The COVID-19 Crisis,National Innovation Systems,and World Development

Introduction

The COVID-19 crisis has been an eye-opener as well as a stress test. It has revealed fundamental problems with ideas and institutions at the foundation of the current world order. While it has confirmed the fundamental importance of science and technology in coping with a major global challenge, it has also shown its limitations and the importance of institutions and organisational capabilities. What matters are broadly defined innovation systems, not just investments in science. While the crisis has demonstrated the need to build stronger national innovation systems (NSI) in the South, it has also shown the need to go beyond national governance and move in the direction of a global innovation system. Without such transformations, there is little hope of coping with challenges such as global inequality and global warming.

At the same time, the COVID-19 crisis has reinforced trends that, in combination, constitute new challenges for innovation system theory and a new global framing for innovation policy. First, at the enterprise level, it accelerated the concentration of intellectual capital in giant corporations, and their rent-harvesting has escalated during the crisis. Second, at the technology level, it gave artificial intelligence a major boost. Third, at the level of the international economy, it resulted in a dramatic fall in the volume of global value chain trade in tangibles. Finally, in terms of geopolitics, the intensified China-US rivalry has undermined transnational collaborations in science and technology.

These trends signal the end of the ‘old mode of globalisation’ and the ‘old international order’, characterized by the outsourcing of manufacturing from the North with the US as the undisputed world economic leader. A new mode of globalisation characterised by an acceleration in trade and foreign direct investments in digital services is emerging. As the US, the former guardian of the rules regulating the world economic order, counters the rise of China with boycotts and embargoes, consensus on the rules regulating the international economy is weakening.

Countries in the South aiming at building stronger national innovation systems need to do so under new circumstances, where artificial intelligence is emerging as a strategic technology, where intellectual monopolies harvest data world-wide, where great powers are engaged in technological rivalry, and where linking up with global value chains for tangibles has become less of an option. One implication is that the issue of scale has become more critical than before; small- and medium-sized countries may need to join forces and integrate economically and politically in order to develop crucial digital capabilities and competitiveness.

Attempts to build a new sustainable world innovation system also have to take into account these new developments. While the COVID-19 crisis has reinforced tendencies in the direction of techno-nationalism, the tech giants have built their own global corporate innovation systems. It is a tremendous task for civic movements in the North and South to create an equitable and ecologically sustainable world under these circumstances.

The Knowledge Divide Is at the Root of Global Inequality

Long before the COVID-19 crisis, it was obvious that the single most important factor determining living conditions was national citizenship; it made a major difference if you were born in the Netherlands or in Sierra Leone. Empirical studies have demonstrated that international differences in productivity primarily reflect the strength of national innovation systems (Fagerberg & Srholec, 2008). The only major exception is a handful of oil-rich countries, where high income per capita reflects the harvesting of natural resources. In a future characterised by decarbonisation, we may see this exceptional source of income dwindle.

Therefore, it is, of course, a crucial challenge for developing countries to find ways to build stronger national innovation systems. The Washington consensus, standard economics, and the guardians of the old world order gave clear recommendations for governments. Openness to trade and foreign direct investments combined with a minimalist government securing law and order with a focus on property rights would lead to a gradual upgrading of production. Specialisation in labor-intensive products would gradually make low-skilled workers a more scarce factor of production, and in the long run, there would be convergence between rich and poor countries. When it turned out that the recipe did not work as promised, other factors such as corrupt governments and soft states were pointed out.

The very first contribution making use of the concept of a national innovation system, a working paper that Freeman wrote for an OECD group on science, technology, and competitiveness four decades ago (Freeman, 1982), offers an alternative perspective. Here, Freeman discusses how economists have used technology to explain international trade. Mainstream trade theory focuses on ‘comparative advantage’ and international specialisation. Technology was reflected in differences in production techniques and, more specifically, in the quantity of capital’ per worker. Countries with less capital per worker would specialise in products produced by labor-intensive processes.

When Leontief (1953) and others demonstrated that the actual specialisation patterns did not fit this prediction, scholars such as Posner (1961), Hufbauer (1966) and Vernon (1966) presented alternative models where international specialisation was explained by technology gaps and product life cycles. But the focus remained on comparative advantage and specialisation, not on the competitiveness of the national economy as a whole and what Freeman referred to as ‘absolute advantage’.

To explain this concept, Freeman refers to historical analysis and to Friedrich List’s concept ‘national system of political economy’. Among economists, list is known mainly for his protectionist ideas and for arguing in favor of protecting infant industries’. Freeman demonstrates that at the core of List’s argument is the idea that knowledge plays a strategic role for economic development and the awareness that catching up countries must combine efforts to build a stronger national knowledge base with drawing upon the global pool of knowledge. A characteristic quote from the list given by Freeman is:

The present state of the nations is the result of the accumulation of all discoveries, inventions, improvements, perfections and exertions of all generations which have lived before us: they form the intellectual capital of the present human race, and every separate nation is productive only in the proportion in which it has known how to appropriate those attainments of former generations and to increase them by its own acquirements. (List 1841, p. 113)

Freeman argued that the classical instruments to overcome weak competitiveness, lowering the national wage level and devaluations, are counterproductive and aggravate inequality and global stagnation; they are negative sum games. An alternative, positive sum game, strategy was to strengthen the knowledge base of the national economy and to build a stronger and more coherent innovation system. ¹ While this analysis applied both to the Global North and to the Global South, his main concern was, and has always been, how low- and middle-income countries can overcome poverty through building stronger national innovation systems.

The COVID-19 crisis has put new emphasis on the importance of building stronger national innovation systems in the South. The unwillingness of the richest countries to share vaccines with the developing countries and their blocking of their access to the intellectual property of Big Pharma have made it clear that, when it comes to countering the impact of global crises, it is not a realistic option to expect generosity from the rich countries. Even in a situation where it is self-defeating in the long run, the rich countries give first priority to protecting their own citizens and the intellectual rents of their own big pharma firms (Greed-driven pandemic still killing millions, ksjomo.org).

Building Stronger National Innovation Systems in Developing Countries: On the Role of Openness

The single most important example of a country that has succeeded in significantly reducing poverty and building a stronger national innovation system is China. The example of China is interesting since it gives insight into the role of openness in a strategy to build a stronger national innovation system.

Deng Xiaoping’s Open Door Policy of 1979 had the prominent aim of bringing modern technology into China. With limited access to foreign currency and limited export capacity, there was little financial room for direct technology imports. Increasing inward FDI was seen as attractive since it could serve both as an import substitution and as a way to transfer technology. Much of the increase took the form of joint ventures between multinational enterprises (MNEs) and state-owned enterprises granting the former access to the huge Chinese markets (Feng, 2019).

The strategy did not result in technological capabilities for Chinese firms, however. By 2005, most of China’s high technology exports came from foreign-owned enterprises importing components and using labor-intensive processes to assemble final products. The frequency of triadic patents owned by Chinese remained extremely low, at 433 as compared to around 15.000 in the US, Europe, and Japan, respectively. The new policy aiming at indigenous innovation that was implemented with the 2006 medium-term plan may be seen as a reaction to the weaknesses reflected in such indicators (Gu & Lundvall, 2006).

The revision of the open door policy was inspired by research on corporate governance and technology management in China. It was focused on automobiles and telecommunications and demonstrated that in these sectors, trading markets for technology (TMFT) had not led to the formation of indigenous technology capacity. According to Feng (2019), the lack of success reflected the combination of the unwillingness of foreign partners to share technology and the lack of incentives for SOE management to build in-house technological capabilities.

This stood in contrast to the observation that some domestically owned (predominantly private) companies increasingly built their competitiveness on technological strength. Prominent examples were Huawei and ZTE in telecom and Chery and Geely in automobiles. This was the background for the strategic shift from imitation to indigenous innovation that was implemented with the 2006–2020 Plan for the Development of Science and Technology in the Medium and Long Term, where the term ‘indigenous innovation’ became the keyword.

The example of China demonstrates that openness can be managed differently and that enterprise strategies are important for their impact on technological capabilities. Importing technologies as a closed package or as turn-key has little impact as compared to, when firms focus on building their own design capabilities while importing components from more advanced economies.

NSI as a Theoretical Concept That Helps Understand the Present as History

The NSI concept brings together empirically based insights with theoretical reflection on the innovation process. It makes distinctions between different kinds of knowledge and different types of learning processes (Jensen et al., 2007). At a lower level of abstraction, it characterises different technologies in terms of what kind of knowledge is at their core. Freeman (Freeman 1995; Freeman 2002) counterposes technologies and organisations/institutions at the system level and uses the term congruence to refer to the degree of match and mismatch between the organisational/institutional level and the characteristics of emerging new technologies.

Some of the most important theoretical elements that constitute the NSI-concept emanate from empirical work and case studies combining qualitative and quantitative analysis. The Sappho-project at SPRU was important in documenting that the innovation process is based on interaction within networks (Rothwell et al., 1974), while the Disko-project in Aalborg (Lundvall, 1985) was useful in specifying how the interplay between technology characteristics and user-producer constellations shapes the innovation process. Econometric studies at the enterprise level confirmed the relevance of the distinction between experience-based and science-based learning (Jensen et al., 2007).

While the NSI concept is a theoretical concept based on empirical studies as well as hypotheses on the character of knowledge, it cannot be understood without reference to history. On the one hand, it takes inspiration from insights from historical studies. On the other hand, it is helpful for understanding and interpreting history. Freeman has used the NSI concept as an important element in his interpretations of economic history. At least since 1980 and until he passed away, Freeman pursued a research agenda with a double aim: to develop an alternative to neoclassical economic growth theory and to explain the evolution of the world order. Why do some countries catch up while others fall behind? What is the basis of world hegemony, and how do you explain that a latecomer country can forge ahead and become a world leader?

Freeman (2002) linked technological revolutions to shifts in global leadership. He explained that, in the 18th century, Britain’s NIS had developed characteristics (and systemic coherence), contributing to explaining why it became the homestead for the industrial revolution based upon steam power and textiles. As new technological systems dominated by electricity and chemistry emerged, Germany and the United States (US) forged ahead and left Great Britain behind. Freeman’s (1987) analysis of Japan’s emergence as a potential technological leader in an era of information technology illustrated this general hypothesis.

This kind of history-friendly theorising has great current relevance when it comes to understand the evolving conflict between the US and China. While the US remains far ahead of China in economic and military terms, China has been successful in technologically catching up. Since 2006, China has prioritised building a strong national innovation system with a focus on reducing its technological dependence. Chinese leaders have given special attention to artificial intelligence and related technologies. When they declared China’s intention to overtake the West by 2030 in these areas, the US responded by engaging in a technology war with China. The economic rise of Japan on the basis of microelectronics (Freeman, 1987) that took place forty years ago triggered a similar, if less aggressive, response from the US (Ostry & Nelson, 1995).

Challenges for the NSI-concept in the COVID-19 Crisis: Policy, Theory, History, and Ethics

As old trends disappear and new one emerge, there is a need to revisit the NSI concept in terms of policy, theory, and history. This last section takes inspiration from Rikap and Lundvall (2021) and lists some critical new phenomena with implications for the concept.

As mentioned in the introduction, the COVID-19 crisis has reinforced tendencies that emerged before the crisis. Inequality between economies has always reflected a knowledge divide. The COVID-19 crisis has sharpened the consequences since access to specific technologies such as hydrogen tubes and vaccines has become an issue of life and death.

At the corporate level, the COVID-19 crisis has revealed the crucial role of intellectual monopolies. ‘Big pharma’ has flourished, operating globally and using lobbying and market power to impose their interests on states. In parallel, the growth of tech giants such as Google and Facebook has accelerated. In both cases, one can discern new patterns where the lead company builds a transnational corporate innovation system that challenges national innovation systems.

The extreme concentration of intellectual capital raises important policy issues in relation to intellectual property rights, antitrust, and national technological sovereignty. While most studies of national innovation systems have focused on how to promote innovation, more attention should be given, how intellectual monopolies concentrate the power to innovate and how they use this power both to harvest intellectual rents in host countries and to shape critical technologies.

The majority of tech giants are based in the US while operating in many other countries. In critical situations, as in the COVID-19 crisis and the US conflict with China, it becomes clear that even the largest of those ‘transnational’ corporations have a specific citizenship and are under the jurisdiction of a specific state. This is not to say that they always act as loyal and subservient servants of the state. Under normal circumstances, they may be powerful enough to circumvent dictates from their own state, and they are constantly engaged in shaping its politics through lobbying. While China has recently made major efforts to rein in its intellectual monopolies, in the US and EU, debates on what to do about them are still going on.

In this context, innovation studies need to look deeper into the dimension of power, including the power to shape society in critical dimensions (health, climate change, education, etc.) through the power to define technological trajectories. While innovation scholars, inspired by Schumpeter, have been aware that big firms may play a key role in promoting innovation (Schumpeter Mark II), the scale and scope of current intellectual monopolies, and the fact that they monopolise technologies aiming at substituting for human intelligence, call for a rethinking of innovation theory and policy.

With artificial intelligence’s co-evolution with a series of supporting organisational innovations and related technological advances, there are good reasons to expect this new trend to transform the innovation process itself (Cockburn et al., 2018). For instance, to some degree, big-scale data gathering will substitute for interpersonal interaction in connection with innovation processes. This raises issues about the need to revise the central assumptions behind the NSI concept. While the building of trust was crucial for establishing lasting relationships between user and producer, increasingly, trustworthiness is established through big data reflecting ‘likes’ and gradings by users. Understanding to what degree tacit knowledge and direct interaction remain critical for innovation in a world where AI is more widely spread is a major task for innovation research.

Global Governance and Global Challenges

The emerging new world order, with its technology war between great powers and global intellectual monopolies, undermines attempts to tackle the COVID-19 crisis as well as the climate crisis. Seen from this perspective, it is obvious that there is a need to go beyond national innovation systems and reflect on how a world innovation system could be fostered.

This implies that it is not sufficient to strengthen the components of such a world systems, the NSI’s; equally important is to transform the relationships between them. To make the world’s innovation system sustainable, it requires a fundamental change in the direction of transnational efforts to develop new technologies and share knowledge across national borders. For instance, in the context of climate change and the COVID-19 crisis, sharing knowledge on green technologies and vaccine technologies with less developed countries would have a more lasting impact both on countering the respective crises and on their capabilities than financial compensation. This would require a radically new perspective on intellectual property at the national as well as corporate levels.

Under the old form of globalisation, manufacturing activities were moved from high-income countries to the south and especially to China, while China’s high growth rates resulted in increased demand for natural resource-based products from Latin America and Africa. The high-income countries and the tech giants exploited their technological lead, harvesting intellectual rents from the rest of the world. While China and some other Asian countries with a strong focus on building a stronger national innovation system succeeded in reducing their technological dependence on the North, this was not true for most countries in Latin America and Africa.

The new form of globalisation driven by big tech companies located primarily in the US and secondarily in China gives rise to digital colonialism. At the core of tech giants operations are secret algorithms and intellectual property. Their dominance is reinforced by ownership of world-wide tangible infrastructure in the form of cables, supercomputers, and gigantic data centers.

Individually, developing countries are too small and weak to cope with tech giants, and one of the most important characteristics of artificial intelligence is its enormous economies of scale and scope. In this light, there are new reasons for developing countries in Latin America and Africa to join forces and move toward economic and political integration. A renewal of a ‘third world movement’ based on regional collaborations could be one step toward a world innovation system.

What can we learn from COVID-19 when it comes to other major global challenges such as global inequality and global warming? These crises are quite different in terms of time span and global outreach. The consequences of postponing climate action are less drastic in the short term. So far, for the rich countries with the most power to change the world order, the main response to global income inequality has been to build walls to keep the poor and low-skilled out while selectively receiving skilled workers from the South. There is no Paris agreement to fight global inequality.

Nonetheless, there are lessons to be learned from the COVID-19 crisis. One of the most important lessons for developing countries, as indicated above, is the need to combine building stronger national innovation systems with joining forces to change the world order with the aim of constructing a world innovation system. The COVID-19 crisis and the recent Cop26 have shown that the transformation will not take place if we wait for initiatives from above. A major hope is that popular movements driven primarily by young people can initiate the necessary ‘globalisation from below’. I see Globelics, where young scholars from all parts of the world develop and share knowledge, as a small contribution to ‘globalization from below’.

Conclusion

We can summarise our argument as follows:

The COVID-19 crisis has demonstrated the importance of science and technology as well as the consequences of the uneven development of national innovation systems and the current global intellectual property regime. While the owners of big pharma were enriched, citizens in countries with weak systems were victimised. Developing countries need to combine building stronger national innovation systems with efforts to change the global IPR framework.

These changes raise many issues for national innovation system theory and policy, including a renewed focus on scale since access to large volumes of data is a key to the development of artificial intelligence. For this reason and because of the urgency of global challenges, there is a need to go beyond national innovation systems and reflect on how a world innovation system could be fostered.