policy has more often drawn on the meritocratic principle than that of redistribution of wealth, and science has been well served as a result. A shift to more equity based decisions might improve the political climate for federal S&T programs, but at what cost to scientific excellence? This is an issue the task force should confront directly. A second issue concerns the need for mechanisms through which the states can concert their own interests in working out new relationships with the federal government. This has been much discussed at many levels in the U.S., and of course a number of semi- official mechanisms exist, not the least of which is the National Governors' Association. However, efforts to create a formal conference of the states, with status approved by state legislatures, has encountered serious opposition from some "states' rights" groups, not withstanding the fact that such a council might well redress the imbalance many perceive in state vs. federal power. But unless the states have some way to speak with some degree of unity, both through the Congress and in direct dealings with the federal agencies, the issues we are discussing will be difficult to address. Appendix A - Distinct, Complementary, and Overlapping Functions at Federal and State Level in the U.S.A. Of the many relationships between central government and state responsibilities for S&T, which are most amenable to constructive change? One way to think about this question is to list the S&T functions at federal and state levels and ask, how many of them are unique to one level of government and offer little opportunity for synergy? How many represent complementary activities that, while quite different on their face, represent great opportunities for synergistic management? How many require state cooperation to "retail" services that are supported centrally by federal agencies? Perhaps 31 Annex I some cases can be found that represent opportunities for states to assume operational responsibilities that are now held by the federal agencies, or to share with federal agencies the task of shifting such responsibilities to the private sector. Let me consider these in turn. Exclusive Federal Responsibilities One federal activity, representing over half of federal S&T investment, appears to be strictly federal in nature: the development of technology for use in governrnent procurement, especially military procurement. (To the extent that DoD moves toward the procurement of dual use technologies this statement will have to be qualified.) Certain indirect effects of this massive federal S&T effort are, of course, of great concern to states --base closings, defense conversion (economic restructuring and its attendant disruptions). Indeed this accounts for the intense state interest in the Technology Reinvestment Program. All federal defense-related R&D facilities necessarily exist in states, but with some notable exceptions are only loosely related to state strategies for technological and economic development. Thus there may well be opportunities (exemplified by the efforts in Ohio and neighboring states to leverage the technical activities of Wright Patterson Airforce Base) to find synergies between the federal functions and the indirect benefits to regional economic development. Complementary Activities: Higher Education and Academic Research This is, I suspect, a uniquely American situation. The federal agencies invest about $11 billion annually in research in America's colleges and universities. Although agencies such as NSF and NIH are very conscious of the contribution that this research support makes to sustaining high quality education at the post-secondary level, the political justification for this university support is additional to the knowledge base on which the society depends. The graduate and post-doctoral training that these funds support is almost a byproduct of that investment, a necessary function to ensure the continued creation of scientific and technical discovery in the future. The fact that government restricts its support to natural and social sciences, by and large, and demands a degree of cost-sharing from the university, is evidence of this research orientation. States, on the other hand, provide the great majority of support for higher education in America. Their legislatures support state universities (and in some states private ones as well) in the recognition that access to low-cost higher education is a necessary source of economic opportunity and personal development for their citizens. To be sure, they give a great deal of attention to the role of those universities as the source of new, high-tech enterprises based on their research activities. But few states overtly support significant levels of academic research. 32 Annex I Given the great concern, expressed repeatedly since the late 1960s, about the failure of labor markets for scientific personnel to adjust the production rate of scientists and engineers, and further concerns that federal funds for academic science are inadequate in relation to the numbers of qualified investigators, over which the federal agencies have little control, the accommodation of the national strategies for S&T knowledge creation and S&T human resource production would seem to call for a level of engagement of the federal and state governments that has yet to happen. I see no way this resource allocation problem can be solved without the concerted efforts of state legislatures and federal funding agencies. If there is to be any kind of voluntary restraint on the proliferation of under-funded graduate programs in science and engineering in state universities, it will require an effective institutional mechanism, perhaps with federal inducements to compliance with the agreements reached. In the current mood of devolution of federal roles to the states, there may be attempts to shift from the federal to the state level the funds and dispersement authority for academic science. As far as I know that has not been seriously suggested. I see enormous advantages to retaining merit-based competition for academic research funding at the national level, and believe that devolution of this responsibility would be counterproductive. Wholesale and Retail Roles The most obvious opportunity for collaboration is the use of federal technical financial resources to strengthen state-based industrial extension services, as provided for in the moribund State Technical Services Act of the 1960s and more recently by the 1988 Omnibus Trade and Competitiveness Act. This relationship is maturing today, providing a mechanism for coupling the NIST Manufacturing Technology Centers (MTCs) to small and medium sized firms (SMEs) in the states. As the number of MTCs grows and as each specializes in an area of industrial activity, the Internet can provide a tool for giving access to all of these Centers from all the states. Thus networking of federal-state services can bring an even stronger argument to the case for a national system, accessing the federal government's enormous S&T enterprise, but using local government services to bring this knowledge to small firms in an affordable, practical form. Another area in which significant levels of devolution have taken place is in environmental regulation, and especially in regulatory compliance. In this case much of the scientific knowledge required is neither in the EPA nor in state laboratories, but elsewhere in the federal, the nongovernmental and the private sectors. This area will become a more complex one, technically, as regulatory strategy shifts toward market surrogate approaches to emissions limitations and toward incentives for new process technologies that reduce emissions without loss of economic efficiency. Here again, 33 Annex I federal leadership to help create national networks to support state efforts to further environmental progress by local firms should be welcomed by the states. National Programs That Require Federal-State-Private Collaboration There are at least two large programs, established at federal level by the Congress but with counterpart activities in virtually every state, that cannot be carried out without some degree of three-way collaboration among federal agencies, states and private industry. One is the National Information Infrastructure (NII), and the other is the Intelligent Transportation System (formerly called the "intelligent vehicle highway system"). These two are closely related. The NII uses the "highway" as its metaphor; the ITS uses information technology as its means for expanding the capacity and safety of its highways. In both cases most of the investment will be private, responding to market opportunities created, in part, by state, municipal and federal agencies. In the case of the ITS there is a private, not-for-profit body called ITS America which provides a forum for discussing coordinated strategies, and the DoT has recently reorganized the management of ITS to provide more focus across the department. There is not, however, a clear strategy for assuring the required level of standardization and coherence of design across states (and internationally for that matter), given the fact that ITS will grow through separate innovations in different parts of the country. Indeed, it is not clear yet just how much of the ITS information and communications support can be expected to come from the NII as it evolves. The President's National Information Infrastructure Task Force, led by the Secretary of Commerce, provides coordination among all the federal agencies, good contact with the FCC and the Congress, and an advisory committee bringing in private sector views. It does not yet have a fornal role for states, providing a mechanism for concerting their interests. State Economic Dvelopment Programs and the Federal Civilian Technology Programs Politically, for two reasons, the riost attractive area for a new federal-state initiative is in the area of S&T-based economic development. First, economic development is at or near the top of the political agenda at both the federal and state levels. Second, the federal government's legitimacy for its activities (the Advanced Technology Program at NIST being the most explicit and visible) is under attack, while the states compete vigorously with one another in the quest for job-creating capital investment. Rather than opposing state government intervention into the economy, many firms work to force that intervention by threatening relocation of productive facilities elsewhere unless tax and other concessions are made. This political contrast suggests possibilities for the pursuit of common interests at state and federal levels. If the political commitment of state leadership served to stabilize 34 Annex I federal investments, and if the federal government's ability to create merit-based national competitions for partnership projects served state interests, new relationships here would appear to be attractive. The popularity of the SBIR program, for which some states, notably Iowa, have organized themselves, would appear to suggest the attractiveness of this approach. Moving ahead on this front would appear to require giving state government a role in the selection process, which might be merited if the states invested their own resources in identifying complementary assets that the state can make available to help ensure success of the projects (special worker training or university connections, for example). I. In one respect the focus on shifting federal-state responsibilities may be more intense in the U.S. than in other nations because of the Cold War dominance of U.S. policy in the past. When the national agenda in the U.S. shifted from the Cold War to economic competition, it was evident to policy scholars, and to the U.S. Commerce Department and a few Congressmen, that U.S. S&T policy needed to shift from the creation of new scientific and technical knowledge to the enhanced diffusion of existing knowledge to firms and other enterprises throughout the society. Henry Ergas calls this a shift from mission-oriented policy to diffusion- oriented policy. Germany, with the strong role played in S&T by the Lander, is the role model, not France or the U.K. Thus it was apparent that many federal initiatives during the 1980s, for example industrial extension services and better workforce training, could not be carried out effectively without the active participation of the states. 2. One anecdote suggested that one state had hired several thousand cooks to prepare meals for school children with their S&T allocation. 35 Annex I STATE-FEDERAL TECHNOLOGY RELATIONSHIPS Policy Options 1. Shift national policy to one emphasizing diffusion and utilization of technology. (a) Local governmental units to retail technology services to SMEs (See World Bank project in progress). (b) Pay attention to university-industry cooperation as a diffusion mechanism. (c) S&T information policy: importation and translation, data evaluation and literature, Internet and electronic publication. 2. Creating competence at state level to manage the technological dimensions of economic development. (a) Host cost-shared (state and industry) research institutes devoted to emerging industrial technologies patterned on the German Fraunhofer Gesellschaft. 3. Gain political commitment from states to S&T-based development: (a) Competition among states, using systemic initiative mechanism. (b) Competition for direct foreign investment; delegate more of the decisions to state level. (c) Leverage local educational institutions through incentives for in-service industrial training. (d) Block grants with delegated responsibility for industrial extension and training services. 4. Address meritocracy vs. egalitarianism as the basis for S&T development policy. 5. Create an institution through which the governors can make common policies prior to negotiation with the central govemment. 36 Annex 2 Annex 2: Institutionalizing Assessment in the Science and Technology Sector Jean-Eric Aubert, OECD-DSTI 37 Annex 2 Introduction As its title indicates, this talk addresses assessment in the science and technology sector with regard to innovation. It is worth emphasizing that innovation goes beyond S&T. It lies precisely at the interface between S&T and the economy. It also differs from research. Research aims at producing knowledge, while innovation aims at developing new products and diffusing them throughout the economy. Innovation results from the combination of an entrepreneur's initiative, the ideas nurturing the project, and the finance supporting it. In general, R&D costs represent no more than half the total cost of innovation projects, which also encompass product design, marketing, production trial, etc. Thus assessment approaches should concern not just aspects confined to the S&T sector, but other government domains, including finance, industry, education, etc. A second remark concerns the notion of assessment. It should be designed and practiced so as to help change perceptions with a view toward influencing policy-making. Assessment tools should correspond to all possible facets of the S&T/innovation scene and related target groups. Several basic ones will be discussed here: indicators, evaluations and audits. This talk is based on the presentation I made at the meeting. Some references are made to the Brazilian situation, especially as defined during a joint World Bank-OECD mission to that country in May 1994. Information others introduced during the meeting is also taken into account. Indicators A number of different types of indicator need to be developed and used to monitor the S&T/innovation scene. For several decades, OECD has been developing a series of manuals with this in view. These now constitute the international norms. The oldest and most famous one, the Frascati Manual, was designed to measure R&D efforts. It establishes principles for collecting and calibrating data for many variables, such as personnel and expenditures, and for different parts of the R&D system, including the business, university, and public sectors. More recently, a manual on human resources for S&T (the Canberra Manual) has been prepared. Another series of manuals addresses outputs in the S&T sector. These relate more directly to innovation, and include (i) manuals on patents and the balance of technological payments, which offer a blend of the various methodologies adopted by different international organizations in this area; and (ii) the Oslo Manual, which provides methodological strategies for surveying innovation (cost, nature, impacts, etc.). It is also necessary to mention the methods in use for collecting and processing data on trade in 38 Annex 2 manufacturing (and services), which enable the measurement of countries' performances in different industrial sectors, classified as a function of their R&D intensity. Other important indicators--located at input/output interface--are attained through bibliometrics. Concerning either publications or patents, these indicators shed light on countries' specific scientific strengths, and on related aspects such as international trends in cooperation. The development of S&T/innovation indicators at the national level should focus on a few principles: 1. Indicators should cover both inputs and outputs of the S&T system and should be based on the most widely accepted international standards; 2. Selectiveness is essential. Efforts should concentrate on those variables which are the most significant to a given country at its stage of development. Rather than using an array of indicators, it is better to depend on a few, very reliable ones; 3. The effort should not be limited to data collection. Communicating and packaging work is also essential, and should be performed with different interested target groups in mind (government circles, institutions managers, industrialists, etc.); 4. A national office dedicated to S&T/innovation indicators should be established as part of the S&T ministry or agency, or of the statistical service. This office should be adequately staffed and well equipped with appropriate network and computer facilities. Last year's World Bank/OECD mission provided guidelines for developing S&T indicators in Brazil, especially as regards the introduction of Frascati and other manuals. At the workshop, discussions and presentations showed that Brazil has access to sets of indicators from various sources, including the business sector. In order to be truly useful, however, these indicators need to be assessed, standardized, and coordinated. Cooperative mechanisms for providing training in this area, with possible OECD involvement, could be explored. Evaluations Evaluations in the S&T sector can be approached in two ways: ex-ant and Cx pjaI. Evaluations take place ex-ante when money needs to be allocated during the policy- making process, as, for instance, during the evaluation of research projects or research groups. Basic methods for this purpose are based on peer review mechanisms. Those 39 Annex 2 that have already been applied in Brazil have been extensively discussed in other parts of this workshop. Another type of ex-ante evaluation is used for defining priority fields, as when, for instance, the government assesses national S&T capability. In a similar vein, governments use evaluations of R&D institutes to identify priorities, especially at times of severe budgetary constraint. The most remarkable experience here took place in Germany after reunification, when drastic reductions needed to be made in the oversized Eastern R&D system. Ex-post evaluations are more frequently used to assess the impact of specific programs. They differ in purpose and method from accounting audits, which review the detailed financial means by which money has been spent. Their goal is to assess what type of research and/or innovation work has been accomplished with program support. Brazil has fairly good experience in this matter, thanks to the PADCT program and associated evaluation group (G.E.A.), which examined the effects of support from the program to Brazilian R&D in various scientific fields. Specific criteria should guide the evaluation of programs aimed at stimulating technological innovation (financial support to industrial R&D, tax incentives, science parks, etc.). Vital yardsticks include the increase of industrial R&D effort in the enterprise's targeted groups, networking between different actors of the innovation process (firms, research laboratories, etc.), new products/processes developed and diffused as a result of the program, new firms and jobs created and/or maintained, and medium- and long-term economic fruits (in terms of firms' creation, market shares, profits, employment, etc.). It is not always easy to relate economic and social performances to precise technological innovations. Thus in the early phases of innovation programs, evaluation efforts should focus mainly on those indicators that reflect a change in the innovation climate, such as the evolution of R&D expenses, networking, etc. It is also important to stress the need for adopting sound methodological principles in the evaluation process. The independence of evaluators; program managers', program users', and clients' involvement in the review process; the transparency of results, and, of course, the implementation of conclusions in the policy- making process, are major concerns here. Basic guidelines, such as those disseminated by OECD a few years ago, should be followed in this matter ("Evaluation of Programs Promoting Research, Technology, and Innovation--Check-List of Principles," July 1990, General Distribution Document). Audits Another type of evaluation in innovation policy might be called "innovation audits." A number of countries have established committees to identify regulatory and 40 Annex 2 institutional obstacles to innovation initiatives. These address diverse areas, such as taxation, customs, product regulations, and professional status (of teachers, researchers, etc.). The pioneering initiative in this matter, which is now an integral part of innovation policy, was the Charpie Report ("Technological Innovation: Its Management and Its Environment," United States Department of Commerce, 1967). Other countries have imitated this inspiring example. However, most such initiatives fail in that they generally end up with a single report, a "one shot event" with limited consequences. Audits should be implemented on a permanent basis. They should be carried out by ad hoc bodies, solidly established in the government, which constantly identify obstacles to innovation and push for their removal. The Brazilian economy would certainly benefit from such an audit process, in view of the numerous vested interest groups and the heavy legislative and regulatory burdens that affect it. An evaluation of the technological strengths of economic and policy measures would help maximize those same strengths. Toward this end, OECD has completed an experimental audit in Hungary. With the lhelp of foreign technological institutes supported by the governments of four OECD member countries, the audit examined the situation of several industrial sectors. The involvement of foreign evaluators, operating on a level playing field, was crucial in this instance. The interest of foreign bodies and governments--which in Hungary resulted in a $1 million project--hinges on the further exploitation of promising technologies and competencies. An audit, by its very nature, helps, leading to further contacts and investments. Case studies are often an excellent tool for understanding key factors and obstacles affecting the innovation climate. Usually these case studies are made and documented in an obscure but professional manner by graduate students. More rarely, governments commission such studies in order to develop appropriate measures. Still more infrequently, case studies aid in the development of media products, such as videos or TV shows, which are intended for widespread dissemination by modern communications tools. Inserted in regular science programs on media, but avoiding propagandistic attitudes, these products can elicit interest in the public at large (as experienced by the author of this note in less developed OECD countries). If followed by further debates in a 'capillary" manner in laboratories, schools, enterprises associations, town halls, etc., this type of action could become an excellent catalyst for collective self- assessment, and stimulus to the nation's confidence in its own creativity. OECD Policy Reviews Finally, OECD policy reviews in the fields of science, technology, and innovation should be mentioned. Now in existence for over thirty years, these reviews have benefited all OECD countries, in some cases multiple times. Russia and several Eastern European countries have been involved in this process, as have Mexico (before joining 41 Annex 2 OECD) and Korea. Undertaken on the request of concerned governments, OECD policy reviews follow an established pattern. First experts and civil servants from the country in question prepare a background report on the R&D innovation system and related policies. Next, a group of high-level foreign consultants, guided by the OECD Secretariat, prepares an examiner's report that focuses on main issues and provides policy suggestions. Finally the reports are discussed in a review meeting held under OECD auspices, then published. Non-member countries requesting a review pay all direct costs (Secretariat and consultants' missions and consultants' fees). Normally the review process takes one year following OECD's receipt of the official request. Although a few modifications to the process will be discussed at an OECD meeting in June 1995, the nature of the "product" and its methodology will remain basically the same. It is hard to assess the extent to which countries follow recommendations made in OECD reviews. But many agree that these reviews contribute significantly to creating a climate that fosters appropriate reforms, that provides key groups on the domestic scene with serious opportunities for involvement, and that draws from international expertise. The adaptation of analysis to national specificities is an important factor in the success of such reviews. Concluding Remarks The effort needed to develop indicators should not be underestimated, especially when the country is, like Brazil, at a relatively early stage in establishing its S&T/innovation policies. An expenditure of some five percent of the whole government S&T budget would not seem unreasonable. This is the proportion alloted to well managed government programs (the sum of ten percent cited during the workshop includes costs related to ex-ante evaluation of money allocation to and further management of projects). The implementation of such an assessment program--in all its different facets-- should be coordinated at the level of the minister in charge of S&T. However, as stressed earlier, the effort should have an inter-ministerial dimension. Formal links need to be established with other relevant parts of the government, both at the federal and the regional levels. In Brazil some groups are practicing "research on research." They already have international contacts and recognition, as well as a good record of publications, studies, and so on. These nuclei, identified by the joint World Bank/OECD mission in 1994, would certainly constitute a useful basis for launching and institutionalizing the important assessment effort as described above. 42 Annex 2 But evaluation needs to be evaluated too. This is why it would be appropriate to assess, with the help of international experts, the work accomplished within a five year time, and to discuss outcomes resulting both from assessment initiatives and the obstacles met in implementing them. 43 Annex 3 Annex 3: Competitive Funding Mechanisms: The State of the Art in Research Funding Daniel Newlon, National Science Foundation 44 Annex 3 I would like to retitle my talk "The State of the Art in Research Funding is in Brazil." In my opinion no funding agency, the National Science Foundation included, does a better job in handling competitive research funding than FAPESP. At NSF we turn research proposals around in six months. At FAPESP it takes six weeks. NSF proposals are evaluated by a minimum of three written reviewers. At FAPESP a single consultant performs the review, but investigators have a chance to respond before a decision is made, to receive further evaluations by the consultant during the course of their research, and to get a review of their final project report. The NSF offers none of these advantages. NSF delegates to universities are responsible for administering the grants, and pay out over a third of this money to the university in "indirect costs." FAPESP disperses the money directly to the researcher and protects its real value against inflation. NSF's administrative costs are also a magnitude higher than FAPESP's. FAPESP's success has been attributed to the fact that it is a regional foundation. It is true that it would be difficult to copy the weekly meetings of disciplinary panels that take place there. These panels pick consultants for the proposals and make decisions based on the consultant's report and the investigator's response. It would be prohibitively expensive for a national foundation to convene review panels weekly. I've tried to arrange for conference telephone calls with relevant members of my program's advisory panel in order to discuss the choice of proposal reviewers. Our advisory panel does review and make recommendations on all proposals. Meetings are held twice a year, hence the long delay in reaching final decisions on some proposals. We are currently experimenting with "virtual panels"--panels that exchange notes on proposals by electronic mail. Other parts of the Foundation are experimenting with triage panels--panels that meet before proposals are sent for full review in order to weed out the weaker proposals so as to reduce the burden of evaluating on the research community. Thus, it may be possible to imitate FAPESP's approach to research funding nationally. We discussed an alternative yesterday: regional foundations financed partly by local tax revenues matched dollar-per-dollar by funds from the national budget. There are disadvantages to this approach. It balkanizes scientific research into regions. It keeps research projects from competing across regions. It makes preserving confidentiality even more difficult because the identity of panel members is public knowledge. I am especially concerned by the eighty percent success rate for proposals submitted to FAPESP. This could show that their review system is unable to concentrate funding on quality projects because everyone knows each other. I have compared the National Science Foundation unfavorably with FAPESP. But NSF is one of the world 's premier research funding agencies. Much of its effectiveness comes from its staffing. As at FAPESP "rotators"--bench scientists who work for one to 45 Annex 3 two years and then return to academics--fill many of NSF's key positions. The culture of an agency dominated by scientists who plan to return to academics is different than that of the typical government agency. The World Bank apparently considered and rejected the rotator option for PADCT, and I think that was a mistake. The other feature of NSF's funding mechanisms that accounts for its success is its reliance an scientific peer review. Currently our review process is called merit review, but this term is not as informative as the old one. Peer review means that the outcome of a competition is informed by and in some cases completely determined by evaluations by scientific peers. Peer review is used throughout the typical scientist's professional life. It determines what articles are published in which professional journals, who is promoted, and who receives research funding. Peer review is the mechanism that the scientific community uses to take control of its future. Bureaucratic or political alternatives to competitive peer review do not work as well because these decision-makers are not as well informed about the scientific merits of the research as active scientists, and place less weight on scientific merit. There are many different forms of peer review: highly structured or informal, evaluation by panels or independent evaluations by ad hoc reviewers, solicited or unsolicited proposals, etc. There are well known criticisms to peer review. Some claim that reviewers will tend to favor what they do or know and not give enough weight to the new and innovative; that reviewers are faddish--everyone jumps on the same line of research; that peer review favors disciplinary over interdisciplinary research; that peer review is idiosyncratic; that peer review can be manipulated by cartels of researchers and, through grantsmanship, by individual researchers; that peer review imposes the burden of preparing and reviewing proposals on the research community; and that young researchers are at a disadvantage in competing with established scientists. Peer review works to the disadvantage of women and under-represented groups. Finally, peer review discourages the scientist from applied research and education. Peer review evolves as science agencies and scientists try to find ways of coping with these disadvantages. For example, NSF encourages program officers to fund innovative projects through Small Grants for Exploratory Research (SGERS), one-time awards of $50,000 that bypass peer review. This year for the first time CAREER awards-- special grants for projects that best integrated research and education--were offered to scientists under forty. Research Planning Grants of $18,000 are offered to women and disadvantaged minorities who want special assistance in preparing competitive proposals. Disciplinary programs are drawn together in inter-disciplinary, goal-oriented special competitions in such areas as the environment, civil infrastructure, and advanced 46 Annex 3 manufacturing. This year, again for the first time, programs throughout the foundation were encouraged to compete with proposals for a $15 million special opportunity fund which financed a number of innovative new interdisciplinary competitions on such topics as environmentally conscious manufacturing, water systems, and learning in natural and artificial environments. Finally, NSF has imposed page limits, ruled out appendices, and simplified forms to try to reduce the burden of preparing proposals. Both NIH and NSF are experimenting with ways of screening out weak proposals to reduce the burden of reviewing proposals. But NSF's peer review process avoids many problems because its program officers by and large have credibility with their respective research communities on account of their reputations as scientists and fair and wise managers of the review process. We intervene to encourage the innovative, foster the young researcher, protect the productive project from idiosyncratic reviews, avoid manipulation by individuals or groups of researchers, and lean against current fads. We decline projects with high ratings if the reviews acknowledge past accomplishments but not future productivity. We choose advisory panels dominated by young researchers--my panel has a median age of thirty-eight--in order to be responsive to new lines of research. I repeatedly challenge critics of NSF to give me one example of a significant line of research that has emerged in economics over the last thirty years that NSF did not support early on. I have yet to be given an example. I have focused in this talk an what I know best--competitive funding mechanisms for individual projects. I have not talked about competitive funding mechanisms for groups of researchers, institutes, or research programs. Frankly, I prefer a system in which the basic infrastructure support comes chiefly from sources other than the science agency. Science agency budgets provide leverage within existing universities for quality scientific research. They do so first by providing some support for the researcher, his equipment and students; second, by bringing visibility to and enhancing the prestige of the research institution; and third, by providing "indirect costs" that subsidize part of infrastructure costs. University researchers' relative success in obtaining competitive grants should reveal to private and public funders the quality of their institution's research programs. Federally supported laboratories are expensive because the entire cost is borne by research budgets and because there inevitably is dead wood in the laboratory that can not be eliminated. Such support is also unhealthy because it frees the laboratory from educational or industry demands. But there is a persuasive argument in favor of using science agency funding to advance scientific research in a way that would not be feasible through piecemeal projects. The creation of worldwide electronic communication capability and, earlier, the competition for funding for supercomputer centers, are good examples of NSF working in concert with other government agencies to provide large amounts of funds competitively. 47 Annex 3 The spectacular collapse of support for the superconducting supercollider is an example of a failed mega-project. There are no hard answers to the best mix of large versus small science nor of institutional versus project support. I guess this is where the "art" of research funding comes in. 48 Annex 4 Annex 4: Recent OECD Work on National Innovation Systems Jean Guinet, OECD-DSTI 49 Annex 4 Defining the NIS Notion A National Innovation System is the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify, and diffuse new technologies throughout the economy and society. Differences in the way countries organise their innovative activities, which have an impact on thieir propensities to innovate, as well as on the nature of their technological/industrial specialisations. can occur in six major areas: 1. R&D intensity and R&D organisation; 2. the organisation of firms; 3. inter-firm relationships, 4. the role of the public sector; 5. the institutional set-up of the financial sector, 6. institutions' arrangements for training and deploying specialised human resources. Countries may also be very different with regard to framework conditions which have a more indirect, but nonetheless strong impact on the innovation process, such as: 1. the macro-economic context; 2. communication infrastructures; 3. the organisation and functioning of the labor market; 4. various aspects of the regulatory context (e.g., intellectual property rights. anti- cartel legislation, health and safety regulations, etc.). 50 Annex 4 Figure 1: The [nnovation System Technicaloerormicanc in ustrial and Frm ,_ uca ona Organization J ommuniaon Training S,stei -Infrsrcuc | / ~~~Know ledge G eneration IF. ro ct r e and D issem inationacoMark o diti n Co~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ndition s' Objectives of the OECD Project on NIS The project is designed to help governments of member countries better understand how their innovation system works, and identify how they could improve its contribution to society. The latter could be achieved via a comprehensive policy approach to promoting the generation and diffusion of economically useful knowledge, where the role of S&T policy would be put in appropriate perspective. The project aims at making international comparisons in order to: 1. identify the areas where the subsequent international exchange of views and experiences would help in finding solutions to common problems; 2. identify national "best practices" and situate them in context, and hence help assess their international transferability; 3. understand better why the functioning of national innovation systems may give rise to international frictions, and hence contribute to the dialogue on possible remedies. 51 Annex 4 The project is part of an overall OECD effort to determine the policy implications of the emergence of a new economic paradigm. the so-called "knowledge-based economy." It is particularly expected to have an impact on the methodology used for carrying out S&T country reviews and on the development of new S&T indicators. 52 Annex 4 Project Design and Methodology The project encompasses two main modules: 1. A general conceptual framework has been developed for carrying out national studies on a comparable basis. It will be tested soon on sample countries. 2. Specialised modules which deal with certain important aspects of national innovation systems. The conceptual work for the modules on financial aspects and on inter-firm relationships has recently been completed. Work on a new module on regional (especially transborder) innovation systems is planned to start next year. More detailed information can be supplied to the Brazilian authorities, should they wish. Policy Relevance The high priority that OECD Member countries attach to this project can be easily explained by the converging influence on policy thinking of three developments: 1. The key role that innovation plays in national economic development in an era of globalised markets is increasingly recognised in wider circles. It is for example symptomatic that the so-called "new growth theory" (which emphasises the role of investment in knowledge) has been developed in part by economists trained at the Chicago School of Economics (e.g. P. Romer). 2. After a decade of gradual government retreat from the economic scene, renewed social pressures for government intervention have occurred in recent years because of the persistent unemployment problem and other developments (e.g. rising concerns about some of the consequences of the deregulation of financial markets). 3. But if governments are becoming more involved in the promotion of economic development through technology policies, far-reaching changes in the nature of the innovation process are forcing them to reconsider the objectives and instruments of their intervention, as well as to take a more integrated approach to the promotion of innovation. On-going changes of the technological paradigm include: I. Innovation is less and less a linear process in which basic research, applied research, and commercial innovation represent identifiable, consecutive steps. It 53 Annex 4 involves more and more feedback loops between these different stages. The blurring of the border between pre-competitive and competitive research implies that govemrnents are getting more involved at the innovation stage, and in principle private firms have more incentives to participate directly in more basic research activities. 2. Any innovation has an increasingly important systemic dimension. It is no longer an "heroic" act performed in isolation. In order to valorise his own technological potential, any individual innovator needs access to a growing number of complementary technological resources and information. Such a blurring of the border between technology generation and technology diffusion has one major policy implication: it is becoming more important for governments to identify missing links in innovation networks and deficiencies in technological infrastructures (building institutional capabilities), as well as to increase the efficiency of the incentive structures which govern the working of such networks (in the field of S&T policy--e.g. intellectual property rights--but also in other fields such as industrial policy, including government support to small and medium enterprises). 3. Innovation reflects more and more individual and institutional learning (by doing. using, or interacting), where exchange of tacit (uncodified) knowledge through human contact plays a key role. The more interactions within the system, the more conducive the system it is likely to be to actual innovations. This points obviously to the need of better integration between S&T policy and education policy. 4. As a result, the outcome of the innovation process is becoming more and more sensitive to certain framework conditions (see above), especially the organisation and functioning of the national financial system. This points to the need of lifting innovation policy to the status of strategic policy for the highest level of government. In summary, governments need to better understand how their S&T system is embedded in a broader innovation system, in order to be able to respond to two main challenges: the need to adjust their S&T policy approach, objectives and instruments to the changing economics of innovation; and to better integrate S&T policy with other fields of government intervention, especially education and industrial policies, so as to increase the leverage of public expenditure in S&T. 54 Annex 4 Relevance to Brazil Regarding the formulation of an overall S&T strategy, there are two kinds of implication, reflecting the two types of challenges that Brazilian S&T policymakers are currently facing. First, like in any other country, having reached a certain level of industrialisation, they must adapt their current policy to the changing nature of the innovation process as described above. But second, they have to do so while at the same time catching up with i +ernational best practices, especially with regard to the private sector's participation in financing and performing research, and the government's commitment and capability to efficiently complement market forces when needed. Government has an eminent role to play in the initiation of a virtuous circle between the supply and demand of S&T, in order to realise the country's economic and social development potential. This involves: 1. The suppression of certain bottlenecks on the supply side, through the creation and/or maintenance of research capabilities of a critical size in certain S&T areas. The selection of these areas should be made with due consideration to what market forces say are the needs of the industrial and service sectors. This requires a sustained government commitment to funding high quality higher education and research in non-profit organisations. 2. The stimulation of the demand side, so that business enterprises increase their in- house research capabilities and their demand for technological services to the Brazilian S&T system, while remaining free to access the best foreign technological resources. Due consideration should be given to the specific needs of SMEs. 3. The improvement of the institutions and incentive structure which determine the intensity and quality of supply/demand interactions, through eventually the reinforcement of bridging institutions and the provision of stimuli to industry/university collaboration. PADCT is a good example of a programme designed to strengthen Brazilian S&T capabilities through fair and credible public support. It also promotes an institutional learning process, the benefits of which are likely to spill over far beyond the strict domain of the programme's application. But it ought to be complemented by measures intended to further stimulate business sector investment in-house or contracted-out R&D. The two laws under consideration, which would provide government matching funds for private sector investment in R&D in two sections, are examples of such complementary measures. But it remains to be seen if they are sufficient to induce more innovation- related investment in enterprises outside this area, in which they are already very active, 55 Annev 4 especially the SMEs sector. In addition, it may be advisable to give closer attention to framework conditions that have a strong influence on the investment policy of the private sector, especially the role of banks and other financial institutions. This could be done along the lines suggested by the Estudo da Competitivade da Industria Brasileira (MCT- FINEP-PADCT), which has the great merit of putting S&T and industrial policies into a common perspective. Evaluation of Specific S&T Support Programmes The foregoing suggest that when assessing the contribution of individual government support programmes (such as PADCT) to the broader economic objectives of the Brazilian government, it is important that the evaluation process be designed so as to allow a consolidated judgment on the direct or indirect contribution of the programme to: 1. increased financing of R&D by the business sector (the situation in OECD countries is presented in Figure 3) 2. the creation of new university-industry links; 3. the densification of innovation networks and improvement of their connection with foreign centres of excellence; 4. the development of multidisciplinary research oriented towarcs clearly identified social or economic macro objectives; 5. the development of a sector of technologically-based, dynamic SMEs; 56 Annex 4 Insert 1: Nature of the Innovation Process o Innovation seldom depends on technological know-how alone. Over the last twenty years, it appears to have become more difficult to derive a competitive advantage merely from technology. A firm needs the complementary assets (distribution networks. manufacturing capability, supporting technology. etc.) which enable it to harvest the fruits of technological innovation. Investment in technological know-how (e.g. R&D) is usually hard to justify unless it goes hand-in-hand with investment for exploiting the know-how. While the coherence of an investment package may make a venture project credible in the eyes of those financing it, investors might not agree to put up funds for all the components of the package. o Innovation is interactive and multidisciplinary. A firm needs to build up a network of relations with a wide variety of local and other partners--e.g., consumers and users, suppliers of equipment and technology, distributors, etc. The reliability and effectiveness of these partnerships can be obtained only through what can be called "relational" investment. o Innovation is localised. It requires the internalisation of those "informational externalities' which pervade a location, region. or county. The members of a firm's work force automatically involve each enterprise in a complex informal network of contacts, loyalties, and shared interests which creates, channels, and deciphers a mass of useful information. Locations rich in externalities usually cost in the form of greater expenditures on such items as real estate and pay. As R. Lucas has surmised, prices on certain markets appear to at least partly internalise the informational externalities which cause human capital to be more productive in some locations than others. o Innovation is a proce.ss of integration. Companies' need to cultivate their external relations obliges them to adopt new forms of internal organisation, with such major functions as production, research, marketing, and financial planning tending to become more integrated. This gives rise to what may be termed "organisational" investment, which is focussed on the control of information flows and used to set up or maintain "info-structure". Such investment is to be considered in conjunction with a similar type, used in the "passive" adjustment of working conditions to meet the demands of new technologies. o Innovation is a learning process. A firm which innovates is characterised as much by its learning capacity as by its efficiency in producing goods, services, or knowledge. This capacity is built around a core made up of its human resources and its system for managing them. "Human resource investment" includes not only formal training expenses, but also all investment. It contributes to the various aspects of 57 A4nnex 4 learning (through performing, using, interacting); it also includes that part of R&D expenditure which gives a firm the ability to prospect and digest technology from outside sources. o Innovation has a societal dimension. Innovation disrupts not only consumption and production patterns but also their associated power structures, whose roots are deeply embedded in the socioeconomic fabric. In the case of large-scale projects, success often depends on investment in "public relations" (not to say political lobbying). This type of investment comes on top of relational investment, the purpose of which is more strictly economic. o Innovation is a process of "creative destruction". Not only must a firm "learn how to learn"; where its organisation, management methods and culture are concerned, it must also "know how to learn". Sometimes it must do so faster than its balance sheet allows, which can be a source of external financing problems. o Innovation has cultural origins in hi.story. These origins are admittedly obscure, owing to the overlays of "creative destruction". But they do limit the fields of possible exploration more than is commonly imagined. Economic historians have developed the concept of "path dependency" to draw the attention to the fact that both the resources and the demand for innovation are to a certain extent subservient to chronology. They have demonstrated that some paths leading towards innovation are ancient, even when covered over with more recent tracks. This finding is of more than purely academic interest. It carries two important lessons for business: one, not to exceed the bounds of social acceptability, and two, not to cut itself off from the guardians of that older memory in which the trajectories of teclnology are inscribed. The second lesson instructs employers to adopt staff policies which may be more expensive, but which recognise the value of accumulated experience, and favour passing down the craftmanship latent in all activities, even the most technically advanced. o Innovation is both costly and risky. An innovative firm, caught between rising sunk cost for innovation, R&D in particular, and shorter product life, has only two ways out: to share the effort and risks with partners, and/or broaden its depreciation base by diversifying its portfolio of products which incorporate the same technological know- how. "Diversification investment" may be considered as tactical investment in support of innovation. 58 Anne-v 5 Annex 5: Encouraging Maximum Productive Use of Scientific Output Peter Kreyenberg, German National Foundation 59 Annex 5 Talking about investment in this context means talking not only about financial investment, but about investment in the talent within the scientific community, especially its younger members. I should refer also to the environment of innovation. In discussing the maximum productive use of S&T output, a number of preconditions should be mentioned: I. the stability of the system; e.g., economic stability is a prerequisite for general confidence, which translates into investments in S&T. 2. the stability of funding in S&T/R&D is also important in the Brazilian context, because in Brazil the main source of funds for S&T is the public sector. In Brazil, this sector is responsible for eighty percent of expenditures in S&T. The S&T sector will continually suffer from the instability which occurs when the public sector has severe financial problems. 3. the time span. Successfully reforming the S&T system requires five to seven years, a span longer than the legislation cycle of four years. This is one of the difficulties one has to deal with in talking to or trying to persuade politicians. 4. adequate budgets. Institutional budgets must be sufficient to support the maintenance and modernization of research facilities, e.g. computer facilities. 5. adequate structures. The government should create the right structures, which provide greater flexibility and more incentives for institutions and staff. Research institutions should be liberated from civil service regulations so that they have greater control over their budgets and hence, a greater measure of self- governance. Let me refer to our Mexican experience concerning the maximum productive use of S&T output. Over the last ten years, Mexico has established a number of so-called "CONACYT" centers. They play an extremely important role in innovation within the Mexican system. Being aware of the present situation in Mexico, we recommended that these centers be situated at or near universities. There, they could carry out their own projects, plus stimulate additional competitive on-campus research. Last but not least, they could be engaged in the training of young, talented students. Another important aspect of these centers is their interdisciplinary research. This is the reason why they can become a focal point for an interface with the private sector, and for adequate relations with the industrial sector. Therefore, Brazilian authorities should study this example as a good instrument for improving S&T output. 60 Annex 5 Please let me mention a second Mexican instrument, the so-called "SNI" system. Through the SNI system, a number of Mexican scientists get better paid. Now in place for over five years, this system is based on assessment and peer review. It has set new standards of excellence for Mexico. We proposed that a system like SNI could play a useful role by honoring the most outstanding researchers' and scientists' efforts. Young scientists deserve special attention. In Mexico, when recent university graduates apply for a special grant, they might first receive a research fellowship to make them independent of the professors at the institutions where they would be doing their research. This formula should also work in Brazil. The Brazilian S&T system seems efficient enough to encourage the productive use of scientific output. But as already mentioned, stability is needed. To me stability is crucial for winning the confidence of the scientific community, young students, and the private sector. Only a sturdy system can attract young students and good professors, and thus maintain an important role in the innovation process in the private sector. On the other hand, the system should be open enough to public demands and expectations. Universities need some outside participation from industry and other private sectors in order to communicate with society. It seems advisable to set up councils made up of representatives from industry or the private sector. Through these councils the university could respond to society's needs, especially at the regional level. Peer review was mentioned often in the previous paper. I do agree that in and of itself, peer review is a good idea. It protects against a closed scientific society. I like to stress that young scholars should participate in the review system because their participation keeps funds and scholarships open to new people and new ideas. But the system also puts a big administrative burden on everybody. Scientists spend an excessive fraction of their time either writing research proposals or evaluating other peoples'. Therefore the S&T system should not entirely be based upon peer review. It should be accompanied by at least some other approaches, and have as its central goal finding good individuals, giving them money, and letting them do what they consider right for a limited time. Or it should emulate the German university system, which supplies the salaries for support staff and a small amount of basic funding for equipment. The principle of confidence combined with the principle of assessment should be the guiding philosophy. The university system should have a sabbatical policy which helps to keep its scientists young by giving them time off from their normal duties so that they can retool themselves scientifically. I propose that sabbatical time also be spent in the private sector in order to establish good relations with industry or the private sector. Sabbaticals should be awarded on the basis of excellent performance in teaching and research. 61 Annex 5 To maximize the productive use of scientific output, young students should be trained in institutions where the main task is teaching and doing research in applied areas. In this context, I would like to mention an institution established in Germany twenty years ago: the so-called "Fachhochschulen". The FHS are providing three- to four-year courses for students. The professors in this institution have a greater teaching load by fifteen to eighteen hours per week. They must hold a PhD, and should have worked in the private sector for about seven years so that they have a blend of training in the academic and private sectors. This institution has become an important factor in the German higher education system, attracting 25% of all students at this level. It should be also mentioned that for Fachhochschule students, spending practical time in the private sector is a degree requirement. In this way all gain practical work experience in a firm or plant. My proposal is that the Brazilian authorities should study this example as a good instrument for improving the productive use of scientific output. Scientific output depends on good education, especially at the undergraduate and graduate levels. Scientists should be broadly trained so that later, they are able to be flexible in exercising their discipline and carrying out research. In this context graduate and undergraduate programs are highly important. Therefore, universities should develop explicit links between their graduate and undergraduate programs. A variety of advanced graduate courses should be offered. In these courses young scientists need to consider in advance the moral, ethical, and long term environmental impact of their work, again in order to rebuild public trust in the benefits of scientific research. Concerning the recruitment of young scientists, there should be a multitude of ways to obtain post-graduate scholarships for study abroad. Science in itself is international. Only by gaining experience in internationally oriented laboratories or research groups early on can young scientists later take part in the international scientific scene. Scholarship recipients should be allowed to choose the institution where they will carry out their post-graduate research. Thereby young scientists can move around to find the best place to use their competence. I should also add that there are several mechanisms for furthering scientists' careers. Special programs for which only young scientists are eligible are very important. In addition to public institutions, private foundations should award money for the exclusive use of young scientists. In my country, professional societies give special awards each year to young scientists. Although these awards carry little or no money, they are invaluable in enhancing young scientists' reputations. Such awards should be publicly announced in order to inform the society. Additionally, existing programs need competent information. 62 Attnex 5 Adequate legislation for patents and intellectual property urgently needs to be established. It is also necessary in order to improve competitiveness with industrialized countries. Experience shows that the university is not really prepared to manage the patenting procedure and study the possibility of adapting inventions to the market. Therefore this should be done by a small non-commercial agency close to the university. In Germany experienct shows that small non-commercial agencies can play an important role in the productive use of scientific output. Concerning university research related to industry, it should be clear that if the money comes from industry, industry has the right to patent the output. But this has to be established within one or two years. After that the university can publish the output. The reason for this is not only to make productive use of the university's research output but to assure its right to publish every work carried out inside that institution. It should be clear that the university is obliged to transfer this knowledge not only to the industry sector but also to society at large. Television is an ideal medium for popularizing the output of research findings and for building public trust in the benefits of scientific research. 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Tel (1) 32105 Snotheartn 1294 Algoma Road Akateemmen Kigaksuppa GseG w lnt Suppkes Agenrcy Merco D F Str Upscara so 26, secta 3 Far (1(432104 Harare Otawa, Onrtrro KIB 3W8 Po Box 23 Org an Solathar Tel (5)606D1ll Bucharest Tel- (4) 662711 Tel: 63-7414333 FIN-00371 Helsmblo 4-5 HaranorFlRoad Fax. (5)606-0386 Tel. (1) 613 9645 SWEDEN Fax (4) 662716 Fax: 613-741-5439 Tel (0) 12141 Duid/I 2 Fax (1) 312 4000 Fr,tzes Customer Sernce Fax: (0)121-4441 Tel: (1) 461-3111 NETHERLANDS Regenngsgalon 12 URL httplp.ooknerwtutnetlr/ekal Fax. (1) 475-2670 DeLrndehboorAnOr-Publrkanes r-10647 Slockhbom PO. Box 202 Tel (8) 690 90 90 74BO AE Kaakobergen Fax (8) 21 47 77 Tel (53) 574-0004 Fax 153) 572-9296 Recent World Bank Discussion Papers (conttinued) No. 288 Africa's Experience with Strictural Adjistmetit: Proceedings of tie Harare Seminar, May 23-24, 1994. Edited by Kapil Kapoor No. 289 Rethinking Research on Land Degradation in, Developing Coutitries. Yvan Biot, Piers Maclcod Blaikie, Cecile Jackson, and Richard Palmer-Jones No. 290 Decentralizing Itqfrastrictnre: Advantages and Limitations. Edited by Antonio Estache No. 291 Transfonning Paymetit Systems: Afeeting the Needs of Emergitig Market Econotnies. Setsuya Sato and David Burras Humphrey No. 292 Regulated Deregulation of the Financial System in Korea. Ismail Dalla and Deena Khatkhate No. 293 Design Issues in RIral Finatice. Orlando J. Sacay and Bikki K. Randhawa No. 294 Finaticitig Health Services Throu4gh User Fees and Insurance: Case Studiesfrom Sub-Saharan Africa. R. Paul Shaw and Martha Ainsworth No. 295 The Participation of Nongovernmental Organizations in Poverty Alleviation: 7T,c Case Study of tlie Hondiras Social Investment Fund Project. Ania Kathryn Vandever Webb, Kyc Woo Lee, and Anna Maria Sant'Anna No. 296 Reforming the Energy Sector in Transition Economies: Selected Experience and Lessons. Dale Gray No. 297 Assessing Sector Institutions: Lessons of Experiencefrom Zambia's Education Sector. Rogerio F. Pinto and Angelous J. Mrope No. 298 Uganda's AIDS Crisis: Its Implications for Developtment. Jill Armstrong No. 299 Towsards a Paymenits System L awfor Developing and Transition Economies. Raj Bhala No. 300 Africa Can Compete! Export Opportunities and Challenges in Garments and Home Prodncts in the European Market. Tyler Biggs, Margaret Miller, Caroline Otto, and Gerald Tyler No. 301 Review and Outlookfor the World Oil Market. Shane S. Streifel No. 302 The Broad Sector Approach to Investment Leendinig: Sector Investment Programs. Peter Harrold and Associates No. 303 Instituitiotial Adjustment and Adjujsting to Institutions. Robert Klitgaard No. 304 Putting Institutional Economics to Work: From Participation to Governance. Robert Picciotto No. 305 Pakistan's Public Agricultural Enterprises: Inefficiencies, Market Distortions, and Proposalsfor Reform. Rashid Faruqee, Ridwan Ali, and YusufChoudhry No. 306 Gramneen Bank: Perfonnance and Stability. Shahidur R. Khandker, Baqui Khalily, and Zahed Khan No. 307 The Unrguay Round and the Developing Econotnies. Edited by Will Martin and L. Alan Winters No. 308 Bank Governance Contracts: Establishing Goals and Accountability itn Bank Restriuctritig. Richard P. Roulier No. 309 Public and Private Secondary Educationt in Developing Countries: A Comparative Study. Emmanuel Jimenez and Marlaine E. Lockheed with contributions by Donald Cox, Eduardo Luna, Vicente Paqueo, M. L. de Vera, and Nongnuch Wattanawaha No. 310 Practical Lessonsfor Africafrom East Asia in Industrial and Trade Policies. Peter Harrold, Malathi Jayawickrama, and Deepak Bhattasali No. 311 The Impact of the Uniguay Round on Africa. Peter Harrold No. 312 Procurement and Disbursetnent Manualfor Projects with Community Participation. Gita Gopal No. 313 Harnessitig Information for Developtment: A Proposalfor a World Bank Group Strategy. Eduardo Talero and Philip Gaudette No. 314 Colombia's Pension Refonn: Fiscal and Macroeconomic Effects. Klaus Schmidt-Hebbel No. 315 Land Quality Indicators. Christian Piefi,Julian Dumanski, Ann Hamblin, and Anthony Young No. 316 Suistainability of a Governnnent Targeted Credit Program: Evidencefrom Bangladesh. Shahidur R. Khandker, Zahed Khan, and Baqui Khalily No. 317 Selected Social Safety Net Programns in the Philippines: Targeting, Cost-Effectiveness, and Optionsfor Refortn. Kalanidhi Subbarao, Akhter U. Ahmed, and Tesfaye Teklu No. 318 Private Secor Development During Transition: The Visegrad Countries. Michael S. Borish and Michel Noil No. 319 Education Achievements and Sdzool Efficiency in RIral Bangladesh. Shahidur R. Khandker No. 320 Houselhold and Intrahousehold Impacts of the Grameen Bank and Similar Targeted Credit Programs in Bangladesh. Mark M. Pitt and Shahidur R. Khandker No. 321 Clearance and Settlement Systemnsfor Securities: Critical Design Choices in Emerging Market Economies. Jeff Stehm. No. 322 Selecting Development Projectsfor the World Bank. Jean Baneth No. 323 Evaluating Public Spending: A Frameworkfor Public Expenditure Reviews. Sanjay Pradhan No. 324 Credit Programs in Bangladesh: Performance and Sustainability. Shahidur R. Khandker and Baqui Khalily THE WORLD BANK A partner in strengthening economics and expanding markets i , Dn to improve the quality of life for people everywhere, especially the poorest Headquarters European Office Tokyo Office 1818 H Strect, N.W. 66, avenue d'lena Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi3-chome Chiyoda-ku, Tokyo 100, Japan Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Facsimile: (202) 477-6391 Facsimile: (1) 40.69.30.66 Telephone: (3) 3214-5001 Telex: MCI 64145 WORLDBANK Telex: 640651 Facsimile: (3) 3214-3657 MCI 248423 WORLDBANK Telex: 26838 Cable Address: INTBAFRAD WASHINGTONDC World Wide Web: http://www.worldbank.org E-mail: books(worldbank.org 9 1 3 ISBN 0-8213-3653-3