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Discussion Paper Series #2004-12 A National System of Innovation in the Making: An Analysis of the Role of Government with Respect to Promoting Domestic Innovations in the Manufacturing Sector of Iran Sunil Mani June 2004 United Nations University, Institute for New Technologies, Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands Tel: (31) (43) 350 6300, Fax: (31) (43) 350 6399, e-mail: [email protected], URL: http://www.intech.unu.edu A NATIONAL SYSTEM OF INNOVATION IN THE MAKING: AN ANALYSIS OF THE ROLE OF GOVERNMENT WITH RESPECT TO PROMOTING DOMESTIC INNOVATIONS IN THE MANUFACTURING SECTOR OF IRAN# Sunil Mani Abstract Iran's manufacturing sector has been growing very rapidly during the 1990s. Consequent to the structural reforms initiated, almost entirely due to domestic compulsions, the sector is undergoing a wave of privatisation and is also more open to foreign investments. The change over to a Republic and consequent changes in the educational system meant that the country has ended up with a large pool of both scientists and engineers. Capitalising on this important human resource, the policy makers have initiated serious efforts towards crafting a national system of innovation for the country, especially since 2001. This paper undertakes a detailed review of the efforts that are being made to create this system of innovation, and identifies the gaps in terms of policy instruments and institutions that are still required. The study concludes with a number of policy conclusions, the implementation of which will support the efforts that are being mounted by various agencies of the government. Keywords: innovation system, human resource development, Iran JEL Codes: O31, O38 UNU-INTECH Discussion Papers ISSN 1564-8370 Copyright © 2004 United Nations University, Institute for New Technologies, UNU-INTECH UNU-INTECH discussion papers intend to disseminate preliminary results of the research carried out at the institute to attract comments # The research underlying this study has been sponsored by the Department of High Tech Industries, Ministry of Industry and Mines, Government of Iran. I am grateful to several officials of the department and in particular to Mr. Seyed Mojtaba Hashemi, Director of the Department, and Mr. Mohammad Halimi. Mr. Halimi was a great source of support and helped me in subjecting the successive drafts to a detailed empirical scrutiny. Research assistance provided by Mr. Borna Barkhordar and comments made by an anonymous referee are thankfully acknowledged. However none of them are to be implicated for any of the errors or shortcomings that may still remain in the paper: the views expressed in the study are those of the author and do not necessarily reflect the views of the United Nations. TABLE OF CONTENTS 1.0 INTRODUCTION 7 2.0 PERFORMANCE AND STRUCTURE OF THE MANUFACTURING SECTOR 11 2.1 GROWTH PERFORMANCE OF THE MANUFACTURING SECTOR 11 2.2 STRUCTURE OF THE MANUFACTURING SECTOR 13 2.3 EXTENT OF FOREIGN PARTICIPATION 16 3.0 TOWARDS DESIGNING AN INNOVATION SYSTEM FOR IRAN’S MANUFACTURING SECTOR 19 3.1 POLICY OUTCOMES 22 CASE OF CDS AND DVDS 29 CASE OF TELECOMMUNICA TIONS EQUIPMENT INDUSTRY 30 3.2 CRITICAL FACTORS AFFECTING THE INNOVATION SYSTEM 35 4.0 POLICY CONCLUSIONS 39 4.1 ADMINISTRATIVE APPARATUS 39 4.2 PROMOTION OF LOCAL TECHNOLOGY DEVELOPMENT 40 4.3 HUMAN RESOURCE DEVELOPMENT FOR SCIENCE AND TECHNOLOGY 40 ANNEXURE 43 REFERENCES 45 THE UNU-INTECH DISCUSSION PAPER SERIES 47 1.0 INTRODUCTION The system of innovation perspective is a convenient framework to understand the process of innovations occurring in an economy and especially within the manufacturing sector. In this framework, the economy is decomposed into various components such as the government, independent research institutes, firms and the higher education system, which supplies human capital to firms research institutes and the government. The success of an innovation system depends very much on how closely knit the relationship between the various components is. Needless to add, innovation policy instruments and institutions play a very important role in cementing the relationship between various components. An application of this framework to the situation in a specific country is very useful in identifying the systemic failures that hamper the generation of innovations. Public policy can then be applied to correct for such systemic failures. An elucidation of this framework is discussed in Mani (2002). I will apply this framework to understand the efforts that are being made by the government to craft a system of innovation for Iran specifically focusing on the manufacturing sector. In order to place our discussion in a proper perspective. The conceptual framework underlying the study is the national systems of innovation framework (NSI) introduced into the literature by Freeman (1987) and subsequently extended and reinterpreted by Lundvall (1992) and Nelson (1993). Two different approaches to the study of the NSI are discernible (Table 1). 7 Table 1 Approaches to the study of the national systems of innovation Approaches Scope Narrow definition of the NSI, e.g., Nelson The main emphasis of this framework is to (1993) analyse the impact of national technology policies on firms' innovative behaviour. Innovative behaviour or activity is measured in terms of formal activities related to the R&D system and the science base. So the narrow definition of NSI includes organisations and institutions involved in searching and exploring, such as R&D departments, technological institutes and universities. 2. Broad definition of the NSI, e.g., Lundvall In this version, the emphasis is on learning, (1992) rather than the creation of knowledge itself. The concept of learning implies that the competitiveness of individual firms and entire systems of innovation reflects the ability to learn. The new trends in production and in the labour market, which are increasingly knowledge based, means that knowledge building and learning are becoming more and more crucial for economic growth and competitiveness. It is also argued that learning and especially learning new skills and competencies is essentially a collective and interactive process which cannot flourish in a pure market economy. Hence the emphasis in this approach is more on the efficacy of networks of firms and how they undertake innovative activity than on formal activities related to the R&D system and the science base Sources: Mytelka and Smith (2001); Tomlinson (2001) It must of course be stressed that Nelson's own definition of innovation is much broader than merely equating it with input (R&D expenditure) or output (patents). He defined innovation as “…to encompass the processes by which firms master and get into practice product designs and manufacturing processes that are new to them, if not to the universe or even to the nation” (Nelson, 1993, p.4). But all the fifteen country studies in his comparative analysis are defined in a formal sense. In our study, I employ a combination of the two approaches, but place an emphasis on tracing the impact of national technology policies on the innovative activity of firms, measured in the 8 formal sense of the term. However, I do take into account the interaction of firms with various elements in the system, for instance with the higher education sector or human resources development. Thus although my framework has more pronounced features of the so- called narrow approach of Nelson (1993), at the same time it combines elements of the Lundvall (1992) approach. Systematic empirical studies on the science and technology aspects of the country are few and far between1. A notable exception is Moeini and Zwadie (1998). The authors study based on a detailed survey of 95 firms in three industries namely automotive vehicles, chemicals/petrochemicals and electrical and electronic industries reached the conclusion that technological learning was limited to the acquisition of mechanical and operative skills, while industrial R&D that would lead to product and process innovation was either absent or ineffective. Over-dependence on oil as a source of income; the absence of a competitive environment in the domestic market; the restrictive conditions of the terms of technology transfer; and the incoherence in S&T and R&D policy and planning were identified as the reasons for the state of affairs. Against the context of such findings, it will be instructive to analyse the efforts that are now being mounted to correct for some of these distortions in the country's innovation system. The paper is organised into three sections. In section two, I survey three dimensions of the manufacturing sector. This is followed by a third section that maps out the present state of what is eventually to become an innovation system of sorts, discusses the performance of the system and identifies two critical factors that have a bearing on the performance of the system. Section four concludes with the specific polic y implications that emerge from the study. 1 The UNCTAD is in the process (c2003) of conducting a Science and Technology and Innovation Policy review of the country. 9 2.0 PERFORMANCE AND STRUCTURE OF THE MANUFACTURING SECTOR Three dimensions of the manufacturing sector are considered; (i) growth performance; (ii) structural changes; and (iii) the extent of foreign participation. 2.1 Growth performance of the manufacturing sector The manufacturing sector accounted for, on an average, about 16 per cent of GDP during the 1990s. I begin by mapping out the structure of the country's manufacturing sector (Table 2). This is done by computing the relative share of value added in the county's total manufacturing value added. As expected given the importance of oil based manufacturing activities, chemicals and chemical products account for the largest share. It is interesting to note that the transport equipment industry accounts also for a significant share and is one of the industries in which the process of import substitution has been very religiously subscribed to.