Libro Blanco Vol I en Ingles

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1INDEX PRESENTATION : 3 EXECUTIVE SUMMARY : 8 SECTION 1 : 21 CHAPTER 1 KNOWLEDGE AND INNOVATION FOR GROWTH : 21 CHAPTER 2 THE NEED FOR A PUBLIC-PRIVATE PARTNERSHIP : 58 CHAPTER 3 THE INSTITUTIONAL FRAMEWORK OF THE NATIONAL INNOVATION SYSTEM : 95 CHAPTER 4 ABOUT THE CONCEPTUAL BASES OF THE STRATEGY : 115 SECTION 2 FIRST STEPS OF THE STRATEGY : 127 BIBLIOGRAPHY : 1587

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1EXECUTIVE SUMMARYIn the last two decades, Chile has done things well. In fact, it succeeded in nearly doubling its per capita incomebetween 1990 and 2005. An achievement which makes us look the future with optimism. However, becoming a developedcountry requires a much more sustained effort forcing us to be prepared for an ever more demanding internationalcompetitive scenario.Two clear trends underlie this future. Firstly, the unstoppable advance of globalisation, entailing new markets forour exports or new consumer goods, but also the emergence of new competitors in markets we thought already conquered.Secondly, the establishment of a new economic order where knowledge and innovation will be the driving forces ofcompetitiveness and long-run development.This knowledge-based new economy requires a more skilled labour force, the development of permanent learningskills, the availability of internationally competitive research centres with a nationwide impact, and the formation ofinter-institutional networks in order to get the highest social returns from the interrelation between education,knowledge, science and technology.This complex and challenging scenario obliges us to review our development strategy. Starting from a critical viewabout the conditions from we undertake this challenge up to the analysis of the global trends and opportunities that wewill face in the future. In that review, the experience of nations that emerged from a relatively similar position to Chile isparticularly relevant.This Council firmly believes that Chile is facing an enormous opportunity to reach the stage of development. Toachieve it, a virtuous combination between the advantages of the natural resource export model, in which Chile hasalready made great progress, together with the capabilities created by an increasing effort in the generation of humancapital and knowledge is needed. The latter, when applied to the production process, permits a leap forward to sectorsbased on acquired competitive advantages.8

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Production diversification: going beyondVarious studies, among others by the World Bank, provide solid evidence that the creation of dynamic sectors basedon natural resources is not incompatible with the formation of new comparative advantages in other industries. Indeed, itis desirable that this happen, since according to studies, production diversification favours economic growth.The idea is to take a strategic look at the production development of the country and by understating that forprogressing towards development based on the static advantages of natural resources, a building process of new dynamicadvantages is needed. This by injecting knowledge into our low value processed products, and also, by strengthening theexisting clusters linked mainly to natural resources. Then progressively shifting to sectors increasingly based on anintensive use of knowledge.The support for strengthening the production potential of Chilean companies proposed in this document should bereflected by an improvement in the production diversification indexes of Chile. Currently, the first 25 main exportproducts represent near 76% of total Chilean exports. This level is below 50% in the countries with twice the per capitaincome level of Chile.MARKET FAILURES AND THE ROLE OF THE STATEMaking real progress in the goals set out requires the greatest clarification possible of what duties correspond to theState and what corresponds to the private sector. The confusion of roles normally leads to overlaps, inhibitions, thewasting of resources and, ultimately, to a loss of credibility in the State and in the private sector.Our National Innovation System (NIS) has some serious organizational flaws that negatively affect its costeffectiveness.However, and fortunately, very positive experiences are found in some areas. As such, organizationalimprovements, the right incentive structure and defining the separation of roles between the private and public sectors,are essential components, as well as the appropriate supply of resources, in a healthy NIS.The State must restrict itself to a subsidiary role, which –in any case– is important, considering the multiplicity anddepth of the market and system failures that affect the innovation process. Among these, appropriability problems,information failures, the intangibility of assets, and network failures stand out. As an operational guarantee, avoidingState intervention in areas where markets work, but also the supply of public resources for innovation should strive,wherever possible, to catalyze greater efforts from the private sector.12

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1C.2 Promote the link of companies with scientific and technological activity targeted at business innovation,through technological consortia, reliable intermediaries (“trusted brokers”) and other instruments, and through thecreation of accreditation mechanisms and others that allow the quality of the research centres to be objectivelyevaluated by the private sector.C.3 Perfect intellectual property rights and develop mechanisms to protect the property rights of innovationsarising from joint activities.C.4 Perfect financial markets to open up new lines of funding for innovative projects and the development of theinputs of innovation (science and education) and to facilitate trade and access to markets.C.5 Deeper development of technological dissemination models based on an integral support for innovation insmaller companies, to facilitate access to specialised technical backing for the innovation development of companies,with accredited consulting systems, and that incorporate the costs of learning or soft innovation associated to theadoption of technology.D. The CultureObjective:Raise awareness and generate a proactive attitude in society towards innovation, recognising it, valuing it andincorporating it as a key factor for the development of the country and, ultimately, for the well-being of all Chileans.Lines of action:D.1 Taking advantage of the positive public opinion, promote the idea of innovation for competitiveness unifyingthe components of the concept and producing the basis of a shared language.D.2 Promoting and reinforcing innovative behaviour in various fields, emphasising the will to overcome the fear offailure and understanding obstacles as opportunities; and generating the urgent and unavoidable certainty thatdevelopment depends on the capacity for innovation.17

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1E. Institutional frameworkObjective:Ensuring the governability of the system and creating an institutional framework to guide, coordinate andsynchronise pro-innovation public policies, permitting the formation of the National Innovation Strategy forCompetitiveness.Lines of action:E.1 Establishment by law of the National Innovation Council for Competitiveness, which is both multi-sectoral andautonomous, thus being independent from pressures on the government and the other players to obtain short-termresults.E.2 Creating capabilities –in the Council and the Government, within the framework of the roles of each, asexpressed in chapter 3– for evaluating and designing the pro-innovation policies and programs, as well as for generatingrelevant information for keeping the strategy up-to-date and being permanently accountable to the citizens.E.3 Strengthening the public institutional framework for innovation based on two main pillars, Corfo and Conicyt,clearly defining the roles based on the market flaws that they seek to correct and overcoming the coordination problemscurrently found.E.4 Creating a framework for managing innovation policies in the Government that protects the strategic alignmentof the various institutions that participate in the public innovation system and that concentrates and makes the politicalresponsibility transparent.E.5 Defining the institutional framework for innovation at all levels of the public system, ensuring thegovernability of the system, and optimizing the management coherent with the principles of the strategy. This impliesreviewing the role of the various components of the system, starting with the agencies, and the public funds andprograms, and including public technological institutes.18

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1G.3 Develop an international-standard platform of basic competences in the under 18 population, prioritising thedevelopment of creativity and entrepreneurship through the use of active learning methods and experimentation in alllearning areas.G.4 Study on the skilled labour immigration policies and the integration of this labour complementing the Chileanlabour force and ensuring its coherence with Chilean growth.G.5 Identify and foster steps that improve the competitive position of Chile in international markets.This Council understands that its task of proposing a national innovation strategy will only be fully achieved whenthe detailed design of the lines of action proposed for adapting the institutional framework and governability systems arecompleted. These systems should take into account the whole spectrum of the public innovation support system, andidentify on both a sectoral (clusters) and a regional level the most significant shortfalls still remaining for the fulldevelopment of its potential as well as the main specific policies required to achieve it.20

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1economy. [see Figure 2]As a starting point on this journey –which is without a doubt more demanding– we propose combining theadvantages of the natural resource export model with the abilities created by a growing endeavour in thecreation of human capital and knowledge, which, applied to the transformation, extension and linkage ofproduction processes, allows taking the leap to sectors based on competitive acquired advantages, as well asthe development of service businesses or the externalization (outsourcing) of highly specialized functions.The Council therefore reaffirms its certainty that the synergy between high level human capital,technological innovation and natural resources will permit Chile to successfully face the tough internationalcompetition, to continue growing in the global market and to each day create more and better jobs for a moreskilled labour force. However, before making any other analysis, it is essential to present the foundations thathave led to the conclusion that this path to development is the right one for Chile to focus on over the nextyears.Historically Latin America and Chilehave turned their backs on naturalresource intensive industries, in thebelief that they do not have a strongdynamism in terms of Total FactorProductivity, which is that part ofgrowth that is not accounted for by theaccumulation of production factors(capital and work) but instead byelements such as the quality of humancapital, technology and knowledge.Two conflicting visionsIdentifying the best formula for growth has surely been the most recurrent discussion in Chile and aroundthe world, particularly in the last 60 years. In this respect, two sharply differing visions have confronted eachother: one, that holds that countries abundant in natural resources must base their growth on the rentsgenerated through this advantage; and another, that claims that betting on development based on this system isa sure path to stagnation, because manufactured products have a greater possibility than natural resourceintensiveindustries of adding value to products through the addition of knowledge and technology. The latestevidence indicates that an increasingly significant part of the growth of countries cannot be explained by thesimple accumulation of production factors (capital and work), establishing the idea that this difference –termedTotal Factor Productivity or TFP, in which human capital, technology and knowledge are fundamental – tends tobe greater when the productive range of a country is more intensive in industrial activity than in the productionof commodities.Thus, the presumption of a greater potential for technical change in manufacturing activities linked tothe great volatility of commodity prices between the First and Second World Wars, led many natural resourceabundant countries, especially in Latin America, to commence a period in which protectionist policies – basicallythrough import tariffs – were used to foster the development of local manufacturing industry that initially arose24

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The advocates of import substitution policies claimed that the prices of manufactured products wouldcontinue growing with regard to commodities and that therefore countries whose economies were based onnatural resources would be condemned to underdevelopment. They claimed that the great advantage thatmanufacturing industries had over natural resource-based industries was that, since they could absorb technicalchanges, they could create, at least for a while, a monopoly over this technical innovation that would provide arent for the producer of the manufactured product. This rent, in turn, would allow for investment in newchanges that would produce new rents when the initial monopoly was diluted as a result of imitation by thecompetition. Thus, the cycle could persist over time, deteriorating the position of commodity-based industriesever more.However, the latest empirical studies contradict that argument, busting the oft-cited “natural resourcecurse” 5 . The evidence rather indicates that neither manufactured products nor commodities have any specialsource of dynamic earnings favouring only one sector 6 , even though manufactured products have the initialadvantage of being able to add value to their products.Moreover, economic research today shows that the prices of commodities do not deterioratesystematically with respect to manufactured products 7 and this has led, for example, the World Bank to state in– From natural resources to the Knowledge Economy: Trade and Job Quality - that natural resources andknowledge are a perfectly possible growth formula, thus contradicting the more pessimistic viewpoints that5 The term was coined by Richard Auty in 1993 to describe why countries rich in natural resources are not capable of using that wealthto make their economies grow and why these countries have a lower economic growth than others that are not abundant in naturalresources. According to Joseph Ramos (1999), even though the data seems to support this thesis, it is more an empirical relationshipthan an analytical one. In effect, the good or bad performance of countries rich in natural resources is not inevitable, but is rather aresult of how good its development policy is and not on the mere fact of having natural resources.6 Bosworth, Barry and Susan M. Collins. The empirics of growth: An update. Brooking papers on Economic Activity, Nº2, 2003. Theevidence provided does not show that the component of total factor productivity stands out more in developed manufacturingcountries versus natural resource intensive ones, even though this, in any case, does not allow concluding that there is no difference intechnological absorption capacity. The result could be due to a particular concern for innovation in developed countries that areintensive in natural resources.7 Lederman, Daniel and William F. Maloney. Neither curse nor destiny: Natural resources and development. Stanford University Press.October 2006. This is because, after a while, innovations in manufactured goods are diffused and become public goods that others candiscover and use, which ends up depressing prices. What happens is that the prices of commodities are much more cyclical, and canimply great blows for countries dependent on natural resources if they do not have macroeconomic management systems to help themface those market variations.26Empirical studies indicate that there isno special source of dynamic earningsfavouring a particular sector, incommodities or manufacturing, and thattechnical change depends more on howit is produced -that is, if knowledge isadded or not- than on what is producedIn fact, the key to productivity lies, moreso than in the production structure, in theparticular concern for innovation, as hasbeen demonstrated by natural resourceintensivedeveloped countries.Furthermore, a country strong in innovation–with more demanding consumers, moredynamic companies, more skilled workersand a supportive government – is betterprepared to face the uncertainties producedby the present competitive environment.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1speak of the "curse" of natural resources, and also concluding that the creation of dynamic sectors based onnatural resources is not incompatible with the development of new advantages in mobile and high technologyindustries 8 . [see Figure 3]Thus, all the data indicates that the important factor is not what is produced, but rather how it isproduced, and that the key of the how lies in knowledge. The lesson taught to us by small natural resource-richcountries that have attained consistent growth is that innovation is necessary in order to follow this path and tocreate and take productive advantage of knowledge. This means learning to derive rents through innovation,and not through a monopoly over natural resources or the capture of protectionist public policies.International experience indicates that a country with greater strengths in the area of innovation –withmore demanding consumers, more dynamic companies, more skilled workers and a supportive government- isbetter prepared to face the uncertainties generated by the current global competitive environment. [See Figure4] In that sense, it is important to recognize that Chile is not starting from zero. On the contrary, in recentdecades there have been numerous successful experiences in the business and scientific research fields,examples that this strategy seeks to strengthen and disseminate. Additionally, the country has developed anawareness, even though only partially as yet, of the importance of innovation and has set aside greater publicresources to foster innovation activity. Lastly, but no less important, the demographic profile that Chile isdeveloping, with a decreasing proportion of young people, opens up the opportunity of multiplying the resourcesin order to produce a great leap forward in human capital, which is an indispensable condition for the innovativespirit to flourish, as will be seen further ahead.The key lies in knowledgeFor a country like Chile, the gamble seems clear: if the evidence shows that the most important factor isthe creation and application of knowledge –more so than the initial advantages of the type of industry in whichit is implemented– it is logical to take advantage of being richly endowed in natural resources. This is even moremarked if it is recognized that –even though manufacturing production could be a more fertile ground forinnovation and the subsequent rents would not be diluted so rapidly–, the problem is that Chile lackscompetitive advantages in the more classic manufacturing sector. Our small size and physical distance from themain consumer markets have proven to be mighty obstacles to the development of competitiveness in that8 De Ferranti, David; Guillermo E. Perry, Daniel Lederman and William F. Maloney. From natural resources to the Knowledge Economy:Commerce and Quality of Employment. World Bank, 2001.BOX 4THE EFFECTS OF INNOVATIONFor consumers, innovation means betterquality products and more convenient prices,more efficient services and, at the end of theday, a better quality of life.For companies, innovation is a promise ofincreased returns, either because it producesmore efficient production techniques than thoseof its competition or because it allowsdifferentiated goods and services to beproduced depending on the needs orrequirements of its clients. All of that translatesinto the possibility of sustained growth,generating more and better employment,increasing remunerations and improving workingconditions.As such, for the Chilean economy as awhole innovation is an essential factor formaintaining a permanent increase inproductivity and driving the growth of thecountry.Unfortunately, the comparison withhigh-growth countries that attainedthat performance before withnatural resource-intensive activitiesor that currently grow fast indicatesthat we have lagged in educationand research and development.27

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1aspect.As a result of all of the above, this strategy recognizes that, at least initially, the greater part of ourfuture gamble must be placed with the development of natural resource-intensive economic activities. However,we must emphasise that this does not imply ignoring the benefits of a greater production diversification(towards knowledge-intensive services and industries) or the argument that manufacturing has more possibilitiesfor innovation in the final product (or “forward”).Thus, even though the gamble must be to start on the commodities-based path, a special effort is alsorequired to not fall behind in the innovation chain and that is not achieved at a low cost. The experience ofcountries that have successfully developed their natural resources shows that it is necessary to create a highlevel of human capital and create sufficient capabilities for learning and innovation at a national level 9 .In the case of Chile, the challenge implies not lagging in education and R+D with respect to other nationsthat are also developing through natural resources and even less so with respect to those that do so throughmanufactured products. For this, macroeconomic balances are not enough. It is not enough to reduce barriers tointernational trade or stimulate competition; a public-private partnership is necessary to make the Stateintervention more effective and efficient in areas where the market does not suffice. A new deal is required tolay the foundations for the private endeavour and investment to materialize and multiply. However, we have toemphasise here that it is a partnership in which the public sector should complement –and never substitute– theprivate sector in the creation of competitive capabilities, since these are capabilities that, ultimately, can onlybe validated by the creation of better goods and services valued in the market.Where the main problems that the private sector does not resolve by itself are found, and what type ofcomplementary policies need to be developed to tackle these insufficiencies, are issues that will be tackled indetail in the following chapters. However, given that the option of this Council –as a result of the earlierconsiderations– is a mixed strategy, that while being strongly dependant on clusters 10 of natural resources (inwhich Chile is competitive today), also seeks to strengthen activities that are intensive in “acquired”comparative advantages; one of the spaces of natural complementarity is precisely identifying and strengtheningthe sectors and activities based on acquired advantages.To overcome this lag, a public-privatepartnership is required, in which thepublic sector complements the privatesector but never substitutes it in rolesthat it can do by itself.A natural area of complementarity isthe prospection of sectors whoseinternational competitiveness arisesfrom acquired comparativeadvantages. This prospection is alsofundamental to order the supply ofpublic goods.9 Ibid.10 A production complex or cluster is generally understood as a sectoral and/or geographical concentration of companies that undertakethe same or closely related activities. Backward linkages refers to the relationship with suppliers of inputs and equipment; and forwardand horizontal linkages, refers to the relationship with processing industries and users as well as to closely linked services andactivities. The cluster can carry out joint measures to obtain collective efficiency.28

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1With this objective, a prospective study was carried out with the international consultancy firm TheBoston Consulting Group (BCG) during the last quarter of 2006 to begin creating a map of the most promisingproduction areas in Chile for the next decade. The basic criterion for its construction has in fact been the crossbetween the potentialities of various sectors in global trade and the “domestic endeavour” required to developthem.The purpose of this approach has been precisely to remedy the fact that a static perspective tends to biasthe creation of public goods towards where revealed advantages already exist (commodities in the Chileancase). In contrast, a dynamic perspective –that does not undervalue the most consolidated sectors– highlightsthe zones in which the provision of public goods is scarcer, but where it is possible to incubate sectors withcompetitive advantages created through knowledge or other assets apart from natural resources.29

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1II. THE LAGS THAT CONDITION GROWTHTHE FIRST CHALLENGE IS TO GROWOnce the central direction of the path towards development is defined, the next challenge is to set theobjectives. As such, for example, to once again double the per capita Gross Domestic Product (GDP) over thenext fifteen years is a goal which should be common to both the efforts of the Government and the privatesector. It is an ambitious task, but it can be done.Reaching the level of 25,000 dollars per capita 11 over the next 15 years would take Chile to the thresholdof development and would mean attaining a standard of living comparable to that of Spain or New Zealandtoday, which are nations that lie among the less advanced third of the select group of countries that make upthe richest countries on earth.The historical evidence is telling. The countries that are developed today reached our present incomelevel growing at per capita growth rates of around 3%, but they maintained that rate for over 40 years tobecome developed. In contrast, despite its significant achievements over the last 20 years, the Chilean economyhas not succeeded in equalling the performance of the Asian tigers precisely because their growth dynamiclasted far longer than ours. [See Figure 1].Today, however, Chile must and can set itself demanding goals, such as those above. We know that LatinAmerica has never succeeded in doubling its GDP in such a short period of time; but Chile did achieve thisbetween 1990 and 2005, for the first time in its history, and can do so again if it commits itself and takes on thechallenge seriously.There is a broad consensus in the world today that the path to long-run growth lies in the evolution ofTotal Factor Productivity (TFP), and in Chile, during most of the last 20 years the contribution of TFP has beenimportant. However, the most recent data –even though possibly highly influenced by cyclical factors– seems toshow that this source of growth is declining in importance. This can become a problem in the medium termbecause the possibility of sustaining growth, based on capital and unskilled labour, does not last forever. In fact,the contribution to per capita GDP growth by labour tends to decrease 12 and investment has already reachedrecord levels.11 Purchasing Power Parity (PPP) in 2005 dollars.12 This occurs, essentially, because employment cannot systematically grow more than the population.30

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1All of this leads to a clear conclusion: if the contribution of classic production factors (capital and work)sooner or later declines, the only possible option is to bet on TFP. Then, the following question arisesspontaneously: What does it depend on? Firstly, it is based on factors such as social cohesion, the quality ofinstitutions or macroeconomic stability, which means that growth is intimately linked to the general activities ofgovernments and public policies. However, above all, the growth of TFP is based on the dynamic and diffusion ofknowledge, on technological change, on the capabilities and the efforts of people –human capital– and oninnovation.These are precisely the areas that lie at the heart of the mandate of this Council and the axis that formsthe basis of this National Innovation Strategy for Competitiveness, because they are, in turn, the zones in whichthe country has the most significant lags compared to its international competitors as will be shown in thisdocument.IS CHILE PREPARED FOR DOUBLING ITS INCOME?This question is not trivial, and the answers, as we will see further ahead, are not necessarilyencouraging. In fact, the international studies show that the competitiveness and productivity lags that Chilemust overcome to attain the level of developed countries increases as they grow faster; this can be clearly seenin the global ranking, where maintaining ones’ position or raising it is an ever more difficult challenge.A cold and non-ideological look at the international evidence compels us to recognize that the keys forcompetitiveness and growth are human capital, R+D and production diversity, three aspects in which Chile hasserious lags, and so decisive steps on these fundamental pillars could provide major returns for Chile.In the 2006 Global Competitiveness Report, the World Economic Forum (WEF) defines the competitivenessof an economy as the “range of factors, policies and institutions that determine the productivity level of acountry”, which converge on nine pillars defined based on the results of more recent empirical and theoreticalstudies on the issue. These are: a) the quality of public institutions, b) infrastructure, c) macroeconomicstability, d) health and primary education, e) higher education and training, f) the efficiency of markets, g)technological preparedness, h) the sophistication of businesses and i) innovation.In 2005 and 2006 Chile ranked 27 in the global index and is the best ranked Latin American country 13 , aunique situation in the world, since, as the WEF indicates, in general countries of the same region have similarperformances. This strong position of Chile is not only a reflection of solid public institutions operating at levels13 Argentina and Brazil, the nearest Latin American countries behind Chile in the list, are ranked 69 and 66, respectively.31

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1of transparency and openness that are above the European Union average, but also of the existence of efficientmarkets which are largely free from distortions; a credible and stable regulatory framework; and an adequatemacroeconomic management that have been determinant in the creation of propitious conditions for growth andthe fight against poverty 14 . [See Figure 2]However, beyond the good macroeconomic performance or the solid level of the institutions and themarkets, there are other areas in which Chile has lags that need to be overcome if the objective is to grow morethrough productivity increases. These lags are clearly found in education, innovation, infrastructure andtechnological preparedness, precisely the spheres of action of this Council. It is somewhat paradoxical that Chileis so far ahead in some issues and significantly lagging in others. However, an optimistic view of this paradox isthat if we could attain advantages in aspects as complex as, for example, institutional conditions and degree ofeconomic openness, an adequate consensus and endeavour would allow us to overcome the lags in the areasanalyzed below. [See Figure 5]14 Systematic reductions in the levels of public debt –partly arising from a fiscal policy coherent with an effective structural surplus–have helped improve the credibility of the policies of the government, claims the WEF in its 2006 report.32

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1II.1 TWO LAGS IN EDUCATIONThere is currently a universal consensus in Chile on the urgency for a profound education reform. Chileneeds to improve its levels of human capital in order to face the challenges set by a future characterized bycompetition and centred on knowledge and innovation as fundamental tools for creating value, both in the areasin which we possess comparative advantages as well as in those that can be developed through acquiredcompetitive advantages.The next chapter will delve into an analysis of the social benefits arising from having a more educatedand skilled population–since part of the acquired knowledge will always be disseminated through the socialfabric– and also into the lack of adequate incentives for the private sector alone to bring the human capital upto the levels that the country needs, all of which justifies the complementary public measures in the creation ofwhat we have defined as one of the fundamental pillars for the competitiveness of the country.This allows us to concentrate here on diagnosing the problem, which starts by establishing two lags inwhich Chile has manifest insufficiencies when compared to countries that can serve as benchmarks: the as yetlow coverage of pre-school and third level education, and the deficient quality of education at all levels, whichhas been widely recognised by national and international studies, especially the PISA evaluations 15 .Insufficient coverage: While it is true that schooling in Chile has been increasing at an average rate of 6%since 1975, this is still not enough considering the challenges facing the country in the future. Given its level ofdevelopment, Chile should have reached 11 years of average schooling by the year 2000 16 , but it only reached 10years, and even though the projections suggest an increase towards 2010, this impetus is not enough to closethe lags with respect to our most direct competitors. This means that it is necessary to take steps to improveour level in order to reach 14 years of average schooling when the country reaches the US$25,000 per capitaincome level, in accordance with the trend shown by the countries with which Chile should naturally compare15 The PISA evaluation is a study coordinated by the Organization for Economic Cooperation and Development (OECD) which every threeyears evaluates the knowledge and skills of 15 year old students in Reading Comprehension, Mathematics and Science of OECDcountries. After its first implementation in the year 2000, the OECD opened up the opportunity of participating in the study to non-OECD countries. It was first implemented in Chile in the year 2001 and was repeated in 2006. The average number of participatingcountries is 40.16 11 years of schooling is obtained from the data in Figure 3.33

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1itself. [See Figure 3]Furthermore, if the experience of countries that have made significant leaps in their growth rates in thelast 30 years is analyzed, it is clear that the rate at which our schooling has increased is low in relation to thosenations. For example, South Korea, in a period of 30 years, went from an average of 6.6 to 10.8 years ofeducation of the population, with an average growth rate of nearly 11% in the level of schooling. Additionally,South Korea had a per capita income below Chile in 1975, while in the year 2000 it surpassed Chile by 50%. Infact, in the 1975-2000 period, the per capita income of Chile grew at an average rate of 20% every 5 years whileSouth Korea did so at a rate of 36%.The picture is quite similar in third level education, which is one of the key aspects for thecompetitiveness of a country. First, the corresponding enrolment levels (43%) fall well below the rates for thebenchmark countries (which even reach 80%) [See Figure 4]. Moreover, between 1991 and 2004, the rate ofincrease of enrolment in third level education, while far above the historical rate, was still considerably belowthe rates of that same group [See Figure 5].The fact that the rates in which both schooling and per capita income have grown in those countriesexceeds ours is a clear sign that if we do not increase the speed at which we are creating human capital, we willcontinue to systematically lag behind, thus losing our competitiveness in the world. As such, Chile should setitself the challenge of speeding up its progress and eliminating these lags between now and the year 2020, inorder to reach a third level education enrolment rate approaching 80% by then, a level comparable to that ofcountries like South Korea, Lithuania and Latvia today.Low quality: the performance of Chile in international tests that measure knowledge and abilities inmathematics, science and reading comprehension is well below that of most of the countries that take part inthese evaluations, revealing a relatively poor performance: countries with a similar per capita income to Chile,such as Latvia and Malaysia, obtain far higher results. The data from Figure 6 show that Chile is placed far belowthe trend curve in all the tests analyzed and that, given our level of development, the result in all tests shouldbe at least 30% higher.The above is nothing new. Various international institutions such as the OECD, the World Bank, theInternational Monetary Fund (IMF) and the World Economic Forum have emphasized the importance of improvingthe human capital of Chile to attain greater rates of long-run growth. Improving the quality of education is anurgent challenge, since it is the only way for Chile to reduce the lags that separate it from its competitors aswell as its goal of taking the definitive leap to development.34

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Coverage and quality, in any case, are intimately related. Both, in turn, are related to the funding factor.Given that the school system has already reached over 99% coverage in primary education and 92% insecondary education 17 , the way to substantially improve schooling is to increase coverage of third leveleducation (technical, university and adult), an aspect in which the country, despite its recent advances, asindicated earlier, is not advancing sufficiently quickly. Firstly, because there are young people, with thenecessary skills, who cannot enter higher education due to funding problems. Secondly, because to dramaticallyincrease third level enrolment the problems of quality that persist in our primary and secondary education mustbe tackled: increasing the number of young people entering third level education will only be effective andefficient if they have the basic competences to take full advantage of that opportunity, and in turn they willprovide the country with a real leap forward in productivity-enhancing human capital.This quality deficit has two lines of solution.The first depends on a significant management-level improvement that increases the efficiency of the useof resources. This requires: i) an adequate level of governability for the system, through a correct organizationof the Government, which is the mandator for most of the primary, secondary and third level educationinstitutions of the country ii) a clear relationship and the accountability of the educational agents to theirmandator, both in the use of resources as well as in the results, and iii) a solution to the failures of informationthat, apart from the relationship of the mandator with the educational agent, allow for an effective control bythe users of the system (which are on occasion joint-mandators, when there is shared funding, or a singlemandator, as in the case of private non-subsidized education) 18 .The second corresponds to the need for greater resources. In fact, the OECD indicates that differences inthe accumulated spending per student account for 54% of the variation in the average performance amongcountries in the PISA test. Let’s see how Chile fares comparatively concerning funding.17 According to the 2003 CASEN survey.18 All these aspects lie at the centre of the discussion in Chapter 3 and are applicable both to the problems of education and to othermarkets. Highlighting these three aspects does not imply ignoring, for example, that the content provided by the educational systemneeds to be more pertinent in its later stages to the reality of the world of work; or the urgency of improving teacher training systems.35

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1A new endeavour in educationA look at the international figures for total spending on education as a percentage of GDP leaves Chilestanding well (6.8% of GDP), even surpassing the average for the OECD (6.35%) [See Figure 7]. This apparentlysuggests that the deficiencies of Chile in coverage and quality are due to problems of efficiency andgovernability, and as such any reform in this area must begin by tackling those aspects.Nevertheless, even though there is a lot of truth in the above, which is why we started by emphasisingthe need to improve efficiency, it is equally necessary to analyze this data in more detail before reachingdefinitive conclusions, because total spending as a percentage of GDP does not any shed light on the problem.For example, it is necessary to consider the demographic differences among the various countries and theirdistinct levels of development. This requires a special emphasis on the performance of the country in terms ofspending per student.A look at the annual spending per student in Chile indicates that we fall far below the OECD average(US$2,900 versus US$7,550 per person) [See Figure 7], precisely because in Chile there are proportionately morepeople of school-going age than in the countries of comparison, which means that the resources have to beshared among a greater number of beneficiaries, and because the Chilean GDP is smaller than that of manynations of the sample, which implies that with a smaller percentage of GDP targeted at education, the richercountries can effectively spend much more money per student than Chile.However, obviously, comparing Chile to rich countries is an unfair comparison. Thus, it is logical tomeasure spending per student, controlling for per capita income. Unfortunately, in this measure, Chile also lagsbehind other countries such as Poland and Hungary, nations that fall into the same income level as Chile.Nevertheless, the analysis is still not complete, because an additional problem must be taken intoaccount: the composition of education spending according to the origin of resources: public or private.The evidence indicates that the contribution of the private sector to education in Chile, as a percentageof the total, is proportionately much higher than the average level in the countries measured by the OECD (infact the proportion is the highest at all levels) and, in addition, it is very concentrated in the best-off sectors ofthe population. It is also evident that the spending on education rises as family income rises; in fact, thespending per student of the richest 20% of the population is nearly three times higher than that of the poorest20% (Ch$1,703,132 versus $Ch590,764 per annum). On top of this, the spending on the education of the 20%lowest-income student population is 85% funded by the State; the equivalent percentage for the best-off 20% isonly 16%. [See Table 1] All of this implies, as revealed by the CASEN 2003 survey, that over 70% of Chilean36

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1students depend on public funding contributions for their education.Since the idea is to make the creation of human capital on a large scale viable, it is necessary tocomparatively analyze public funding for education, given that it is unlikely that much more family resourcescould be provided in the case of students from the three poorest quintiles. Let’s look at the evidence; whenmaking international comparisons, it can been seen that public spending on education as a percentage of GDP[See Figure 8] and, moreover public spending on education per person of school-going age, as a fraction of percapita income [See Figure 9], falls below the levels of referential developing countries.Table 1Public spending perstudentPrivate spending perstudentTotal spending perstudentIncome Quintile (Ch$)I II III IV V500,412 477,987 441,687 411,686 276,40490,352 167,486 341,002 550,402 1,426,727590,764 645,473 782,689 962,088 1,703,132Source: Marcel M. And C. Tokman, Public Finance studies, Budget Office, Ministry ofFinance, 2005.The above implies that public spending per student is low, controlling for per capita income and theevidence that shows that countries spend more on education as they become richer. While it is true that theemphasis and resources recently targeted at pre-school education, as well as the differentiated subsidy project,are steps in the right direction, the task of catching up in the skills level of our human resources will most likelyplace a significant additional demand on public and private resources.It would be premature to estimate the funding requirements that closing the coverage and quality lagswould have. However, some approximation can be inferred through international comparisons. In fact,international comparisons place Chile at a total spending per student level below the average in 2003 for the37

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1OECD for countries that are indispensable benchmarks for Chile. Moreover, public spending on education perperson of school-going age is currently around 10% of the per capita income, far below the level of its peers,even when accounting for income level. [See Figure 9]Even though the differential of public spending is generalized in primary, secondary and third-leveleducation, the problem is more marked in the latter. To raise enrolment in third level education, the problemof funding could become a greater restriction further ahead as improvements in the quality of secondaryeducation raise the number students prepared for entering higher education. Not having the necessary fundingto cater to these new students would make the effort made in quality in primary and secondary levelspointless. 19The data presented sheds light on the direction that educational policy should take over the next years,taking into account the demographic variables that indicate that the total school-going population of Chile willdrop in the next few decades, which would pave the way for an increase in the spending per student.The lesson of Taiwan, South Korea and Malaysia –which commenced with lower levels of developmentthan Chile 30 years ago- is clear: much faster growth rates are accompanied by permanent increases in thelevels of education (coverage and quality). This is essential when considering the challenge of the knowledgeeconomy, because, in that context, only those who invest in learning the right way will advance faster andfurther. Moreover, if we consider that only developing human capital will allow for development in scientificresearch and technological development inputs that are fundamental for innovation and competitiveness.Given these large lags, the Council has chosen to abstain, for now, from defining other goals and morespecific indicators of human capital –as well as R+D, until possessing, thanks to studies already in progress, agreater degree of clarity with respect to the real specific needs of the country in the matter, thus avoiding anarbitrary extrapolation of the data that, even though it may be relevant in other countries, may not beappropriate for Chile 20 .19 Even at this level a financial estimate is risky. As will be seen in the next chapter, it is fully justified for the State to act as guarantorfor the private sector to finance students, based on problems of intangibility of assets and network economies. Nevertheless, theimplicit subsidies in the resulting interest rate should decrease with the income level of families, which could liberate currentlyuntargeted resources and, as such, extend coverage.20 Indicators such as the number of doctors per inhabitant or the number of engineering professionals are commonly used as indicativedata on the gaps that the country needs to close in order to make progress on innovation and competitiveness. While some of theseconditions may be applicable to Chile, it is also possible that the main failures of the country may be found in other areas, be theyprofessional or technical, that the Council prefers to explore before proposing measures in a specific area.38

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The Council is aware that public resources are difficult to obtain, and that other demands tend to imposepolitical tensions and difficulties on the authorities that can act against the growth objectives desired. In orderto make real progress in a greater availability of resources, it is necessary to clarify as much as possible whatthe State must do and what must be left to private initiative. Confusing roles leads to problems of capture andinefficiency and to a loss of credibility in the State, the private sector and, ultimately, in ourselves. Thisexplains why in this report (Chapters 2 and 3) great attention is given to the conceptualization of analyticalfoundations that allow for an adequate separation and complementarity of roles between the private and publicsectors, based on establishing the competences and limitations of each sector. As may be deduced from theconcepts presented in this report, our innovation system, ranging from the formation of human resources, toscientific research, adapting technology, and innovation in companies, exhibits some serious organizationalfailures that adversely affect its cost-effectiveness. Nevertheless, there are some very positive experiences insome areas. As such, organizational improvements, an adequate structure of incentives and a precise definitionof roles between the private and public sectors are essential components in this task, in addition to an adequateprovision of resources.II. 2 A GREATER R+D ENDEAVOURAs indicated earlier, Total Factor Productivity (TFP) has become an ever more relevant aspect inexplaining the growth of countries. Even though various elements affect it –the quality of institutions,macroeconomic stability, the openness of the economy, education and innovation-, recent studies havedemonstrated that the increase of TFP strongly depends on at least two factors that are considered veryrelevant by the Council: the quality of human resources and research and development spending (R+D).Thus, an analysis of the behaviour of 15 countries of the Organization for Economic Cooperation andDevelopment (OECD) concludes that it is not correct to argue that rich countries invest more in R+D becausethey are rich, but rather that they are rich precisely because they invest more in R+D.The question we should ask is, How does Chile fare in this variable? A comparison with more developedeconomies which succeeded in positively changing their growth trend indicates that Chile spends relatively littlein R+D. In 2004, Chile invested 0.68% of its GDP on R+D, compared to 2.4% by South Korea when it had a similarper capita income to that of Chile. or 1.3% by Ireland, or 1.4% by Slovenia. The differences are even greaterwhen compared to highly developed countries: Israel heads the list of nations that most invest on R+D with arate of 4.9% of GDP, followed by Sweden with 4%, Finland with 3.5% and the U.S.A. with 2.6%. In conclusion,39

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1with the exception of Hong Kong, all countries with a level of development the same as or above that of Chilehave higher proportional spending levels on R+D, and, more significantly, already surpassed us when they hadsimilar development levels to Chile. [See Figure 10]To achieve the goal presented earlier of a per capita income level of US$25,000 within 15 years time,Chile’s R+D spending should rise to 2.3% of GDP, which would require an annual increase in spending of 13% until2021.An interesting trend observed in countries that invest strongly in R+D concerns the distribution of theinvestment initiative between the private and public sectors. Developed countries have a high proportion ofprivate sector participation relative to the public sector. The comparable figures for Chile in 2004 were 37%private versus 53% public spending 21 , but by 2021, 50% of resources should come from the private sector,reaching 1.24% of GDP (versus 0.25% in 2004), while public spending should reach 0.7% of GDP (35% of the total).[See Figure 11]The low level of participation of the private sector, measured by R+D spending, is evident in the figuresfrom the last Survey of Innovation and R+D in Chile in 2004, implemented on all companies, both public andprivate, from production sectors with over 2,501 UF: only 11.2 % of the entire universe of 24,500 companiessurveyed invested in R+D.Other indicators of “inputs or activities for innovation” in the business sector, also show very low levels.An example of this is the number of establishments that possess intellectual property rights (patents, acquisitionrights of vegetable varieties or copyrights, not including brand names) which only reaches 10 % of the total.To add more data on the urgent need for innovation in Chile, evidence is found in the literature indicatingthat there is a significant time lag between making R+D spending and its results in the TFP of countries 22 . Thisperiod averages four years, even though it can vary depending on the production sector, and can range from twoyears, as in the electrical machinery and communication equipment industries, to five years, as in the case ofmedicines and pharmaceuticals.21 The remaining 7% comes from R+D carried out by foreigners in Chile.22 Rouvinen, P. “R&D-Productivity dynamics: Causality, lags and dry holes”, Journal of Applied Economics, vol. 5, Nº 1, pp 123-156.2002.40

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The levels of public spending –both proportional and absolute- made by innovative countries, are farhigher than in Chile, as shown by Figure 12.Public R+D spendingCountrybillions US$United States 96.7Japan 21.3Germany 17.9France 14.9United Kingdom 10.4South Korea 6.5Australia 4Sweden 2.44Austria 1.9Switzerland 1.73Finland 1.43Belgium 1.38Denmark 1.15Singapore 0.98New Zealand 0.49Chile 0.341

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1II. 3 PRODUCTION DIVERSITY: GOING BEYONDThe World Bank states that the creation of dynamic sectors based on natural resources is notincompatible with the construction of new comparative advantages in mobile and high technology industries.Moreover, it is desirable that this occur, since there is evidence that production diversity –captured, forexample, through the density of exports– favours the growth of countries 23 , because as new sectors and newrelations are created, new potentialities are also created or revealed that can trigger enormous leaps forward inthe economy of a country. [see Figure 6]Therefore, the idea is not to propose a greater production diversity as a way of escaping the “naturalresource curse”, which does not actually exist, but rather of looking at the production development of thecountry strategically and understanding that, based on the static advantages provided by natural resources, thepath towards development lies in creating new dynamic advantages. First injecting knowledge to production,strengthening the existing clusters linked mainly to natural resources, and then shifting gradually to sectorsbased on a more intensive use of knowledge.Some trees block the view of the forestThe first question is why production concentration occurs and which factors make it an obstacle togrowth. A document recently published by researchers at the Centre for International Development at HarvardUniversity makes progress in both aspects 24 , using a very explicative metaphor.Its authors –Ricardo Hausmann and Bailey Klinger–represent the economic reality of a country with aforest in which some tree covered zones as well as other poorer parts can be easily seen. The taller and strongertrees –which can most easily be seen– are the strongest production sectors of the economy, which in Chile couldbe the copper mining or cellulose industries. These trees have the capacity of grouping other related sectorsaround them that end up forming large areas dense with vegetation.There is more. There is not only a production confluence around the tallest trees but there is also aneffect in which public policies and the institutional organization of the country adapts to suit them –since theyBOX 6WHY CLUSTERSThe quest to develop the KnowledgeEconomy and economic diversification in Chileby fostering existing or budding clusters (mainlylinked to natural resources) is motivated by thefact that clusters have been deemed “thefactories of competitiveness”, since they havethree characteristics:- They better target the needs of clients,which is at the heart of the competitiveadvantage, since they are organized aroundclients and the end-uses,- They create more efficient markets andhave lower transaction costs (e.g. search costs)for all the players of the cluster and, as such,they activate productivity.- They are centres of innovation,simultaneously as a result of the extreme rivalryfound in some areas and the fluid cooperationfound in others.23 Hausmann, Hwang and Rodrik (2005)24 Hausmann, Ricardo and Bailey Klinger. Structural transformation in patterns of corporative advantage in the product space. Workingpapers. Center for International Development at Harvard University. August 2006.42

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Less volatility, more growthThe effect of diversification on growth appears through two channels: i) firstly, because productiondiversification leads to a lower volatility of exports and that leads to less volatility in the economy. In fact,more unstable economies grow slower than economies that are better protected from cyclical fluctuations; ii)and secondly, because it allows going beyond the traditional comparative advantages, which are usually veryfew in lower-income economies.As such, the efforts of an economy to diversify its production structure beyond its traditional comparativeadvantages is one of the keys for achieving sustained growth. Therefore, for an economy rich in naturalresources such as Chile, it should be emphasised that diversification is crucial to achieving higher levels ofincome.The evidence shows that countries rich in natural resources that have attained development have pairedtheir higher growth rates with export diversification. This is clear in the case of Finland, as shown in Figure 13.The diversification of Chilean exports has improved (considering the 1970-2004 period), but it stills liesamong the not-very developed group of countries.Indeed, if we include another measure of the level of concentration of exports of countries, that is thepercentage of total exports represented by the top 25 export products, we can see that the level in Chile is 76%of total exports.In contrast, even when they have production structures based on natural resources, the 25 main exportproducts represent less than 60% of total exports. [See Figure 14]44

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1FIGURE 1The importance of maintaining growthFIGURE 2Competitiveness of ChileFIGURE 3Years of schooling in Chile100 150 200 250 3000 500 1000 1500PIB per cápita(Base: PIB per cápita año 1986=100)1985 1990 1995 2000 2005A ñosPaísesC orea Chile MalasiaPIB per cápita(Base: PIB per cápita año 1966=100)1970 1980 1990 2000 2010AñosPaísesC orea M alasia ChileIn the last 20 years, Chile has grown at a pace similar to the mostsuccessful Asian countries: Malaysia, the best of the Tigers, andSouth Korea, the most dynamic of the Dragons (figure above).However, in the last 40 years, Malaysia has succeeded inincreasing its GDP five-fold and South Korea over twelve times;meanwhile Chile has not even managed to triple it.Ranking de Chile en los nueve factores que componenel Indice de Competitividad Global del WEFMacroeconomíaEficiencia de los MercadosInstitucionesSofisticación de NegociosInfraestructuraPreparación TecnológicaInnovaciónEd. Superior y CapacitaciónSalud y Educación Primaria724253035353940570 20 40 60Posición en el rankingChile ranks 27 out of the 125 countries listed in the GlobalCompetitiveness ranking of the World Economic Forum. However,in each of the nine determinant pillars of competitiveness, Chile haswidely varying performances: the high-points include macroeconomy,efficiency of markets and the quality of institutions. Theweakest points are health and primary and higher education, andtraining and innovation.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on the Global Competitiveness Index 2006-2007 of theWorld Economic Forum.Años promedio de escolaridad(sobre población de 15 años y más)0 5 10 15Años promedio de escolaridad y PIB per cápita199019801960 197020000 5000 10000 15000 20000 25000PIB per cápita PPCPaíses de rápido crecimiento y ricos en recursos naturalesChina Corea India MalasiaTailandia Suecia Dinamarca AustraliaN. Zelandia Noruega Canadá ChileTendencia promedioIn the year 2000, the over-15 population had an average of 10 years ofschooling, one year less than the country should have had considering itsincome level, given the trends of high-growth economies. Even though inrecent years Chile has improved its average rate, estimates by Cohen andSoto (2000) indicate that schooling will reach 10.77 in 2010, while thecurve for high-growth economies indicates that Chile should reach anaverage of 12 years. This serves to warn us that the lag may beincreasing.Source: Studies Unit, Executive Secretariat, Innovation Council. Based onthe: “The World Economy: Historical Statistics”, A. Maddison, 2001; andCohen and Soto (2000), “Growth & Human Capital: Good data, goodresults”. Discussion papers Nº 3025, CEPR.Source: Studies Unit, Secretariat of Innovation Council. Based on“The World Economy: Historical Statistics”, A. Maddison (2001) andestimates of the Economist Intelligence Unit.45

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1FIGURE 4Third level EducationFIGURE 5Third level EducationFIGURE 6PISA en Comprensión Lectora y PIB per cápita% de matrícula0 20 40 60 80Matrícula en educación terciaria y PIB per cápita9101239199 0 1 2 3919999 00199 0 1 2 391212399 1020 5000 10000 15000913919199 091PIB per cápita PPCPaíses de rápido crecimientoChile China Corea EstoniaIndia Letonia Lituania MalasiaTailandiaTendenciapromedioThe figure shows that in Chile the percentage of students enrolled out ofthe total population of third level attendance age is below the levelcorresponding to its level of income.Source: Studies Unit, Executive Secretariat, Innovation Council. Basedon A. Maddison (2001),“The World Economy: Historical Statistics” and"World Development Indicators”, World Bank (2006). PPC refers toPurchasing Power Parity.992 30123990123Porcentaje0 20 40 60 80 100Porcentaje de matrícula en educación terciaria214339892665Chile Corea Estonia Irlanda Letonia Lituania29591991 2004The Baltic States, Ireland and South Korea (which have had highgrowth rates over the last 10 years) have taken a much greaterleap than Chile in third level enrolment, in some cases doublingthe level in Chile.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on "World Development Indicators”, World Bank (2006).26763373Puntaje400 450 500 5502000200020032003200020002003200020032000 20032000 200320002000200320035000 10000 15000 20000 25000PIB per cápita PPCPaíses intensivos en recursos naturales y de rápido crecimientoAustralia Canada Chile CoreaDinamarca Finlandia Letonia Nueva ZelandaSuecia TailandiaTendenciapromedioThe basic competence levels shown by some Chileans in theinternational PISA tests is below what would be expected by theincome level of the country and the trend seen in high-growthcountries and those that are rich in natural resources.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on A. Maddison (2001),“The World Economy: HistoricalStatistics”; “Literacy skills for the world of tomorrow. Further resultsfrom PISA 2000”, OECD, UNESCO-UIS (2003), and “Learning forTomorrow’s World. First results from PISA 2003”, OECD (2004).PPP refers to Purchasing Power Parity.2000200346

FIGURE 7Total spending vs. spending per student oneducationPorcentajeDólares convertidos a PPC0 2 4 6 80 2,000 4,000 6,000 8,000 10,000CoreaDinamarcaDinamarcaSueciaN. ZelandaCanadaGasto total en educación(% del PIB)ChileAustraliaSueciaFinlandiaNota: El gasto de Hungría, Polonia y Canadácorresponde sólo a gasto público.PoloniaN. ZelandaHungríaCoreaFinlandiaHungríaCanadaGasto total en educación por estudiantePoloniaAustraliaChile has a similar proportional spending level on education asbenchmark developed countries (above). However, in absoluteterms, Chile has a lower spending level per student than thebenchmark developed countries and it is even lower than the levelin countries with similar per capita income levels, like Hungary andPoland (below). In the latter cases, the figures only correspond topublic spending.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on "Education at a Glance”, OECD, 2006.ChileFIGURE 8Public spending on educationGasto público en educación como porcentaje del PIB(promedio período 1999-2004)ChinaSingapurCoreaChileRep. ChecaHong KongAustraliaCanadaLetoniaLituaniaEstoniaFinlandiaNueva ZelandaMalasiaSueciaDinamarca2.08TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESS3.723.944.034.164.34.875.535.645.96.026.216.796.977.460 2 4 6 8Puntos porcentuales del PIBMost high-growth economies with abundant natural resources havea higher level of public spending on education than Chile, exceptSouth Korea and Singapore. However, the latter have a high levelof private spending.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on the "World Development Indicators”, World Bank (2006).8.39FIGURE 9Public spending on education(per person less than 24 years of age)% del ingreso per cápita% del ingreso per cápita5 10 15 205 10 15 20 25 30Gasto público en educación por habitante en edadescolar (% del PIB per cápita) y PIB per cápita199 12002199120021 991199 120021 9912 0020 5000 10000 15000200 2199 12 002VOLUME 1Source: Innovation Council. Based on “The World Economy: Historical Statistics”,A. Maddison (2001); “World Economic Outlook” (Sept. 2006), IMF; "WorldDevelopment Indicators”, World Bank (2006); “World Population Prospects: The2004 Revision Population Database”, United Nations (2005); "World Development 47Indicators”, World Bank (2006). PPP indicates Purchasing Power Parity.199 11991PIB per cápita PPCPaíses de rápido crecimientoChina Corea Chile EstoniaIndia Letonia Lituania MalasiaTailandiaTendenciapromedioGasto público en educación por habitante en edadescolar (% del PIB per cápita) y PIB per cápita199 119911991 2 0022002200 2 1 9912002 2002199 119912 002199 12002199 12002200 219911 991 2002 199119912002 1 991 1 9910 5000 10000 15000 20000 25000PIB per cápita PPCPaíses intensivos en recursos naturales y de rápido crecimientoAustralia China Canada CoreaChile Estonia India DinamarcaFinlandia Letonia Lituania MalasiaNueva Zelanda Suecia TailandiaTendenciapromedioPublic spending on education in Chile per person of school-going age –asa percentage of per capita income– is below the corresponding level forhigh-growth economies (above) and also if successful countries, rich innatural resources are added (above).20022002200 220022 00220022 002

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1FIGURE 10How much Chile invests in R+DFIGURE 11Composition of R+D spendingFIGURE 12Composition of R+D spending% PIB gastado en I+D0 1 2 3 4Gasto en I+D (% del PIB) y PIB per cápitaChile0 5000 10000 15000 20000 25000Producto per cápita (PPC)Dinamarca Finlandia Noruega SueciaAustralia N. Zelanda Irlanda MalasiaLetonia China Chile CoreaTaiwán Hong Kong Singapur EsloveniaEstonia Lituania Tendencia promedioChilean spending in R+D as a percentage of GDP is below the levelappropriate to its income level, in comparison to the trends ofsuccessful countries, which are rich in natural resources and havehigh growth.Source: Studies Unit, Executive Secretariat, Innovation Council.Based on “World Development Indicators”, World Bank (Sept. 2006);“The World Economy: Historical Statistics”, A. Maddison (2001);“World Economic Outlook”, International Monetary Fund (Sept. 2006).Porcentaje0 .5 1 1.5Porcentaje del gasto público en I+D(% del PIB)SingapurAustraliaCoreaEstados UnidosFranciaAustriaSueciaFinlandiaAlemaniaNueva ZelandiaReino UnidoSuizaDinamarcaJapónBélgicaChilePublic spending on R+D in Chile, which in 2004 was 0.3% of GDP,is lower than that of developed countries.Source: Studies Unit of the Secretariat of the Innovation Council forCompetitiveness, based on data from the Main Science andTechnology Indicators, OECD.Porcentaje0 20 40 60 80 100Composición del gasto en I+Dpor fuente de financiamientoJapónSuizaCoreaSueciaFinlandiaChinaDinamarcaEsloveniaAlemaniaEstados UnidosIrlandaCanadáSingapurNoruegaRepública ChecaNueva ZelandaChileMéxicoFuente del gastoPúblico PrivadoOtras fuentes nacionales ExtranjeroThe figure shows successful countries and the percentage of GDP investedby the public sector in R+D. Singapore, Australia and South Korea have thehighest rates in this aspect. However, the United States, Japan andGermany have the highest absolute rates (figure). Chile, in relative terms(% of GDP) and in absolute terms, lags in the last place.48

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1FIGURE 13Evolution of exportsFIGURE 14Concentration of exportsComposición de las exportaciones de Finlandia, 1970-2000(% de las exportaciones totales)Porcentaje de los 25 principales productos exportadossobre el total de las exportaciones (países similares)Porcentaje0 20 40 60 80 1001970 1980 1990 2000ProductosProducto de madera Pulpa y prod. de papelMet. básicos y prod. de metal Maquinaria y vehículosElectrónica y prod. electrónicos Químicos y prod. químicosOtros bienesPorcentaje0 20 40 60 80 100Rep.Checa Eslovenia Estonia México Chile VenezuelaProductosPrincipales 25 productos exportados Otros bienesComposición de las exportaciones de Chile, 1970-2004(% de las exportaciones totales)Porcentaje de los 25 principales productos exportadossobre el total de las exportacionesPorcentaje0 20 40 60 80 1001970 1980 1990 2000 2004ProductosMaterias primas agrícolas AlimentosMetales y combustibles Máquinas y equiposOtras manufacturas QuímicosOtros bienesPorcentaje0 20 40 60 80 100Alemania Finlandia N. Zelandia Corea Australia ChileProductosPrincipales 25 productos exportados Otros bienesWhile Finland has diversified its export basket over the last 30years, copper remains the main export product of Chile, eventhough its share of the total has declined since 1970.Source: Studies Unit of the Secretariat of the Innovation Council forCompetitiveness. Based on UNCTAD data.The increased diversification of the export basket is a commoncharacteristic in developed countries with high-growth. Chile lagsbehind in this aspect, even when compared with various similarnations in terms of per capita income.Source: Studies Unit of the Secretariat of the Innovation Council forCompetitiveness. Based on UNCTAD data.49

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 1GLOBALIZATION AND ITS CHALLENGESAs was analyzed in the strategic guidelines documentpresented by this Council in February 2006, over the next years themost noteworthy element in the globalization process will be therelocation of production units at a global level, led by multinationalcompanies in search of efficiency gains or access to scarceresources. This is no longer only natural resources, but also humanresources or pro-business environments. This process will especiallyaffect the services sector and the links of the value chain ofcompanies that can characterize these services, key among which isresearch and development (R+D) activity.Chile has become an attractive option in the off-shoreservices sector and–as will be seen in Chapter 4– it is a greatchallenge to continue generating the conditions to attractinvestment in knowledge intensive activities.The world is currently subject to the effect of high-impacttechnological revolutions: of Information and CommunicationTechnologies (ICT), of biotechnologies, and more recently ofnanotechnologies, each in a different phase of development. In thecase of ICTs, there is evidence that the national production systemhas not yet taken full advantage of the productivity gains facilitatedby the use of these technologies. On the other hand, a new range ofinnovations linked to wireless technologies and embedded softwareis emerging that can multiply these productivity gains multi-fold.Thus the need to continue fostering an extended adoption of thesetechnologies in various spheres of our society and especially at thelevel of our main export sectors.Despite its as yet early stage of development, biotechnologyshould be expected to have a high impact in Chile, since practicallyall of our main export sectors can benefit from its development.Therefore the challenge is to acquire knowledge of thesetechnologies early on. It should be kept in mind that the aggressivetrend of first-world companies in protecting intellectual propertyrights over varieties, biological processes, genes and others, givesthem a hard-to-surmount market power and limits the access toknowledge for production and research in Chile.An aspect that cannot be ignored in the next few years is theincreasing sensibility of consumers in our main markets regardingaspects such as caring for the environment in our productionprocesses and issues related to the quality and safety of food. Thisaffects the choice of strategies for positioning our products and,subsequently, in defining agendas of technological innovationrelated to them.50

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 2KNOWLEDGE ECONOMY AND EQUITYIn the face of the renewed challenge to continue growing to achieve development, this Council must contribute by proposing a NationalInnovation Strategy for Competitiveness to the President of the Republic, based on an ever more significant contribution of knowledge toproduction activity that begins by exploiting the advantages that the country has in the area of commodities based on natural resources. Italso looks for opportunities in sectors with growth potential today that are further removed from those resources. This alternative, whichdemands a greater effort to raise national competitiveness through innovation, is not only a formula to ensure greater growth, it is also apath to greater equity, since its base resource is the development of knowledge. This is an asset whose property is, or has the potential tobe, much less concentrated and opens up new and better opportunities to those who possess it.As will be discussed in this document, knowledge is quite special as an economic good. One of its main characteristics is that there is norivalry in its consumption: in other words, the fact that one person uses it does not impede another person from using it at the same time. Inturn, it is also a good in which property rights are not perfectly defined, and that means that nobody can be a sole owner of knowledge asthough it were a piece of land.The international evidence shows that the countries that have attained development invested a large quantity of resources in the creation ofnew knowledge, thus discarding the idea that scientific-technological activities are a “pastime of rich countries”. An additional characteristicof these countries is that they present a significantly more equitable pattern of wealth distribution than Chile and one explanation for thiscould precisely be that their production structures are based on sectors where technology and knowledge play a key role. How? Because insectors based on natural resources, property –of land, water or minerals- is very well defined and concentrated in very few hands, whichpermits the rent to be easily captured by the few existing owners. On the other hand, in knowledge intensive sectors, where property ismore extended (which occurs in all countries, independent of level of economic prosperity), rents –which can be very significant– aredistributed among more people.The implications of this in the distribution of income are evident. However, there is also another key element that promises greater equity ifChile advances towards a knowledge economy: human capital. The statistics of the Organization for Economic Cooperation and Development(OECD) show that the higher the level of human capital, the greater the participation rate in the labour market, employability and salaries.51

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 3EXPLOIT THE ADVANTAGES FOR GROWTHIn “From Natural resources to the Knowledge Economy:Trade and Job Quality”, the World Bank highlights that a greathistorical error made by Latin American countries is to turn theirback on their natural advantages, whatever they may be: awealth of natural resources, location, natural beauties orculture. It also states that this attitude is, to a great extent, aresult of prejudice about the supposed superiority ofmanufacturing activities with respect to those based on naturalresources.The analysis of the World Bank firmly indicates thatactivities based on natural resources can be knowledgeintensiveindustries and, as such, have the capacity to fostergrowth over a long period of time. It provides various examplesto support this claim.Firstly, it indicates that undeniably Australia, Canada,United States, Finland and Sweden based their development ontheir natural resources. In fact, even today they are netexporters of products based on this type of resources, togetherwith high technology products.It indicates, for example, that the evidence availabletoday definitively shows that the industrial success of the UnitedStates is due to a progressive transition towards naturalresource-intensive manufacturing sectors and only shifted tomore knowledge intensive sectors in a much later stage of itsdevelopment. It states that mining was the “collective learningphenomenon” that led to the creation of a strong technologicalsystem, which later evolved into the modern manufacturingsector.52It mentions that Canada was the country that inspired the“theory of basic products”, in which the exports of primarygoods leads to long-term development through demand orsupply links.In the case of Australia, the development of theproduction of wool and the extraordinary and continuoussuccess of mining, in addition to industries derived from both,made it one of the richest economies in the world at thebeginning of the twentieth century. Today, the discovery of newdeposits and the creation and export of knowledge linked tomining –based on a large-scale educational and researchinfrastructure– could once again raise it towards the top of thelist.The Scandinavian nations that manufacture planes, luxuryautomobiles, famous designer furniture and, more recently,advanced telecommunication products, also started growingslowly based on their natural resources. Sweden’s Volvo andSaab arose, partly, as a result of production linkages from theforestry sector. Perhaps the most interesting case is the Finnishcompany Nokia. It was originally a producer of wood pulp, andhas become a key player in the global cellular phone market.The key elements of this evolution –according to the WorldBank– were the institutional structures, the knowledge networksand a committed human capital policy that, although created tosupport the processing of resources, was transferable to hightechnology sectors.In summary, the historical data are eloquent: when wellmanaged and inserted within an appropriate institutionalframework, natural resources can be engines of development.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 4LET’S MAKE THE MOST OF THE OPPORTUNITY: LET’S FIX THE WEAK POINTS OF CHILE IN THE GLOBAL COMPETITIVENESSREPORTEducation is the weakest competitiveness factor of Chile,according to the World Economic Forum (WEF). The performance inhigher education and training is low not only compared to developedcountries, but also compared to developing countries that, like Chile,have had high growth rates in recent years. The quality of educationcontinues to be our Achilles heel. In fact, our performance in the qualityof education in science and mathematics (ranked 100) and the quality ofthe educational system in general (ranked 76) are the main weaknessesof Chile in this respect.Meanwhile, technological preparedness, which measures theagility with which the economy is capable of adopting existingtechnologies that improve industrial productivity, is also quite weak inChile. Technological preparedness is especially relevant in an economysuch as Chile which, in general, is not on the cutting-edge of technologyand that can, therefore, benefit from adopting foreign technologies. Assuch, it is important to exploit the position with respect to thetechnological frontier and innovate by adopting and adapting newtechnologies, which undoubtedly requires the availability of a nationaltechnological base.While it is true that the performance in certain aspects of thisfactor is noteworthy, such as ICT legislation (ranked 24) and the level ofR&D and technological transfer (ranked 24), other aspects appear asquite weak and explain the position 35 of Chile in this factor: forexample, quantity of computers (position 44), internet users (41) andtechnological absorption at a firm level (33).The sophistication of businesses also constitutes an importantfactor measured by the WEF. While Chile performs well in terms of thequantity and quality of local suppliers (ranked 25 and 23, respectively),marketing (24) and sophistication in production processes (26), certainCanadaDinamarcaNueva ZelandaFinlandiaSueciaCoreaSingapurAustraliaTaiwanMalasiaEstoniaChinaChileRep. ChecaLituaniaLetoniaFinlandiaDinamarcaSueciaTaiwanSingapurAustraliaCanadaCoreaNueva ZelandaEstoniaRep. ChecaLetoniaLituaniaMalasiaChileChinaSalud y Educación Primaria246791820212542435557580 20 40 60 80Posición en el rankingEducación Superior y Capacitación1237101417212223272829320 20 40 60 8040Posición en el ranking70777953

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1areas remain weak and need to be overcome to make efficiencyimprovements. These are: presence of value chains (58) and nature ofthe comparative advantages (51). These aspects highlight the fact thatthe Chilean economy continues excessively concentrated on naturalresources.Finally, the second weakest factor in the competitiveness ofChile is its performance in innovation. The country only ranked 39 in thisaspect; far below the position of high-growth economies. For example,South Korea, 20 in the global ranking, rises to 15 th place in the area ofinnovation; Malaysia ranks 22 in the general list, but rises to 21 ininnovation; and Singapore, ranked 15 in the global index, rises to 9 thplace in innovation.The poor performance of Chile in this area is mainly explained bythe provision of technological products by the government (ranked 54),the innovation capacity in the country (ranked 50), the quality ofscientific institutions (ranked 48), the level of R+D spending incompanies (ranked 48) and the protection for intellectual property(ranked 45). Once again, Chile is surpassed by developing countries thathave experienced significant growth rates in recent years.Regarding the capacity to link producers, suppliers andcustomers, the WEF has developed indicators based on the “GovernmentOpinion Survey”, which gathers the opinions of authorities andbusinessmen from around the world with respect to some aspects of therelationship among production agents. The aspects looked at are: (i) thenumber of suppliers for various industries, (ii) the perceived quality ofsuppliers, (iii) the capacity to analyze and penetrate internal markets,(iv) control the distribution of products internationally, (v) the nature ofthe competitive advantages of the country in terms of exports, (vi) thetype of products exported (commodities or highly differentiated andunique goods) and (vii) the possibility of obtaining the appropriatemachinery for the production processes within the country. Chile isranked among the first 30 countries in the first four items (out of a totalof 125). In contrast, the values obtained in the latter three items fallSueciaSingapurAustraliaDinamarcaFinlandiaTaiwanEstoniaCanadaCoreaNueva ZelandaRep. ChecaMalasiaChileLituaniaLetoniaChinaSueciaDinamarcaFinlandiaTaiwanCanadaMalasiaCoreaSingapurNueva ZelandaAustraliaRep. ChecaChileEstoniaLituaniaLetoniaChina12Preparación Tecnológica71012141617182326283542430 20 40 60 80Posición en el rankingSofisticación de los Negocios59111518202223262829300 20 40 6035Posición en el ranking4154756554

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1below the average. These are related to the dependence on naturalresources and static advantages eventually provided by this condition. Inaddition, there is insufficient technology or the necessary capabilitiesfor producing capital goods necessary for production.Source of figures: National Council of Innovation for Competitiveness. Based onthe Global Competitiveness Index 2006-2007, of the Global CompetitivenessReport.FinlandiaSueciaTaiwanSingapurDinamarcaCanadaCoreaMalasiaAustraliaNueva ZelandaRep. ChecaEstoniaChileChinaLituaniaLetonia4689101315Innovación2124252830394650660 20 40 60 80Posición en el ranking55

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1ACTION RECOMMENDATIONSChile needs to continue growing to attain development and the path to achieve it is the Knowledge Economy. Thishowever does not imply turning our back on natural resources, but rather to make the most of this advantage as a solidstarting point to advance, straight away, in the search for other sectors with acquired competitive advantages.The leap to the Knowledge Economy essentially revolves around innovation, understood as the process of creatingeconomic value through which certain products or production processes, developed around new knowledge or the novelcombination of existing knowledge, are effectively introduced into markets, and as such social life.This new path to development ensures greater growth. It also offers the possibility of progressing towards greaterequity since its base is the development of knowledge, which is an asset whose property can be distributed more equitablythan capital or natural resources, mainly through the formation of our human capital.Chile can set itself this goal after having successfully implemented the reforms to create an adequate macroeconomicenvironment and a foreign trade orientation that stimulates its production capacities to the maximum and that highlights theneed for a new step in its development.Chile can set itself the great challenge today of doubling its per capita income over the next 15 years, to the level ofUS$25,000 (2005 Purchasing Power Parity). This implies attaining living standards similar to those of developed countriestoday.This growth must be maintained in the increase of Total Factor Productivity (TFP), based on the dynamic anddiffusion of knowledge, on technological change, on human capital and innovation.- Move from 10 years of average schooling (year 2000) to 12 years by the end of this decade, and 14 at the beginningof the next decade.- Increase enrolment in third-level education from the present 43% (of people aged between 18 and 24) until nearly80% within 15 years.- Make significant progress in the results achieved by Chilean students in the international PISA evaluations.- Increase R+D spending as a percentage of GDP, rising from 0.68% (year 2004), to 2.32% in the next 15 years. Thisimplies doubling and increasing five-fold the present public and private spending on R+D respectively as a percentage ofGDP.56

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1- Reducing, the proportion represented by the 25 main export products from 76% of total exports to no more than50% of total exports.Finally, the proposal is to complement the measurement of the progress of the country in innovation based oninternational rankings that, despite some methodological weaknesses, allow a permanent comparison with benchmarkcountries for our economy or our competitors that have served as the base for determining the lags indicated.- Progress significantly in the “innovation” factors (currently 39), “sophistication of businesses” (30) and in “highereducation and training” (40) in the Global Competitiveness Index of the World Economic Forum.On top of these global goals measured by international innovation indicators, new challenges should subsequently beadded, concerning closing specific lags that the Council has decided to determine during 2007.57

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1CHAPTER 2THE NEED FOR A PUBLIC-PRIVATE PARTNERSHIPMarket Failures and the Role of the State in InnovationABSTRACTThe present chapter examines why innovation does not occur at the desired levels for the Strategy outlined in Chapter1 and concludes with the criteria that should serve to guide the design of instruments for tackling these lags. For this,it looks at the cultural framework contextualizing the phenomenon of innovation and identifies the main marketfailures that explain why the private sector does not have enough incentives to act with the requisite intensity. It thenlooks at how those failures manifest themselves throughout the innovation process. Then, with this analysis in hand, itdefines when and how the State should act to correct those failures.The previous chapter not only highlighted the essential relevance of innovation (and its inputs) in growth,but also brought to light the distance separating Chile from developed countries or from the fast-developingeconomies of today. Moreover, the recent data reveal large gaps between the real performance of the countryand the performance appropriate to its level of economic development.58

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1What is happening? Why, given the wide-ranging consensus that countries become more competitive andgrow faster if they construct “new assets” –human capital, knowledge, and innovation– does this not occur tothe extent that Chile requires?The answer is complex because the problem is also complex. The report of the Innovation Councilpublished in February 2006 cautions that this deficient outcome is the result of present weaknesses in thevarious components of our National Innovation System: in businesses practices, in human capital formationsystems, in scientific and technological knowledge production and diffusion institutions, in the mechanisms thatlink or articulate these components, and in the pro-innovation institutional framework.As such, the task of searching for solutions requires both an integrated perspective and a detailedanalysis. It requires looking at the problem from a systemic perspective, but also tackles the details in order tounclog bottlenecks where the market does not provide all the answers. It is necessary to again step back andlook at the whole picture when formulating the Innovation Strategy for attaining the goals that the country hasset itself for the next 15 years.The present chapter looks at why innovation does not occur at the desired levels automatically orspontaneously, understanding where the market fails, what the weaknesses of the system are, when and howthe State must participate and the possible shortfalls it may have when acting.THE PARTS, THE SYSTEM AND SOMETHING MOREThe poor results seen in the preceding chapter indicate that, in the area of innovation, a greaterendeavour is required from both the public and private sectors. This requires a new partnership that clearlydefines the roles of each sector and that considers the market and policy failures when designing instrumentsand structuring the institutional framework of the system.To fulfil this purpose, a rigorous diagnosis is needed of what is happening in the country and what itsdriving factors are. As such, when defining the strategy and to understand the problem in their entirety, theCouncil has combined the analysis of market failures –understanding them as analytical instruments thatestablish the pertinence of the public interventions– with a systemic viewpoint. This has not only provided for anunderstanding of the details that allows for a framework of reference and a model of actions for the State to bedefined, but also to make general and cross definitions to guide public policies.The mixture of approaches has allowed what in some cases seemed to be market failures to becomebenefits, viewed from another perspective. For example, that nobody can be the sole owner of knowledge is afailure that explains why the private sector invests very little in basic research; but given that a part of theThe search for an innovation strategymust be tackled with a systemicapproach, an integrated perspective aswell as a detailed analysis to unclog thebottlenecks where the market does notrespond by itself.The systemic viewpoint requiresclearly defining the roles of the Stateand of the private sector whendesigning the instruments andinstitutional framework related toinnovation. Likewise, it also pressesfor measures that go beyondinnovation, such as the physical anddigital infrastructure of the countryand others, but that are essential forinnovation to occur at the level thatChile requires.59

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1knowledge acquired will always be disseminated socially, collective benefits will be produced, which will justifythe State investing public resources in education, base research or in training.Meanwhile, the global viewpoint gives this Council the task of highlighting issues that are not within itsdirect mandate, but that are essential for innovation to occur at the levels required by the country. These arethe adequate development of the physical and digital infrastructure; perfecting financial markets that open upnew funding options for innovative projects; and the quality of primary and secondary education, which is anessential requirement not only to reach the number of professionals and technical personnel that the countryneeds, but also to create a scientific and technological system that provides both cutting-edge knowledge in thevarious areas and solutions for specific production problems.The integral approach also requires understanding the elements within the system, with theirinterrelations and effects. Thus, for example, it indicates that defining public funding for universities isessential, and can be a tool for ensuring education of quality and excellence in basic scientific research, as wellas an instrument for guiding the education of professionals based on the present and future needs of thecountry, or to foster the joint work between the scientific community and companies. It also sheds light on thevalue of accreditation systems both for education and for training. Above all, it highlights the fact that toachieve successful results in the area of innovation, an interaction between the internal capabilities ofcompanies and the agents that surround them is necessary: universities, research centres, public agencies,suppliers, customers, and even its own competitors.The systemic viewpoint obliges us to go further, because in the modern world, innovation occurs in globalnetworks, through partnerships among agents that operate from different parts of the planet. Thus, whenspeaking of the system and its possible failures, reference is not only made to Chile (Chilean capital, Chileancompanies, Chilean universities, funding from the Chilean State), the national agents are also considered in theglobal context. This means that in the desired state, each agent participates in global networks, which implies,for example, Chilean companies observing the world and their markets as a source of innovation or Chileanresearch centres considering the companies of the world as potential customers.Even though the concept of innovation hasa positive connotation in Chilean society, itproduces conservative attitudes in people,since it requires them to make an effort tocreate value in order to progress, and avoidcounterproductive practices that, forexample, seek to derive immediate benefitsfrom the State.60

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1THE CULTURAL CONTEXT“If we have learned anything about the history of economic development, it is that culture makes all thedifference. (Max Weber was right in this)” 26 , states professor David Landes, of Harvard University, subtlyemphasising “all the difference”. This is because there undoubtedly are theoretical principals that reoccur moreor less rigorously independently of the focus of analysis, but it is those particular issues that make economics asocial science that cannot escape the vicissitudes characteristic of the human condition and which make themarket no more and no less than an intricate network of human relations.The unavoidable culture is knowledge and the arts, lifestyles and customs, scientific and industrialdevelopment. It is as much a way of understanding consumption as a way of managing the human resources of acompany. Culture is a defining marker of an era, as well as the living record of social evolution. It is,simultaneously, a snapshot of a group as well as of a nation.Thus understood, culture defines the way in which markets and the State develop, how they areperceived and how people choose to express their participation within it. This explains why each country –andeven region within a country- has its own business culture, its work culture or consumption culture: to get anidea of whether a community is prepared to increase its wealth, you have to find their stories, the myths theyhold, the heroes they admire, the metaphors they use, because economic development is by its very essence acultural process 27 .Certainly, iinnovation is no exception, thus the wide-ranging attitudes found on the issue throughout theworld and, above all, the great variety found among countries in the design of public policies that foster orfacilitate innovation activity 28 .In Chile, one of the first factors working against a good performance in this aspect is precisely the lack ofawareness regarding the importance of innovation and of the factors that form its foundations, a culturalrestraint that blocks the view beyond what has always defined the way of being and understanding and doingthings. This appreciation seems to be supported, for example, by the relative unimportance given to science andtechnology in the primary and secondary education of our students.One of the first factors that should betackled to strengthen innovation in Chile isto massively increase the awareness in thecountry regarding the imperative need toinnovate.26 Landes, David. La riqueza y la pobreza de naciones. Javier Vergara Editor. Argentina 1999.27 Chamlee-Wright, Emily and Don Lavoie. Cato Policy Report.28 Benavente, José Miguel. Antecedentes para el diseño de una política tecnologica nacional. 2004.61

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The data provided by a qualitative study carried out in 2006 to have an adequate diagnosis in this matter,corroborates this claim. The concept of innovation is still not very clear in Chilean society and it is expresseddifferently in the various segments and spheres of activity. Nevertheless, there is a positive connotation in all ofthem intuitively associated to “newness”, and the “future”, but without making the connection to production.Obviously, those with a clearer understanding of the concept are people linked to the business world,technology and science.The research also detected that there is cultural resistance in many strata towards the incorporation ofinnovation into daily life. This is a result of the more conservative tendencies of Chileans towards these issues.The problem cuts across the whole society. Students may not be aware as to how much economic wellbeingcan be produced by studying more. A small company may not get a full idea of the benefits brought aboutby a technological change in its production or a new management model. A worker cannot gauge the value oftraining; even large companies may not understand that the great challenge imposed by globalization isprecisely that of innovating or giving in.In recent decades, and as a result of changes in its development strategy, Chile has been able to begin totransform its motivations and aspirations. A central role has been played in this respect by the greater relevanceof the market, the economic opening and global competition, as well as by the actions (concordantly with thedeepening of democracy) of a State that is vigilant of competition, that corrects market failures and providespublic goods, infrastructure and social protection 29 .Without a doubt, these transformations have contributed to limiting the inertia of a traditional societywith, in some cases, a trend towards a rent-seeking culture. However a new step is necessary. In the era ofinnovation, we must realise that the key to the future lies in creating value. This is achieved through newproducts that satisfy consumers, with new processes that reduce costs, and new ways of disseminating thequality and content of our products. These strategies differ from older practices aimed at capturing publicpolicies, at infringing or evading taxes, labour obligations or caring for the environment; all in all, to seek toextract gain from the rights of others, be they consumers, suppliers, workers or, more generally, citizens. Theoption to innovate is certainly more difficult, since it requires creating value to earn more; but it is more in linewith the needs of economic development as well as social cohesion. Above all, it is the only sustainable option,because societies develop when they are capable of creating value cooperatively and competently.29 Eyzaguirre, Nicolás; Mario Marcel, Jorge Rodríguez and Marcelo Tokman. Hacia la Economia del Conocimiento: El camino para crecercon equidad en el largo plazo, Public Studies Journal Nº 97. Public Studies Centre (CEP). Santiago, 2005.62

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Given this situation, the February 2006 report of the Council, as well as this Strategy, defines as a prioritythe large-scale increase of awareness in Chile –of its companies, its authorities and its workers– of the need toinnovate. The State is required to fulfil an essential role in this task, since given that innovation is “learned bydoing”, in the private sector there will always be an insurmountable difference between those who have alreadytried a new solution and those who have not.Moreover, those who know the benefits of innovation will have very little or no economic incentives totransfer this experience. This is evident, for example, in the fact that, even though today Chile has a range ofcompanies with a strong export culture in which competition and innovation are key factors of survival, thisexperience is not disseminated nationwide, even though, as this report has highlighted, they may be decisive forthe future of the country.63

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 12.1 MARKET FAILURES IN INNOVATIONEconomic science has explained in the last five decades why and under what conditions the markets workand when they do not. It has demonstrated, for example, that the markets can lead to the underproduction ofsome products, such as basic research, and the overproduction of others, such as pollution. Its most dramaticfailures are economic crises, recessions and depressions, but there are also another large number of more subtlefailures that prevent the markets from producing efficient results 30 .As such, to understand why innovation does not occur at the expected levels appropriate to the level ofdevelopment of the country, it is necessary to go where the market provides no answers. Putting the spotlighton these problems will not only help understand what is happening, but also to start designing solutions.Especially, if it is known that there is an underlying cultural problem and that it prevents the agents of thesystem from seeing all the present and future development opportunities.The first step of the analysis shows that there are at least four kinds of market failures that cross andaffect the innovation. These can vary in intensity, give rise to another and even add their effects to variousstages of the process.A. INSUFFICIENT APPROPRIABILITY. Who owns knowledge? This question surely causes sleep-loss to manyscientists seeking new knowledge, to the inventor who designs a revolutionary product, to the small businessmanwho wonders whether to venture into a design change, or to a large company that is evaluating whether toreduce costs or to opt for research that could radically change its production processes.Knowing who has the property of the knowledge also means determining who will get to keep theeconomic benefits arising thereof. The response to this is generally not very uplifting: knowledge is a publicgood that quickly escapes from the hands of its creator 31 . Therefore, investing in its creation tends to be badbusiness, even though collectively there is a clear economic benefit.Thus, the problems of appropriability become the most essential market failure inherent to innovation,also leading to many of the failures of information detailed ahead.This failure is most strongly felt in the most basic research, and as such, without public funding, this typeof activity would practically not occur. Even though as applied science progresses (research with medical orThe analysis of why innovation does notoccur at the expected levels with onlyprivate sector initiative reveals at leastfour types of market failures that crossand affect it: insufficientappropriability, information failures,intangibility of assets and networkfailures.The difficulty in privately appropriatingthe benefits of creating new knowledge isone of the main obstacles to innovation.Even though the collective benefit may bevery high, there is a lack of economicincentives to individually carry out anactivity that is crucial for the innovationprocess.30 Stiglitz, Joseph. Globalization and Its Discontents. Taurus, Buenos Aires. 200231 Its consumption is non-rival and can only be partially excluded.64

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1industrial applications), the possibility of appropriating the benefits of this knowledge increases throughpatenting and licenses, this guarantee will always be partial or limited over time, depending also on how wellthe legislation defines and protects property rights.Problems arising from limited appropriability emerge, as well as the trend of many companies orindividuals to exploit the knowledge generated by others (avoid risks and running costs) 32 and the difficulties forvarious agents that could have the same objectives to coordinate and act together.B. FAILURES OF INFORMATION. “Information is power”. In economics, this is much more than a slogan.Information is a key element for decision making, therefore, having incomplete information or simply not havingit is a difficult disadvantage to overcome.In innovation, the failures of information are a recurrent problem that, in most cases, originate from theproblems of appropriability: information –that can be essential for many agents of the system– is not availabledue to the disadvantageous combination of high costs to produce it and the low possibility of retaining itseconomic benefits. There is no individual actor willing to make this effort and it will be very difficult tocoordinate some collective will 33 , and as such, given the great social benefit that having relevant informationcan provide, the State is required to correct these deficiencies.One formula of public measures for resolving this type of failures is the creation and publication of thisessential, albeit missing, information. The work carried out by this Council during 2006 and 2007, to produce amap of sectors with the greatest competitive potential is targeted precisely at that objective, providing as apublic good an analysis that the private sector does not have the economic incentives to carry out or todisseminate, but which can be essential for the future of the country.Chapter 1 showed that, while it is true that the production diversity of a country is positively related toits growth possibilities, there are factors that work against the development of emerging sectors, preciselybecause there is a lack of information on their potentialities and the public goods that are necessary for thefinal push. Without this analysis, the State and the private sector can be short-sighted regarding newdevelopment possibilities. Especially if these are not directly related to the sectors with the greatest weight andDue to the high costs of producing certaininformation and the low possibility ofretaining the economic benefits, keyinformation for the actors of the systemmay not be available, and there may notbe any individual or collective actorwilling to produce it.As knowledge becomes more specific,information tends to become asymmetric,generating distrust among the players,which can hamper the innovative endeavor.32 This is known as free riders.33 First, because it is unlikely that many actors are willing to, at the same time, dedicate efforts to create the information. Secondly,because the low appropriability makes contractual agreements on how to distribute the always limited benefits of this task difficult.65

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1track-record in the economy. This lack of information implies that there will not be any public or privateendeavour to establish the foundations to support a new production sector.In addition, the weight of the cultural factor on the scope of possibilities of people also produces seriousfailures of information. Thus, in a country marked by a rent-seeking culture, a culture of innovation is unlikely,since, before making any innovation endeavour, the idea of finding the right loop hole in the system to capturea rent or to get the most out of a benefit will always be present. This not only forces the State to targetsignificant resources to protect the system from capture, but above all it also requires time, efforts and funds togenerate the awareness that innovation is the right path for competition and growth 34 .Asymmetries versus StandardsEven after overcoming the problem of lack of knowledge, there are still asymmetries of information thataffect decision making in the most diverse circumstances, ranging from how the State defines what scientificproject to fund up to how a company can know if a research institute can provide a solution to its problems.For example, the most telling of these problems is education, which is one of the essential inputs for theinnovation process. As shown in Chapter 1, Chile lags far behind in the quality of its education at all levels. Infact, failures of information are so significant in this market that, in the absence of a deliberate, concerted andcontrolled endeavour to create information on quality and opportunities, it is unlikely that parents can make anadequate decision when choosing a school, institute or university for their children, even if they could afford it.It is also unlikely that, without enough information, a student entering third-level education can know the bestfuture study option in economic terms, either because it opens the door to a labour market with realemployability possibilities or because it provides the competencies that are really required by the productionsector.The creation of standards – understood as information that allows the user to evaluate, without needing alarge investment the quality of a good or service with complex characteristics – is the most appropriate responseto solving these deficiencies. However, it faces problems of appropriability. Creating standards is very expensiveand, because it can serve many users, no one is willing to individually take on the cost of creating thatinformation; therefore, given the social benefit that it can provide, the State is required to implement it.The creation of standards emerges as themost appropriate response for informationfailures, but it clashes with problems ofappropriability. To create the standards isvery expensive and, since it can serve manyusers, nobody is willing to individually takeon the cost of producing them.34 Chile faced a similar challenge some decades ago when the decision was made to open trade up and to adopt a development modelbased on exports. This not only required creating the economic conditions that would support the option chosen, but also to raise theawareness level so that the business world would exploit this opportunity and take on the costs as well as the benefits.66

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Thus, in the case of a small businessman who must evaluate if the technology offered by a supplier isreally what he needs, the asymmetry of information can be decisive, since he may end up buying something thatis of no use to him. A solution for this problem could be to sign a contract that attempts to cover all possibleoutcomes of the buyer-supplier relationship, but it would be very expensive and would probably end upinhibiting the implementation of the business. Given this and with the understanding that the adoption of newtechnology is essential for raising the productivity of the country and realizing that the problem of one buyermay be the problem of many others, the State could invest in the creation of a model contract that contributesto levelling the conditions between buyers and suppliers. This can contribute to increasing the productivity ofthe country. If the range of situations does not allow the problem to be solved through the creation of modularcontracts, the State can, for example, provide certified technological intermediaries which allow equitableagreements to be reached among the parts.As competition and innovation progress on a global level, the problems of asymmetry of information donot only include those involving the agents present in Chile, but also outside the country. Thus, the problems ofinformation of potential foreign consumers of Chilean products requires, for example, public support for thecreation of standards to support the “Chile brand”, providing guarantees of product quality or of compliancewith environmental or labour norms 35 .One derivative more: the problems of coordinationInformation failures generate, in turn, lack of knowledge or distrust that are precursors of the failures ofcoordination and these can lead to the duplication of endeavours, as two companies separately engage in aproject that could benefit both and whose costs could be divided between both. However, the lack ofcommunication and coordination also hampers the feedback mechanisms, making the dissemination of35 Even though this is very relevant for international trade and the exports of the country, the problems of appropriability in thegeneration of those standards restrict private endeavours and justify the intervention of the State. However, this intervention mustresist the pressure of groups that seek to present a particular problem as one of national interest or who seek to obtain funding foractivities where there is no market failure to justify State intervention.67

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1knowledge a slower and inefficient process, and affecting the fluidity with which innovations are incorporatedinto the system and thus the rate of increase of productivity 36 .C. INTANGIBILITY OF ASSETS. The fear of not getting funding through the traditional paths for innovationrelated activities arises from the great degree of uncertainty on whether the innovations may actually besuccessful, as well as because generally the assets generated by these types of projects are intangible, such aseducation or training in the use of new technologies.Given that banks only lend money if there is a material guarantee with a market value that protects themfrom the possibility of default, innovation and many of its inputs seem to be automatically excluded from thistype of funding 37 . Firstly, because the intangible asset that requires investment does not offer the bankcollateral in the event of non-payment, and because there is a very real possibility that the beneficiaries of theloans may not make the necessary effort to fulfil their commitments (a problem known as moral risk).Thus, for example, in order to solve the need for a loan system for higher education 38 , a complex systemin which the State must take on some risks had to be designed 39 . This occurs because the collective economicbenefit of having a more educated population greatly exceeds its individual returns. Why? Because education notonly affects those who receive it directly, it also affects those who have some kind of contact with the educatedThe intangibility of the assets produced byinnovation and the uncertainty regardingits economic results, lead to an inadequateprivate funding for these kinds ofactivities.36 Even when firms recognised that working together could be efficient, there is evidence that developing activities jointly amongvarious economic agents can produce transaction costs that can even wipe out the benefits of the partnership. This is very relevant inthe development of a research project.37 This implies that only capital increases or subsidies are viable formulas to limit the personal risk of innovators to adequate levels.38 Understood as a loan provided directly to students, in contrast to alternatives that are more akin to consumption loans, in which athird party (with verifiable income) takes on the commitment.39 In the case of education loans, there is the moral hazard that the student may not make a sufficient effort to complete the course ofstudy, which is crucial in determining if the loan will eventually be paid off. In some cases, such as in consumer loans, banks have otherformulas to avoid or insure against the non-payment risk. The first is based on the large number of potential clients, which allows thebad-debt risk to covered by the interest rate (paid equally by all). The other one is to establish credible threats for those who do notfulfil their commitment: for example, publishing the unpaid loan in a public credit report. However, none of these options work ineducation. This is because the number of clients is much lower, their specificities are greater and, above all, the creditor does nothave effective means to make the student complete his/her studies. Therefore, in this type of loans, universities should act as theprincipal guarantors in the early years of study, while the State should take on that role towards the end of the system. When theeducational institutions also share part of the risk of the operation, they are forced to show a clear interest in the student completinghis/ her studies and thereby pay the loan.68

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1individual, since part of the knowledge acquired will always be disseminated. Knowledge also fertilizes theentire social environment, generating the foundations for new knowledge and new ideas to emerge.However, this type of support does not occur with other intangible assets, such as the training given toemployees of companies in a new technology (unless the companies can appropriate the productivity increase ofthe employee), the acquisition of soft technologies (management or marketing, for example) or high levelprofessional education.D. NETWORK FAILURES. Networks can be a central element in innovation, as they permit information andknowledge to be disseminated and they facilitate communication and allow for the key contact to occurbetween those who have a problem and those who can solve it, or between those who need something and thosewho can satiate that need.The key lies in which members of the network not only draw from it, but that also feed it, which producesa much higher collective value. However, the problem occurs because the cost of joining the network does notnormally take into account the value contributed by the new member, which often discourages theirincorporation. Additionally the value of a network increases as the numbers of its members grow. This explainsthe public interest in creating and fostering it. A new system of telephony or Internet messenger is “better” asit permits communication with a larger number of people, and so long as this number (or critical mass) is notreached, the existence of the network will surely not be profitable and, as such, it will be financiallycomplicated to put it into operation.It is in this light that the challenges facing Chile today with regard to Internet connectivity throughgreater access to broadband systems should be seen.TIME MATTERSAs already cautioned, these four most common kinds of failures in innovation occur differently in each ofthe stages of the process and generally do not occur alone. They can even occur on top of failures in theprovision of infrastructure, and problems related to the scale or size of the agents involved, or to weaknesses inthe institutional framework or in the coordination of the system, preventing it from operating fully coherently.This implies that each stage of the innovation process has its own reality and each one can require a differentsolution framework.[see Figure 1]But there is more. Time.Networks can be a key element ininnovation. The key lies in which of themembers of the network not only drawfrom it, but also feed it, which produces amuch higher collective value. However,the contribution of the new member is notdeducted from the cost of joining thenetwork, which constitutes a disincentivefor that.The market failures occur in a dynamicmanner, and their effects can occur overtime. This requires prospecting –lookingto the future and “bringing it to thepresent” – especially in the production ofpublic goods – such as education, scienceand knowledge – that operate with longmaturing periods. The costs of actingmultiply if the decision to do so is nottaken on time.69

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1All the market failures described above do not occur in a static manner, but rather dynamically, andconsequently their effects are not only immediate but can occur over time. This is precisely what forces us tolook towards the future and “bring it to the present” so that, based on what the dynamics of the globaleconomy will be, and what role Chile will have in those scenarios, to understand what decisions must be takennow for the country to fully become part of that possible future.This need for prospection is essential, especially in the areas that have been defined in the previouschapters as indispensable for the development of the country – such as education, science and knowledge – thathave very long timeframes. This implies that it is practically impossible to act on these factors instantaneously –it is inconceivable to think of changing the educational level of a country in a brief period of time, and also thatthe costs of acting multiply if the decision of doing so is not taken on time.70

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 1WHAT INSTRUMENTS TO USE TO TACKLE MARKET FAILURES*Once the main market failures associated to innovation activity and the justification of the State to intervene areknown, it is important to review a range of policies that a government can implement to foster that activity. This should bedone keeping in mind that markets are heterogeneous and industries differ greatly in aspects such as type of researchundertaken (basic or applied), the degree of appropriability of the technology they face, and the different levels of linkagewith customers, suppliers and research and education institutions.Matching Grants (or Shared Funding Programs)Investment in certain kinds of innovation produces spillovers, which leads to a limited appropriability of the benefits orto the returns not covering the investment costs. However, given that some of these projects are socially desirable, theState may be willing to co-fund the investment.Teubal (1996) suggests that the implementation of incentive policies for R+D in the initial phase should be based onsubsidies of at least 50% of the costs of the project for at least five years. This structure implies a reasonable division of therisk and funding of the project between the public and private sectors and would therefore allow incentives for companies tobe created as well as avoiding problems of moral risk.Technological ConsortiaThese seek to “unite the forces” of companies of a particular industry to share the costs and benefits derived fromR+D. Thus, they internalize the externalities derived from spillovers in R+D activity and reduce the transaction costs.However, in some circumstances this instrument could even disencourage R+D spending: a) when firms share theresults of the joint R+D activity, but they compete when selling the products, there may be a drop in the benefits whichwould disencourage investment in R+D; b) in a context where the spillovers received by a company are independent of itsR+D spending and under competitive markets, a research consortium could lead to a reduction of the costs of the innovationendeavour.71

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Tax Relief ProgramsThis instrument leaves the decision on which projects to fund at the discretion of companies.In general, this scheme should be applied to larger firms with significant R+D project portfolios, in which innovativeroutines have already been learned and accepted. Small or new firms can have low income levels subject to taxes and, evenwhen the tax relief is at a maximum, may not have sufficient income to invest in R+D.Tax relief on R+D spending can be done in two different ways: an incremental scheme based on additional R+Dundertaken by a company and a volume system based on the total R+D activity undertaken.Subsidies and LoansIn the context of generic R+D where the objective of the authority is to obtain collective learning, subsidies aresuggested as preferable to loans among the direct incentives.This is particularly relevant for SMEs, which in general face more restrictions to carry out innovative activities andwhich, in the initial stage, have little experience in technological matters. Teubal suggests that this type of companiesshould receive subsidies instead of loans for innovation and R+D: "due to the transparency of the incentive offered, therelative ease of administration and the low administration and transaction cost for beneficiary companies. These advantageswill increase the feasibility of rapidly stimulating a critical mass of projects. This is an indispensable condition forundertaking a collective learning process that is cumulative of innovation and R+D, the main objective of innovation policy inthe initial stage of implementation of horizontal technology policies."Once a firm has attained notable performance in innovation activity and has accumulated substantial knowledge, itcould be equipped to face riskier projects and shift from a subsidy scheme to a loan one via risk capital.Consequently, the design of the public policies associated to fostering innovation can differ depending on the type ofmarket failure being tackled. Furthermore, before designing the instruments, an analysis is required of the degree in whichpatents or other mechanisms are available and allow innovators to appropriate a significant part of the benefits derived froma successful innovation.By way of example, if the type of innovation is linked to the development of quality inputs for use in vertically relatedindustries, the associated market failure is the low appropriability of returns associated to innovation. This occurs becausethese inputs often have a generic character in that they can be used in various industries without having to incur excessivelyin additional R+D to incorporate it to the processes or activities of companies. In other words, it can be "copied" at a lowcost. As a result, there would not be sufficient private capital for the development of generic inputs.The role of the State in this type of market failures is to foster the availability of funding or of capital especially forSMEs and new companies that do not have the necessary capital to execute those innovations. This would reduce the barriers72

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1to entry of innovation-intensive companies and foster competition in the industry. The idea is that the State limit itself tofostering and ensuring an adequate environment for the development of this market and leave the decisions on whatprojects to back up to firms specialized in risk capital.Another type of innovation is that associated to the development of complex systems, such as in the aerospace andtelecommunications sectors. In this case, the market failure arises from also the low appropriability of returns. On top ofthis, there is the high risk associated to the results of technological innovation projects and the high associated costs. Assuch, the willingness to invest in this type of high risk and high cost projects is low given that the prospects of recovering thereturns of the investment are scarce.In this case, competitiveness policies should be adopted for cooperation in the area of R+D (such as R+D consortia inwhich the costs and benefits of R+D are shared). Another alternative is to subsidize innovation activity, where subsidiesshould be provided in exchange for the commitment by the innovative companies to disseminate their results. The latterfosters access to innovation at a reasonable cost, preventing a single company from capturing all the benefits (and all therisks) which ultimately favours the consumer, since prices are generally lower in a more competitive environment.* Based on “Antecedentes para el diseño de una política tecnologica nacional”. José Miguel Benavente, 2004.73

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 12.2 BASES FOR PUBLIC ACTIONS IN INNOVATIONSCIENCE AS A STARTING POINTThe first chapter of this document has highlighted the importance of science in innovation and growth.This is particularly the case with research that is more applied to technological development or targeted atproviding a response to production problems. Even though in Chile first-rate scientific research is carried out invarious disciplines, its impact on the national production system is not very satisfactory.Why? One factor is the low number and dispersion of researchers, which makes it difficult to generate thenecessary critical masses for a greater impact. Additionally, there are incentives and cultural elements thatseparate it from the scientific activity of the production world. Thirdly, the public funds that support scientificactivity have shown greater efficacy in fostering free research or research weakly linked to companies (“pushedby science”) than in research with a production impact (“demand-driven”).There is a consensus that the country must invest more in science. Consequently, the Council in itsFebruary 2006 report recognises the need to carry out a generic endeavour such as the obligation to foster thescientific work that is more oriented to production needs. This is a task in which the business world should getinvolved with a much greater financial commitment. This document proposes a gradual increase in the supportto individual researchers or centres of excellence for their own initiatives. It also obligates the task of creating anew balance in the future between basic and applied research, favouring the progressive prevalence of sciencelinked to knowledge for innovative change and the growing pre-eminence of research driven by companies forR+D activities.However, to define the National Innovation Strategy for Competitiveness, the Council has sought to takeup the analysis again based on essential questions.Is it necessary for a relatively poor country such as Chile to target a share of its public resources to fundbasic scientific research? Is it not enough to have a handful of trained professionals capable of reading thescientific publications that are produced elsewhere?The answer is Yes, it is necessary, but not only because it is very difficult for a researcher to fullyappropriate the benefits of producing knowledge, but also because home-grown basic science will give thecountry the capabilities to understand new knowledge or to adopt the new technologies that emerge from it.Why? Because highly trained people possess something that is not entirely transmittable through their research74Even though in Chile first-rate scientificresearch is carried out in variousdisciplines, its impact on the nationalproduction system is not very satisfactory,given the difficulty in reaching a criticalmass of researchers, The distance betweenproduction and scientific activity and theincreased efficacy of public funds forfostering free research versus “demanddriven”research.It is necessary to target funding to basicscientific research, since without it, it isdifficult to understand new knowledge oradopt new technologies that arise from it.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1papers: a tacit knowledge that can only be transmitted through a direct interaction and in the doing with theacademic and scientific communities, with companies and the other agents of their environment. Only when thistacit knowledge is applied, can the country acquire the capabilities for producing local knowledge as well asobtaining and appropriating knowledge that emerges elsewhere. Moreover, it is only through these means thatChile can wholly participate in global innovation networks.Furthermore, a significant part of the public funding for first-class basic science should respect thefreedom to choose the areas of study, because otherwise at least three threats emerge: i) the loss associated toan incomplete supply of basic knowledge required to drive the production endeavour; ii) depriving the countryof knowledge that could be essential in the future even though today it may not seem to be so; and iii) thepossible curtailing of ideas or knowledge that appear unexpectedly during the execution of scientific work andthat can be valuable in areas that are not directly related to that research.However, the allocation of public funds in this area should fulfil various criteria: i) certify transparency inthe supply and the excellence of those who receive 40 ; ii) ensure the tacit transfer of knowledge 41 ; iii)adequately foster the development of a growing supply of researchers 42 ; iv) impede the occurrence of crosssubsidiesamong related institutions; v) ensure the tracking of the implementation of projects; and vi) ensureaccountability, with regard to project spending and those responsible for approving it.FROM SCIENTIFIC INTEREST TO MARKET INTERESTAs progress occurs in more applied research, the underlying problems are constantly changing. Eventhough it is still limited, the possibility of exclusively appropriating the benefits of the new knowledgeincreases. As such, norms on intellectual property begin to become relevant and it is also important (for public40 The evaluation of projects must be carried out by agents with unquestionable merit and neutrality.41 The funding instruments of basic science should consider what the most propitious circumstances are for the desired transfer ofknowledge to occur. Note that two failures occur simultaneously here. The lack of appropriability of tacit knowledge and theasymmetries of information on whether he who claims to possess it actually possesses it. This problem is particularly relevant ineducation, since it highlights the key significance of the cognitive and pedagogical capabilities of teachers. In other words, the needfor teachers to be well-trained, as well as the critical value of teacher evaluation, in order to overcome the problems of asymmetry ofinformation42 The asymmetries of information that occur when jointly evaluating senior and junior researchers can restrict the development of newresearchers. This makes it advisable to extend public support to research for teams of more novel researchers. This also requiresconsidering that the parameters measured for each type of initiative be different. For example: the tacit knowledge transfer capacityof a senior researcher cannot be evaluated on the same scale as that of a researcher who is just starting-off.As research becomes more applied, thepossibility of exclusively receiving all ofthe benefits of the new knowledgeincreases. As such, the mechanisms thatfacilitate its appropriation start tobecome relevant, especially intellectualproperty rulesThe convenience of having demand sidesignals in applied research implies ensuringthe private contribution in the whole chainof knowledge creation. This contributionmust be greater, the more that saidknowledge draws closer to a product thatcould be validated by the market.75

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1funding decisions) to determine precisely how much returns the private sector can have (and as such, how muchresources should be supplied) and how much should continue to be financed by the State.At this level, not only the particular interest of scientists to seek certain knowledge becomes relevant,but also the demands of other agents of society, such as companies, or the needs of the country. The February2006 report of this Council indicates that in this stage of the process, priority should be given to research thatseeks to develop knowledge which, when incorporated into innovative processes, provides for results thattranslate into products validated by the market and an increased competitiveness level for the country.All in all, the practical differentiation made in this document with respect to basic and applied sciencedoes not mean that this Council sees them as not linked or assumes that a researcher cannot participate in oneor the other. On the contrary, the analysis does not ignore that scientific activity is a continuum and thereforethe commitment is reinforced (expressed in February 2006) to foster the involvement of researchers, currentlylinked to free research projects, in projects with objectives declared through the linkages of the public fundingsystem of scientific-technological centres (STCs) with contestable funds (which can have some variablecomponent that depends on the relationship with the private sector) and private funding (from the demandside). This should be complemented with evaluation systems that reward the work of researchers in projectslinked to companies or that value, together with the publication of papers, the creation of patents, licenses orother indicators of production pertinence.The demand-side signals are essential in this model. Therefore, these instruments should foster thepresence of the private sector in the entire creation of the knowledge chain and, above all, that its presenceincrease as the research draws closer to a product that could be validated by the market, especially in thoseareas in which the comparative advantages that the country must exploit are revealed.Funding from the demand side can also emerge directly from this Strategy, either because of the need tocover gaps in areas that are essential for innovation and competitiveness or that foster the development of asector with a defined potential. In this case, the State should incorporate controlled selectivity criteria,targeted at facilitating the development of capabilities where they are required, applied to instruments offunding 43 or other efficient formulas.This forces the bodies (Councils or others) to define the allocation of public funds, they should not onlybe capable of determining the quality and pertinence of projects, but also to have the capabilities to estimatethe public funding that each requires.BOX 2STRESSING INTELECTUAL PROPERTYIntellectual property policies are essential in theKnowledge Economy, but they require a delicate balance.From the local viewpoint, and even though theproblems of appropriability that reappear on variousoccasions of the innovation process are recognized, it isnecessary to be proactive in fostering the development ofnorms on intellectual property. This is to guarantee thateverything that is appropriable and can lead to a patent orlicense can do so. This is because as private returns exist(which implies that there is a better private willingness tofunding), the use of public funds, which could be used forother needs, will be avoided.Globally, Chile must adopt clear definitions in thismatter in international fora and trade negotiations, drivinghome the idea that the defense of intellectual propertycannot become a threat to free competition.Nowadays, some global companies use thismechanism as a way of blocking access to new markets. Assuch, and since the State is interested in patenting, since itinfluences on others doing it later, instruments that supportcompanies that begin this process in more developedmarkets should be considered.43 The creation of specific funds that are difficult to undo and that tend to capture clientelism is not recommended.76

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1UNIVERSITY-FIRM: A COMPLEX RELATIONSHIPThe more the applied research, the greater the emphasis given to the relationship that occurs betweenthe scientific world and the demand for new knowledge that emerges from companies. This contributes tomaking the system as well as the public policy instruments that must be regulated more complex.At this point of the chain, the State, even though it continues to participate with resources, must request(and use as a selection criterion) a greater proportion of private sector contribution to the projects. Theobjective of the research (increasingly more commercial) also provides for greater possibilities of patenting andother ways of ensuring the appropriability of the results of the technological scientific endeavour 44 .[see Figure2]However, the problem is more complex. The decision of companies to venture into a research projectwith innovative ends is hindered by a fear of free riders and a possible association or link with a research centrethat can be hindered by lack of knowledge or distrust.Asymmetries of information between universities or research centres (supply) and companies (demand)can be high and complicate a fluid relation between both. The latter can be unaware concerning what theacademic centres can really sell it, and the centres often distrust or disdain the commercial interest of theircounterpart. Even if these initial complications are overcome, problems in the definition of contracts can arise,above all if these include patents or licenses. Lastly, the small or medium size of companies is sometimes a keyfactor inhibiting the demand or that makes it very expensive to end the asymmetries of information.In this scenario, a lower proportion of public support for research begins to appear (in line with thegreater private sector participation). However, the contractual complications that can arise force the State toplace greater attention on the property rights of innovation arising from collaborative activities.The public endeavour at this stage should be targeted at the accreditation of research centres. Thisserves as a guarantee of quality for the business world. In addition – as the Council verified through workshopswith agents of the National Innovation System – the interrelationship of both worlds through roundtables orconsortia that favour cross-fertilization should be fostered, above all in crucial areas for this strategy andespecially in those that have been defined as clusters with potential. However, this relationship should not beAsymmetries of information betweenuniversities or research centers (supply)and firms (demand) can be high andcomplicate a more fluid relationshipbetween both. However, to foster thisrelationship, the public endeavour shouldbe targeted at certifying guarantees ofquality in the technological supplyreceived by innovators.Chile is still an emerging developingcountry, so it is inevitable that most of thenew scientific and technological knowledgewill continue to be produced abroad. Thisrequires a great technological diffusion,adaptation and adoption endeavour in ourfirms.44 According to specialized studies, 85% of patents do not produce economic value, because they are not associated to a licence. Inmost cases, the decision to patent seeks to impose a barrier to entry for other competitors, or it is also a form of permitting newknowledge to become public, keeping a certain degree of protection77

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1restricted to the national context, but rather opened up to a global approach that leads to, for example, linksbetween Chilean companies and foreign universities, or Chilean universities with foreign companies.A more complex formula is that of reliable intermediaries or trusted technological brokers, who can actin two spheres:i) bringing together the interests of research centres with that of companies (so that the problems of oneside can be tackled by solutions from the other side). In a small country like Chile, a broker could bring togetherthe scientific supply as well as the business demand, generating relationship possibilities that would otherwisebe too complex due to problems of scale;and ii) improving the possibilities of appropriating the scientific work as markets are understood and thecommercial value that the researchers had not identified in their work are “discovered” and that can even gobeyond the area of knowledge in which the science occurs.However, the cost of becoming this type of operator (which needs high levels of knowledge 45 ) seems tofar exceed the possibilities of a small market of making this endeavour profitable unless there is public supportat the beginning. The initial analysis of the Council is that, as the university-firm relationship is defined asessential in the innovation process (because it also generates broader social benefits) 46 , the State could supportthe emergence of these brokers so that they can subsequently finance themselves 47 .TECHNOLOGY FOR COMPETITIVENESSAccording to this Council in its strategic guidelines presented in February 2006– Chile is still an emergingdeveloping country, restricted in size and resources, so it is inevitable that most of the new scientific andtechnological knowledge will continue to be produced abroad. This implies that it is likely that technologicaltransfer – associated to foreign direct investment, to the acquisition of licenses and the processes of adoptionand adaptation of technology available in the world – will be more significant than local innovation for a longtime.45 In the literature, it is understood as an activity intensive in specific capital.46 The network externalities are also a good reason for the State to support the creation of open networks (or even of sophisticatednetworks with restricted access, but nevertheless as public goods) or the relationship between research centres and firms, as the socialbenefit exceeds the private one.47 The most recent example is Australia, which has developed this kind of agents under the umbrella of public bodies targeted attechnological transfer. This also contributes to reducing the distrust that emerges from the fact that one of these intermediaries canbe closer to the interests of research centres or private firms.78BOX 3OBJECTIVE TECHNOLOGIESAND ORGANIZATIONAL ASSETSRecent studies suggest that the impact of theadoption of new objective technologies (hardware andsoftware, for example) on productivity depends oncomplementary investments in organizational assets(practices, culture and organizational structure), to thepoint that the adoption of new technologies can producenegative results. The lesson is that technological changeis based not only on the financial capacity to acquire ordevelop new machines or processes, but also on theavailability of soft capacities in the organization.Thus, investment in technological assets willincrease productivity when accompanied by investments inorganizational assets, because organizations and peopleadopt new technologies according to how they think itshould be used, or concordantly with their commonpractices and their structural dynamics, although notnecessarily according to how these technologies can havea greater impact. As such, the support to investment innew technologies should consider a similar respect forinvestment in organizational assets. In addition, it shouldbe kept in mind that technological options that implysimilar levels of investment in fixed capital, may have verydifferent investment levels in organizational assets and, asa result, the activities of consultants and/or representativesof technological solutions can have conflicts of interest.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Thus, this Council indicates that one of the great tasks for the next few years will be increasing theproductivity of companies through a major endeavour of technological dissemination, adaptation and adoptionwhich will allow the best production practices present in Chile and the world to be incorporated and it offersthem the possibility of joining the field of innovation.From this viewpoint, the first large problem in this area is that these companies (and some large onesalso) do not have the capacity to search for new technologies. They are not aware that they do not know, and itis therefore impossible to adopt or adapt new technologies, among these there are precisely those that teachhow to innovate 48 .Nevertheless, if this obstacle is overcome, the problems will persist, because the acquisition of “hard”technology (machinery) sometimes entails a much larger investment in “soft” technology (knowledge withrespect to the use of machines), for which there is no funding since it is an intangible asset. Lastly, the adoptionof these technologies is also a complex process that is strongly influenced by the “absorption capacity” of theorganization (which depends on previous learning) and which often requires profound changes within thecompany, even though it can also yield significant benefits. [See Figure 3]However, all in all, the evidence shows that the problems of most small companies precede the adoptionof new technologies and are related to management and funding. As such, the need – clearly expressed in theworkshops carried out by the Council with agents of the National Innovation System – arises to employ models ofintegral support for innovation, that facilitate access to a continuum of solutions, which will not obtain fundingin the banking system 49 .The first task is to support the company (with significant contributions from the State) through an integraldiagnosis 50 and a general consultant that accompanies it during a limited period of time. Only then will it bepossible to progress to more specific support for each area, one of which can be technology or other innovativecomponents, even though in some cases the size of companies would make advisable the formation of consortia,which could take on this cost or the acquisition cost of larger equipment.48 “Soft” technologies include some that help firms to innovate, defining work methods, organizational structures or other managementformulas that foster creativity, the communication of ideas, learning and participation that supports innovation.49 The lack of collateral when requesting a loan for this type of requirement restricts the access of SMEs to the financial system. Thepresence of “moral hazard” type incentives inhibit the spontaneous development of mechanisms that correct this phenomenon throughcustomer portfolios, as occurs in personal banking.50 This diagnosis must be standardized, in order to make the creation of a market of consultants that implements this task costeffective.79

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1As the process advances, it will be necessary for the company to increase the level of own-funding forthese services for it to also exercise an effective control of what is received 51 , to control the risk of creating asystem that fosters consultants that live off subsidies, and that do not produce specific results for companies.This requires the development of specific strategies that always keep the company as the main agent for thesubsidy, and not the consultant. This industry –in which there will be technology specialists 52 – must, in any case,have their competencies accredited as well as their performance evaluated through a certification system forthe company that received the support 53 . Then, the system should allow the consultant to obtain adequate gainsafter he acquires the specific knowledge, and keep that knowledge available for smaller companies..A relevant element when defining the explicit support for this level is that the technological extensioncan put the company (no matter its size) in the position of having to make the tough decision of introducing atechnology that destroys competencies, either personal or from supply industries. This not only leads to thethreat of a resistance to change, but also the challenge for the State of having a regulatory frameworkappropriate for quick job re-training (constant training is essential) and for the quick setting-up and closingdown of companies.HUMAN CAPITAL: QUALITY AND CONSTANT RENEWALChapter 1 has shown us that to successfully face the challenge of progressing in the Knowledge Economyand facing the threats of global competition, one of our main challenges lies in improving the quality of ourhuman capital. The challenge for Chile lies in injecting more resources into education, developing systems thatguarantee the quality and pertinence of those services and changing approaches with respect to objectives andmethods, at both a school level and in third-level education and job training.The consensus in this Council is that the great weakness of human capital in Chile today is the low level ofbasic competencies revealed by the PISA tests. We can add to this the indicators that show the lag of theInvestment in human capital forinnovation requires considering a singlesystem of education and training. Thisrequires ensuring access to third-leveleducation, favouring the development oftechnical education, and has the preconditionof ensuring the quality ofprimary and secondary education.51 This contributes to reducing the effect that as the complexity of the firm increases so too do the costs associated to an ever morespecialized consultancy work. This is especially the case with non-standardizable technology.52 Similar to the technological broker in terms of their functions, and the complications in generating a technological broker market andmaking it profitable.53 The State support for the consulting industry occurs through certification and the subsidy to demand given to the firm. The objectiveof the certification is to measure the work of the consultant in his/her task and the pertinence of the work done. There is also the riskof capture of the consultant by the technological suppliers, but that is an inherent problem of the provider, be it public or private.80

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1country in variables that are essential for innovation and competitiveness, such as the percentage of thepopulation that enters third-level education or the distorted proportion of professionals versus technical staff.Tackling the problems of primary and secondary education is not within the brief of this Council, but it isessential to emphasize what the February 2006 report states as a goal for the country and a minimum base forany challenge in the area of innovation or productivity: that the school system should develop a platform ofinternational-level basic competencies in the population aged below 18, prioritizing the development oflanguage and communication (written and spoken), managing mathematics and the reasoning characteristic ofthe sciences, the use of Information and Communication Technologies (ICT) and proficiency in English. Likewise,to foster the competencies, abilities and behaviours associated to creativity and entrepreneurship in primaryand secondary schools through active teaching methods and experimentation in all sectors of learning.A great leap forward in third-level educationToday, around 40% of young people (aged between 18 and 24) in Chile enter third-level education. Underthe present conditions of basic competence acquisition, it would be a timely endeavour to raise ourselves toaround the 50% mark. This is a high and certainly desirable figure given the gaps described in the previouschapter. It is however also a significant challenge, because if young people do not arrive with the basiccompetencies, there is no point in opening up the doors of higher education to them 54 .To make progress here, the first step is to ensure the quality of primary and secondary teaching 55 . Thesecond step is to decidedly expand the coverage of third-level education based on the capabilities of students.However, why should the State fund education at this level? The answer is because the social benefit ofhaving a greater number of educated people exceeds the private benefit that they obtain through highersalaries, and this leads to higher economic growth for the country (this is a case of network failures).Nonetheless, because it is an intangible asset and its result are uncertain, the possibilities of funding educationthrough the financial system are very scarce (unless there is a guarantor) 56 .The Council estimates that the country should advance in third-level education coverage to levelsapproaching 80% of the population between 18 and 24 years of age towards the year 2020. This significant54 Out of the not-incorporated 60%, the experts believe that only 10 percentage points correspond to students who have the necessarycompetencies for this educational level. Consequently, further improvements will invariably require improving the quality of the basiccompetencies.55 For this, the systems for measuring competencies should be reinforced and the standard recommended is that of the OECD.56 Without State support, only people with higher incomes could study.81

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1increase requires a revision of the funding mechanisms for this type of studies. Today, the public system coversthe poorest 60% of the population through scholarships or State guaranteed loans, and the following 20%partially.Moreover, the public policy decisions with respect to the provision of scholarships or State guaranteedloans should consider not only the most complicated socioeconomic conditions of the poorest sectors of thepopulation 57 , but also the labour market conditions which they can face once their education is finished 58 . Thesystem should also push for the funding support mechanisms to reflect the costs of degree programs.Priorities and QualityThe ratio between professionals and technical personnel in Chile (11 to 1), which is sharply different tothat of developed countries, indicates that the eventual extension of the public funding for third-leveleducation should concentrate, albeit not exclusively, on the technical and non-university side.Why has this occurred? Firstly, because for a long time the incentive of State financial support was onlyconcentrated on universities and professionals institutes were added to the system of State guaranteed loansonly two years ago. Furthermore, due to cultural and information problems, society is not yet aware of thegreater returns that the study of technical professions 59 can provide. On top of this, the structure of theeducational system offers few options and incentives for students to progress –in accordance with theirpossibilities and needs – on various levels of education and training.The abnormally high ratio betweenprofessionals and technical personnel inChile (11 to 1) indicates that theextension of public funding for highereducation should concentrate intechnical education.57 The alternative cost of studying for people from the 1 st , 2 nd and 3 rd quintiles should be evaluated. Quitting work to study may meancutting access to funding of needs as basic as food. This is why the expansion of the present scholarship and loan schemes should beexamined for food and other costs ( such as, for example, study textbooks).58 It is important to keep in mind the level of State subsidies (rates), for example, salary based discrimination still present in thecountry according to socioeconomic origin or gender of workers, as well as the private returns from different professions.59 In some cases, the private returns from a technical course of study even exceeds that of some professionals, especially those inwhich the market is saturated in terms of the supply of graduates. According to figures from Futurolaboral.cl, in 2004, an auditor froma professional institute gets a higher salary than that of a university educated auditor ($853,000 versus $773,000)82

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1A basic requirement for the system is opening up a greater range of “routes” and intermediate steps thatnot only offer options for secondary, technical and even university education, but that also extend the spectrumof possibilities within each of these institutions 60 .This bias towards technical education must also be understood as a formula for strengthening programs orareas of competencies in sectors that the Strategy has defined as high potential and in which today or in thefuture there may be a deficit of human capital 61 . Nevertheless, in any case, the increased financial contributionin this area should be accompanied by a system that ensures quality 62 through a dynamic accreditation model forinstitutions – that captures the changes experimented by the market and the signals given by the InnovationStrategy for Competitiveness – and through the accreditation of the competencies of its graduates. This modelshould also be adopted by the university sector, especially in those areas where a greater State contribution isrequired to close gaps or reinforce special sectors.Clearly the State should only provide support to students in duly accredited institutions. However it is alsonecessary that the instruments provide an absolute clarity ensuring that the State contribution is directedtowards where the market failure was detected and that it be used exclusively to provide the solution.Otherwise, in the case of multi-product providers, such as universities, cross-subsidy incentives will be createdand competition will consequently be affected.Should, then, the subsidies be different depending on the real costs of each study program? 63 The Councilbelieves that differentiation is the way to go; in any case, that State endeavour should be concordant with thepriorities defined in the Strategy and the sectors that are deemed to offer the greatest potential or that requireovercoming larger gaps between their present level and the requirements of the country. [See Figure 4]The emphasis proposed in technicaleducation should be linked to the presentneeds of production or the competitivenessgaps identified in sectors with competitivepotential.60 It is necessary to create a system that recognises acquired competencies at a given level and then rewards the step up to the nextlevel, by validating said competencies and as such reducing the time required to obtain a new level of education or other mechanisms.The idea of modularizing education and issuing intermediate diplomas also allows other persons to join the labour market earlier (torespond to its economic needs) which means throwing away the time and money invested over one or two years of study.61 One way of bringing the supply of technological education institutes closer to the demands of the labour market is for the privatesector to participate on their boards, which would allow it to sanction the programs they teach depending on their pertinence.Meanwhile, the State can use the scholarships system to favour sectors that the Strategy has defined as key, always being careful toavoid capture by those sectors.62 Which must be public information for decision-making by those who buy education services.63 The same problem can occur in training, and others with the acquisition of large-scale equipment.83

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 184BOX 4HOW IS HIGHER EDUCATION STRUCTURED IN DEVELOPED COUNTRIESAbove all, as a flexible network of learning opportunities for each individual to plot his/her owneducational agenda. People are expected to search for the competencies that they need throughout theirlives and that institutions offer a wide range of educational possibilities. This is based on a secondaryeducation and cultural environment in which the student has already acquired the basic knowledge andmaturity necessary to take his/her education into his/her own hands and, subsequently, to manage theflexibility.Subsequently, those opportunities are designed to offer people the greatest possibilities of movinghorizontally, between various programs and institutions and, vertically, between different levels of highereducation.Additionally, higher educational systems are structured around two main channels with multiplepoints of contact between each other. One corresponds to level 5B in accordance with the InternationalStandard Classification of Education (ISCED) and leads directly to the labour market through technicalvocationalprograms lasting three years at most. The other, to the academic channel, covers the short andlong programs of level 5A –that provide general and professional education– and the advanced ones of level6, leading to doctorates.To ensure the necessary flexibility, mobility and personalization of educational agendas, thisarchitecture incorporates three central pillars: learning loans of the same value in the international arenaof higher education; setting curricular standards related to the competencies that people are expected toacquire in different programs and levels, and degrees and titles that inform the labour market moretransparently on the programs completed, the accumulated learning loans and competencies achieved.The countries of the OECD are currently moving in these directions.Chile, with its rigid system of long courses of study with early specialization and emphasis onprofession-oriented teaching and titles that serve as status symbols, is out of line with these trends.The system offers scarce possibilities to young people and adults to personalize their educationalagendas. The educational opportunities are organized as degree programs with only one entry and exitpoint. This hinders horizontal mobility and restricts vertical mobility. The programs of level 5B do not haveenough support and are designed as terminal courses, which disencourages their demand and prevents themfrom being undertaken on a large scale. In turn, the programs of level 5A are habitually structured asprofessional training, and not as occurs in developed countries as general education preceding

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1professionalization and postgraduate studies. While in the OECD countries most students who study at level5A graduate in three or four year programs, in Chile they do so in programs of 5, 6 or more years (SeeTable). This is costly for students, their families and the economy. It fosters dropping out and does notprepare graduates to face a changing labour market; and increasingly demands generic and crosscompetencies.GRADUATION RATE IN THIRD LEVEL EDUCATIONACCORDING TO LEVEL AND TYPE(Percentage)Level 5B Level 5ªFirst grade from 3to < 5 yearsFirst grade of 5, 6or more yearsChile 9.1 9.3 12.3Australia 1.0 29.1 7.1Canada 16.4 27.2 2.3Denmark 22.6 9.2 0.0Finland 18.3 30.6 6.3South Korea 30.8 27.5 0.6New Zealand 16.4 31.8 7.3Norway 6.4 29.4 6.9Spain 7.5 12.6 15.8Holland 1.0 32.7 1.4Source: OECD, Financing Education –Investments andReturns. Analysis of the World Education Indicators 2002.85

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1TECHNICAL EDUCATION AND TRAINING GO HAND-IN-HANDThe concept of lifelong education requires a more global look at the educational and training system.Moreover, it requires viewing both as simply one large human capital formation system. Thus, a design withmore entry and exit options, intermediate certificates and modular systems of competence certification arisesfrom not only the requirements of the formation of technical and professional personnel, but also from theirtraining needs over time.However, various interests are interwoven in training that are not always aligned. The first great problemis appropriability, because the company assumes that it cannot appropriate all the benefits of training, eitherbecause the knowledge acquired by its employees is not completely appropriable or because the worker can goto another company “with everything learned”.On top of this, companies say that they do not have a clear evaluation of the returns that they cangenerate through this investment and that their fostering systems are not necessarily associated to training. Thisdiscourages the interest of the worker in it 64 . The lack of awareness to innovate can be an explanation, but itundoubtedly the existence of standards of competencies that help improve the information conditions in thework market also contribute.Another complicated factor is that, something which is important for a businessman may not be importantfor the employee, and the relevant issue for each of them may not coincide with the needs of the country.Public policy in this sector should start by reconciling the interests of all agents (the State, workers andbusinessmen), dedicating itself to the primordial task of creating the standards of competencies that will beuseful for training as well as the technical education at a third-level education institution. The failures ofappropriability and asymmetries of information justify the public support at this level 65 , and even in thesubsequent stages, such as the design of capability certification tests and the funding of the training itself,given that it would be difficult to obtain loans for this intangible asset. All of this, understanding that the socialbenefit of having a more skilled labour force is greater than the individual returns that each person can obtainthrough a better salary.The instruments for training should strengthen the areas of the economy that this Strategy defines aslagging and those with a potential future. In addition, they should give the choice for workers to train or certifyThe concept of lifelong educationrequires viewing companies as a singlehuman capital creator, withintermediate diplomas and modularand certification systems.Public policy should reconcile theinterests of all actors (State, workers,business people), aiming to create thestandards of competence useful for thirdlevel-training and technical education.Chile requires a greater number ofpostgraduate students who, as a resultof their low private returns, should besupported through public-backedfunding mechanisms, such asscholarships, always linked to first-rateeducational institutions and to thecompetitiveness lags identified.64 This disencourages workers from getting training because they do not see that leading to wage improvements and/or promotions.65 Note that when training is in a very specific aspect of the firm and is, as such, totally appropriated by it, State funding does notcorrespond at all or only at a minimum level.86

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1competencies if they want to 66 and foster that the supply of training adjusts to the needs of customers 67 andavoid collusion between the training intermediaries, the training institutions and the companies requiring thetraining.THE NEED FOR A HIGH TECHNOLOGICAL SPECIALIZATIONWith respect to the formation of highly-skilled human capital, the analysis of the Council is that the socialreturns for the country of having a greater number of postgraduate students 68 in various areas of knowledge,exceeds the individual benefit. Strictly speaking, the private returns of these academic levels is very low andtherefore this should be defined as an area of interest for the State, attainable through scholarships that shouldbe determined based on greater quality demands from the institutions that teach those courses 69 .Once the needs for specialized human capital have been seen to – based on criteria related to the sectorswith the greatest development potential in the country and the evaluation of the existing or potential lags inhuman resources –some areas of knowledge can be fostered selectively as a medium term solution, or defineimmigration policies 70 to respond quickly to the most urgent needs. This also requires that the publicinstruments ensure that the resources reach their objectives and do not get bogged down with internal problemsof education institutions 71 .One way of expressing this priority – indicated in the February 2006 report – is the stimulus of forming“critical masses” of researchers associated to centres of excellence, within and outside universities, targeted atissues or disciplines of particular importance for innovation. The priorities should include the most relevantdisciplines and the issues or problems of that most affect the development of clusters with competitivepotential identified by the Council, with the objective of preserving and dynamizing its competitive advantages.66 The international experience of personal learning accounts already exists.67 This could benefit smaller and more flexible training centres, but it also requires an efficient accreditation system.68 Doctorates and post doctorates, but not masters, are included, whose private returns do not make subsidies advisable, such as MBAs.69 The Council believes that positive discrimination policies are not justified for doctorate or post doctorate programs carried out inChile versus those carried out in foreign institutions. The quality requirements in the allocation of resources will drive the improvementof national programs and the State support for these programs should be targeted through these two channels: a) no negativediscrimination in the amount covered by scholarships, whether it is a national or foreign institution; and b) financial support for thelocal institution to join widely recognized international accreditation systems as it fulfils the requirements.70 These policies appear attractive in the short-term, but their efficacy is highly debatable in satisfying the requirements of theinnovation endeavour in the medium term.71 Cross-subsidies within universities or institutes could distort the effect of public policies, if they are not duly targeted.The need for specialized human capitalmust be defined based on criteria relatedto the sectors with greatest developmentpotential in the country and theevaluation of the existing and potentiallags in human resources.87

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 12.3 THE DELICATE ROLE OF THE STATEWhat precise role the State must play in the economy and in society continues to be an open and activedebate in Chile and around the world, driven by two often irreconcilable positions. On the one hand there arethose who think that the market will solve everything, and on the other hand, those who view the State as theinfallible solution.However, in the last 50 years, economic science has explained why and under what conditions marketswork and when they do not. It has provided convincing evidence that, once the roles of each are defined, theState can and should exercise a necessary complementary role to correct the allocation of resources and thedynamization of growth. This does not mean forgetting, however, the theories and evidence that refer to thefailures of the State – lack of coordination or the certain possibility that it be captured by private interestgroups – and with it the possibility that a failed public intervention will damage more so than the lags it seeks torepair.Clearly, since there are is always information or imperfect markets, there is room for the efficiency ofthe intervention of the State to improve. However, given the failures of both, they must act jointly, as partners,with the exact nature of the association being different depending on the country, on its level of political andeconomic development 72 and its culture.In this framework, the market and system failures not only justify but also obligate the State to foster andfacilitate the innovation process and help in the construction of assets that support it. This occurs because,while a significant part of innovation takes place at a private level, the government plays a significant roleregarding the conditions in which innovation activity is undertaken. As indicated in the February report, thisimplies, among other tasks, providing an adequate infrastructure for the system to operate, defining theinstitutional framework for transactions to occur quickly and efficiently, facilitating the construction ofnetworks and articulation among agents and, in general, ensure the necessary coordination for the system as awhole to function coherently.Thus understood, the creation of institutions that assure the national articulation of the innovationendeavour is a task in which the State plays a key role, making the sense of the technological endeavour, itspertinence, coordination, goals and evaluation mechanisms explicit. This not only provides sense to the work ofWhile it is true that much of innovationis carried out privately, the governmentshould provide the appropriateinfrastructure for the system to operateand the institutionality for transactionsto occur quickly and efficiently, tofacilitate the construction of networksand the articulation between actorsand, in general, to ensure the necessarycoordination for the system to functioncoherently.Since there is imperfect information ormarkets, there is room for Stateintervention to increase the efficiency ofmarkets. Given the failures of the marketand the State, both must act jointly,respecting their corresponding spheres.72 Op. Cit.88

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1this Council, but also explains why many governments from around the world (of developed and developingcountries) make great endeavours today in the discussion and application of this type of policies.Tackling the failuresThe analysis of the specificities of the market failures in each stage of the innovative process (or in itsinputs) has had precisely the objective of identifying the level of precision needed by the instruments to be usedto tackle them. This is expected to prevent the generality of the policies from giving rise to abuse, bureaucracyor rent seeking.Nevertheless, the analysis of failures does not allow defining the exact dimension that the intervention ofthe State should have and this opens up a fertile room for capture, since the public action can always go beyondor fall short with respect to what is actually necessary.One related question is, for example, how much resources the State should target to solving problems ofappropriability at the level of the basic sciences. However, before answering this, it is necessary to define howmuch the scientist can appropriate prior to State intervention. Moreover, the authority should question itselfincluding how it can push for appropriability levels to be as high as possible, in order to foster the higher privateendeavour before exploiting the always scarce and contested public funds.The design of public policies should, therefore, always keep in mind that an improved private sectorperformance can be hindered by the absence of public action (which is why the State has to participate in theinnovation process), as well as by over-intervention.This is why it is essential that the policies be coherent and permanent over time. However, they shouldalso be revisable, flexible –to respond to changes that occur in reality – and even be able to terminate them, ifthe circumstances that produced them are no longer present. All of this also seasoned with well-definedincentives to get the best performance from the private sector endeavours and public resources, constantlymonitored to evaluate their impact and, especially for the risk of capture, furnished with strict control andaccountability systems.Indeed, the decision to act by the State requires a detailed and effective design of the governability ofthe system. [see Figure 5]The analysis of market failures does notallow the magnitude of the publicintervention to be precisely measured,which provides a fertile space for captureattempts.89

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 5IN SEARCH OF THE RIGHT R+D INCENTIVES *Understanding the need to innovate and, even, whathas to be done to foster innovation may be a simple task, butknowing how to do it is a complex challenge. In this sense,the design of the right incentives is crucial when establishingan institutional structure for supporting R+D, because adiffuse scheme can produce more costs than benefits.Even though there is a broad spectrum of measures forfostering technological activities (for example, competition,tax, subsidies or the provision of public policies), the designof the instrument has become a central issue in thediscussion. The key is to be very clear regarding theobjectives of the public policy as well as the nature of themarket failures that justify the intervention, always keepingin mind what failures in companies or in policies can makethe measures by the authorities to foster these activitiesunfruitful.Morris Teubal suggests that if companies have notinternalized the need to incorporate innovation, it will notrespond, irrespective of the policies that are applied.However, even if the awareness does exist, the capacity tocarry out the innovation must be considered, which can belimited by various factors: absorption capacity of theorganization, transaction costs, problems of intellectualproperty rights, limitations in the creation and/or access ofspecialized agents that carry out R+D.and technologies, including classic R+D in companies,technological transfer, absorption and dissemination andcertain kinds of technological infrastructure, among the mostimportant. The HTPs generate a process of cumulativelearning of R+D or other critical technological activities forthe restructuring and adaptation of companies, which impliesa collective cooperation in which all sectors can have accessto the results of innovative firms. If this access is notavailable, the incentives to carry out innovation will bereduced, while the difficulties of transforming individuallearning into collective learning will make the disseminationslow and that will affect the speed of accumulation of theknowledge and experience within a firm.Upon reaching this point, it is essential to know thatany acceptable portfolio of policies for fostering therestructuring of national innovation systems cannot excludehorizontal policies or targeted ones. The important thing is toclearly define the objectives and have a flexible design witha dynamic perspective. This is because in the beginning, ageneric and subsidy policy may seem primordial, but later,when certain sectors have reached an acceptable level ofdevelopment in supply and demand, other more targetedpolicies with other types of incentives may be required.It should be mentioned that for the successful take-offand consolidation of R+D at a firm level, policies that “learn”from their results are required and not policies of simpleterm planning. Learning derived from applied instruments is90

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Given the above, in an initial stage, the policies thatseek to foster R+D in a generalized manner, normallyassociated to generic innovations, should be targeted atfostering both the demand and the supply of R+D in firms.These Horizontal Technology Policies (HTP) arecharacterized by fostering socially desirable activities in awide range of industrial sectorsessential, since this allows for redesigns to attain betterresults over time and face new objectives and new needsthat arise on the road. There is much international evidenceon the difficulties in carrying out changes of this nature.91

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1ACTION RECOMENDATIONSAchieving success in the task of adding knowledge to production requires a systemic viewpoint and a new partnership combining privateentrepreneurial initiative with a public sector participation targeted at, on the one hand, ensuring the provision of public goods that support innovation;in other words, human capital (through education and training), the networks of physical and technological infrastructure and scientific research and, onthe other hand, the incentives framework and the rules of the game that favour technological development and the emergence of greater productiondiversity.The action of the State should be strictly restricted to a subsidiary role, correcting the market and system failures that affect the innovationprocess: the problems of appropriability, failures of information, intangibility of assets and network failures. With the above criteria fulfilled, theprovision of public resources for innovation should always seek to leverage greater endeavours from the private sector.The design of public policies has to take into account that all the market failures described do not occur in a static but rather in a dynamic manner.This not only requires flexible and revisable instruments, it also requires strategic decisions when facing the future challenges of the country.The action of the State must also maintain an adequate balance combining the strengths from neutral public policies with the need to incorporateselectivity criteria, which must not emerge from an arbitrary analysis nor one contaminated by interest group pressure, both for the potentialities of thenational economy and the obstacles or lags that the country faces in developing them.The country requires a human capital formation system that integrates the education of technicians and professionals and employment training,which is flexible, based on competencies, and capable of generating, diffusing and appropriating innovation, especially in sectors with competitivepotential.For this, it is determinant that the population has more people with third level education, with education focused on ensuring the quality of ourprofessionals as generators, diffusers and users of innovation.Since education is an intangible asset and the results are uncertain, the role of public funding for third level education is crucial. The social benefitof having a more educated population and the funding problems characteristic of education, open the door to the action of the State in order toguarantee access to the system to those who, while having the abilities, are excluded from third level education due to a lack of resources. Today, thatpublic support only covers (and only partially given the other costs that must be covered by students) the three poorest quintiles of the population.Furthermore, the ratio today between professionals and technicians in Chile is totally different to that found in developed countries (11 to 1), dueto an undervaluation of the returns of technical education (asymmetry of information) and the fact that public funding for technical third level educationhas only been incorporated recently.92

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Greater flexibility in the formation of human capital is required, including intermediate levels, which Chile does not have today.In addition to this, there is the need to ensure quality and trust in that quality. It is necessary to identify the human capitalcharacteristics required and homogenize the measurement criteria, thus contributing to making the acquired competencies demonstrableand reducing the asymmetries of information, for example, between the education centres and the students, and between firms and theirworkers. This also allows the formation of human capital to be adapted and harmonised with the current and future needs of the country,particularly fostering the competencies that will be determinant for the development of certain strategic sectors.Lastly, investment in highly specialised human capital produces high returns for the country. Private investment in the formation ofpostgraduates students faces failures of appropriability and asymmetries of information characteristic of the generation of knowledge, andtherefore occurs in below-optimal levelsWith respect to science, its development needs to be fostered as the basis of innovation and growth, emphasising research that ismore applied to technological development or targeted at providing answers to production problems, particularly those linked to thesectors in which we are or should be competitive today, and those in which there is a good relationship between their potential and theeffort required to develop them.Given its strategic relevance and the fact that the difficulty of fully appropriating knowledge inhibits private funding for thisactivity, the public system has to develop it.A greater level of scientific activity increases the capacity to appropriate knowledge produced by others. For this, the generation ofcritical masses of researchers is crucial since it increases their productivity and strengthens network synergies. This concentration ofresearchers would increase the efficiency of public spending and reduce the transaction costs with the business world, as with othernational and international groups that could benefit mutually from a higher degree of interaction.However, human capital and scientific activity are not innovation as long as they do not link to company activity, or do not end inproduct, process, marketing and organizational innovation that allows them to compete successfully in markets.Companies are the motor of innovation and as such need to put innovation at the core of their business, overcoming fear and thecosts of acquiring and adopting innovation.This implies that science should provide support in the generation and adoption of innovation. Companies can, in turn, help identifybusiness opportunities in scientific activity.It also implies overcoming the impossibility of appropriating this investment in innovation and not taking the comfortable position ofwaiting for others to implement it and then copy it.93

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The State support should be ordered around the failures that exist in each stage of the innovation process, together with thecharacteristics of the firm. This can modify the regulatory framework, allowing funding for innovation to emerge, and contribute by fosteringthe mobilisation of private sector resources and can, as a last resort, substitute private funding.A clear example of the above occurs in smaller companies, as a result of their weakness in the basic capacities that underlieinnovation. This requires that the management and funding problems be solved so that the company can take the steps up to the level whereinnovation occurs. In addition, it should be kept in mind that innovation requires changes that, in turn, require learning. All of these lead tothe need for articulated State support that tackles the range of factors involved.Finally, to ensure the success of the strategy, it is essential to generate an awareness and proactive attitude towards innovation insociety, recognising, valuing and incorporating it as a key factor for the development of the country and, as such, for the well-being of allChileans.94

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1CHAPTER 3THE INSTITUTIONAL FRAMEWORK OF THE NATIONAL INNOVATION SYSTEMSUMMARYThis chapter covers the role corresponding to the State within the public- private partnership necessary for Chile to embark on its pathin the Knowledge Economy. It makes an in-depth analysis of the potential failures of the State or government that should be avoidedwhen designing and applying pro-innovation public policies and indicates the governability challenges that need to be resolvedthrough the institutional design of the National Innovation System. Based on this, an institutional proposal is presented aimed atensuring an adequate governability of the system –by the Council and the Government –and provides the bases for guiding the specificdesign of the rest of the public institutional structure for innovation.The analysis of the market failures and performance lags in fundamental areas has led to a diagnosis ofthe factors that prevent Chile from attaining higher levels in innovation and productivity, and also to identifythe areas that require state intervention and what kind of intervention is required for greatest effectiveness andefficiency.The previous chapters have shed light on the need for public-private cooperation, and also on the need totarget our endeavours towards strategic objectives, the need to articulate the supply and demand of scienceand technology and the obligation to provide adequate incentives to the various relevant players of the systemto progress towards competitive innovation. The analysis has also highlighted the task of guiding, coordinatingand synchronizing pro-innovation public policies –be they selective or neutral – with those targeted at forminghuman capital and developing the science areas, since only that will lead to greater economic growth with thecreation of quality employment.95

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1All these demands reinforce the points made in the February 2006 report: it is necessary to develop aNational Innovation System (NIS) to overcome the current deficiencies and limitations, and to have proinnovationpolicies that respond to the demands of governability and flexibility.In the work undertaken during 2006, the Council confirmed the diagnosis of the strengths and weaknessesof the National Innovation System; a system that has been progressively formed thanks to the endeavours andvision of a few, but that has led to a fragmented model, without a coordinating body, with agencies that do notcommunicate with one another, and sharp differences in thinking among its various components, without clarityregarding the capabilities and tasks of each participant and without the coordination needed to make the workcoherent; a system that, in addition, did not include players and realities that have proven to be fundamental ininnovation, such as education, technical training and life-long education.The problem of structuring the system and its institutional framework should, therefore, be tackledurgently. According to the Organization for Economic Cooperation and Development (OECD), the institutionalframework must anticipate, for example, how to overcome tensions that are inherent to the system and itsgoverning institutions and how to integrate vertical and horizontal policies that are part of the complexcharacteristics of the innovation system. This Council has indicated that the design of the institutionalframework is pertinent for an efficient systemic approach to the Knowledge Economy as well as to complementpublic and private endeavours in innovation.The analysis of the weaknesses still present in the system does not hinder us from recognising thesystem’s strengths; in fact, although only partially, parts of the system are rich in experience and recognised fortheir transparency and efficiency. It is these very strengths that allow us today to tackle the greater, butnecessary, task of raising our NIS to an appropriate level for the future challenges facing the country and thatexplain why the public budget given over to innovation increased by 9% between 2002 and 2006, nearly fourpercentage points above the GDP growth rate over the same period.A solid starting point is provided by the existence of various funds for science that are run withcontestable schemes and which allocate the resources according to criteria of excellence, as well as by theexistence of funding programs based on demand and aimed at leveraging private sector resources. [see Figure 1]It is necessary to develop a NationalInnovation System to overcome thepresent lags and limitations of proinnovationpublic policies, based on theimplementation of an institutionalframework that caters to the demands ofgovernability, representativeness andflexibility.The National Innovation Systemrequires an organizing body that isclear regarding the capabilities andtasks of each participant, and thatensures the coordination necessaryamong the institutions.THE FAILURES OF THE STATE OR THE GOVERNMENTAs chapter 2 indicates, there is the chance, albeit not the certainty, that public-private cooperation isbetter than leaving the private sector to act alone. This is why it is so necessary to review the potential failures96

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1of the State, both in the analysis of existing pro-innovation public policies, and when designing the new policiesand institutional framework of the system.There are three main failures of the State that affect innovation: i) dynamic inconsistency; ii) problems ofcapture; and iii) problems of agency. These failures affect any public policy, but they are particularly significantin the case of innovation, consistent with the extent of the market failures that arise in this area.i) Dynamic inconsistency refers to the difficulty for an authority to persevere with measures that canhave short-term costs and whose benefits only show up in the long-run.Dynamic inconsistency can also be understood as the expression of a problem of information in generaland of asymmetries of information in particular. For example, it is possible that neither the citizens nor theauthorities can see the benefits of a decision whose effects only show up in the long-run. Another possibility isthat the authorities can see it, but the public does not, and therefore the government does not receiverecognition for this kind of initiative. A third possibility is that, even when the government and the citizens areaware of the importance of those measures and though they are committed to its implementation, it does notend up occurring because voters prefer present consumption and press for immediate results or because publicfunds are targeted at short-term needs 73 .Dynamic inconsistency is particularly significant in the area of innovation not only because the fruits ofthe investment will most certainly not be felt within the period of office of a government, but also because ofthe difficulty in measuring the impact of pro-innovation policies and the lack of general awareness of itsimportance.This implies two main challenges: first, to resolve the tension between the private interest in short-termprofitability versus the collective need for long-run performance; and second, to develop a certain level ofawareness in society to make it more mature and show more solidarity with respect to issues that are essentialfor its survival and make it receptive to long-run effect public policies and future benefits. The OECD cautionsabout this tension, for example, in budget practices that treat investments in R+D+I (research, development andinnovation) and human capital as annual expenses, even though their nature is long-term.There are three main failures of theState that affect innovation: dynamicinconsistency; problems of capture;and problems of agency. Thesefailures affect any public policy, butthey are particularly significant in thecase of innovation.The difficulty facing an authority toopt for a measure whose benefits willbe felt beyond the mandate period isparticularly clear in the case ofinnovation (dynamic inconsistency),because the results are long-term andbecause of the lack of collectiveawareness of the importance of theinnovation.73 It is necessary to highlight that the problems of dynamic inconsistency are asymmetric among the various authorities in the publicsector. Moreover, and particularly in the area of innovation, there are ministries that face greater costs if the government suffers fromdynamic inconsistency, which produces internal tension in the Government. This is one reason why –as will be seen later – the ministersthat would suffer greater political costs if there is no innovation are part of this Council.97

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1All of the above suggests the need for a body targeted at fostering the conviction that investment ininnovation is fundamental for the development of the country as well as the certainty that not carrying outinvestments on time can lead to very high costs, either because it implies a much greater investmentrequirement in the future or because it hampers growth.An adequate balance is needed here between the need to avoid short-sighted public policies and havingthe necessary legitimacy. This means that if the government and society decide, transparently, to opt formeasures that generate faster results, even at the cost of sacrificing future possibilities, they are well withintheir rights. More strictly speaking, dynamic inconsistency does not occur at the level of the main definitions,but instead occurs when paying political costs, for example, when freeing from capture or reformulatingprograms, or when prioritizing the use of resources in slower-maturing innovation programs and sacrificingothers of greater immediate political interest.The failure of the State associated tothe capture of rents occurs whensomeone derives a private benefitfrom some public instrument. Totackle this, it is necessary to identifythe market failures that indicatewhere the intervention of the State isreally required.ii) The failure of the State associated to the capture of rents occurs when a person or group manages todraw a private benefit from some public instrument: in the field of innovation, this may occur for example,when attempting that the State fund activities that could have private appropriability and that, therefore, donot require public funds.The danger of capture is greater in innovation, precisely because the market failures are deeper in thisarea, which leaves plenty of room open for public intervention and for those seeking to draw the greatestbenefit from this action, for which it is very difficult to establish clear and uniform limits. The threat increasesif, as in this case, the system is fragmented and operates based on stagnant compartmentalization, whichnormally implies the duplication of functions and, therefore, greater possibilities of capture, no longer by theuser but instead by the executor of public policies 74 . In this scenario, one of the greatest risks arises from thosewho, tied to a rent-seeking culture, prefer to target their efforts at pressing to maintain the status quo insteadof opening up to competition and innovation.During the strategy debate, this Council has come to the conclusion that, due to an evident lack offoresight, the system tends, additionally, to favour more traditional sectors with a greater weight within theeconomy. Furthermore, the institutional framework tends to be guided by the interests of these sectors and74 The problem here is, above all, of design; therefore, if the review of the system detects the duplication of functions and requires anadjustment to eliminate it, the cost cannot be borne by those who carry out the duplicated duties. A coherent productive role withinthe system should be sought for employees whose functions may not be required anymore, which may even include re-training plans.98

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1makes the State short-sighted regarding the possibility of taking steps to open up new development alternativesfor the country. This “conservative” trend makes public policies –taxation, sales, financial or tariffs– targets forcapture and therefore it is necessary that the system have the strategic planning tools required to open upalternatives to emerging sectors that, otherwise, would suffer due to this inertia.This is crucial, since –as indicated in Chapter 1– there is evidence that greater production diversity ispositively related to economic growth. However, it requires a special endeavour from the State to provideinformation that helps to focus on unrevealed potentials for development – in response to the market failuresthat take away private sector incentives for doing so – through a not-captured and transparent process.The emerging and intuitive development in Chile of an innovation system and of public policies associatedto its performance becomes, in any case, a great opportunity to face the problem of capture, minimizing thepolitical costs that it may entail both in attempting to shield the future instruments and in the desire to “freefrom capture” those that already exist.But how can the danger of capture be faced?In its discussions, the Council has defined a first line of action based on the theoretical effort carried outto identify the market failures that indicate that State intervention is really necessary and where public policy isnot appropriate. A second line is based on a clear separation between those who formulate and those whoexecute the policies, to establish adequate control and counterweight systems. The third line occurs directly inthe execution of public policy instruments, either through the counterpart system between the principal and theexecutor or through performance agreements through which the latter commits to measurable goals.In addition, all of the above requires institutional strength to face the pressures of interest groups –especially if a significant decision-making power over financial resources is concentrated in a single institution –and a governability of the system that allows for the adaptability of instruments, in accordance with theevolution of the market and the dynamic national and international context.In order to ensure that theimplementation does not deviate fromthe objectives set out in the design ofpolicies (problems of agency), aprofessional management controlsystem is required together with theimplementation of mechanisms thatallow the various players tointernalize the costs and benefits oftheir actions.iii) problems of agency occur because there is an asymmetry of information in hierarchical relations:there is a “superior” that commissions a task to an executor, but the latter has a privileged position because ithas all the information on the mandate. This asymmetrical position can hamper the fulfilment of this mandateand harm the “superior”, which, in the case of innovation policies, refers to the President, who is the legitimatedefender of the interests of the citizens.In the area of innovation, the failures of agency can occur once the strategy is designed, due to the lackof means to fully ensure the complete compliance of the executors with that strategy.99

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The fact that learning in the area of pro-innovation public policies occurs through the day-to-dayoperations – as in the case of innovation itself – makes it impossible to establish a complete and definitiveseparation between the creation and execution of policies, because the specific knowledge of those who worknear the problems is essential for defining or fine-tuning the instruments required to tackle them. Nevertheless,the Council has sought to make progress in defining a theoretical framework that indicates when the Stateshould intervene and how it should do it. The extent of that participation and where the limit that separates itfrom capture lies, remain aspects that only show up through contact with the reality. This factor magnifies theproblems of agency, because as the agent participates in the design of policies, it also becomes both judge andjury and tends to self-justify its actions, whether or not the policies are beneficial or effective.To minimize this problem, various instruments arise linked to the contracts between principal andagency, which can be grouped into two kinds: first, those that seek to increase the control mechanisms whichreduce the information gaps; second, those who want the executor to internalize the benefits as well as thecosts of the “superior”, for it to have the incentives to act coherently with its interests, and third, whereevaluation plays an essential role.The solution proposed by this Council tends towards a combination of the mechanisms already described.Firstly, a professional management control system is required. This, together with tackling the problems ofagency, also creates useful information for the continuous improvement of the Strategy. However, since thisformula is always incomplete and its costs rise faster as the degree of control increases, it is necessary tocomplement its action with mechanisms that allow the various agents to internalize the benefits as well as thecosts of their actions. A good method for progressing along those lines is to establish budget clauses that,together with the allocation of resources, also define clear responsibilities with respect to the goals, shuttingout the possibility that if the objectives are not reached, new funds cannot be obtained. This allows the rightmovesand errors in the implementation of innovation policies to be revealed and highlighted.Additionally, since the costs of control increase with the dispersion of public instruments –as the firstreport of the Council suggested–, support should be given to prioritizing the adaptation of duly evaluatedexisting instruments as new needs or opportunities arise, instead of the creation of other new ones and theirsubsequent accumulation over time. In any case, it is necessary to rationalize the tools until attaining theminimum efficient level for correcting the market imperfections identified. The OECD emphasises this point,indicating that the risk of duplication or of excessive fragmentation and de-centralization in the implementationof programs has significant effects on the long-run impact in the implementation of the strategy.100

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1COHERENCE ON VARIOUS LEVELSApart from the dynamism and complexity of innovation, a challenge imposed by the analysis of thefailures of the State on the institutional design of the system is the issue of coherence. The OECD indicates that,based on experiences in the governability of innovation systems, at least three kinds of coherences must beensured and coordinated:i) horizontal: referring to the integration of many policy areas, which implies ensuring that the variousplayers are aligned and carry out a social control (tackles the problems of capture);ii) vertical: ensuring that the creation and execution of policies are consistent (coherent) with theobjectives of the global Innovation Strategy (tackles the problems of agency); andiii) temporal: referring, firstly, to tackling dynamic inconsistency, but also to ensuring that the policiescreated now must continue to be effective in the future, which requires mechanisms that reveal the potentialincoherences and provide new perspectives and paths to change.As such, there is a huge institutional challenge that requires a reliable, transparent and rigorous State inorder to evaluate its interventions, capable of ending or re-formulating them, either because they areinefficient or because they are surpassed by the development of the market itself; a State capable of learningfrom its errors and avoiding capture by interest groups as well as interventionism that is inconsistent with themarket.THE RAISON D’ETRE OF THE INNOVATION COUNCILThe figures presented in Chapter 1 are evidence that the National Innovation System does less than itshould regarding innovation and its inputs: the public investment shortfalls in R+D or in the formation of humancapital, for example, indicate dynamic inconsistency at a government level. Meanwhile, the high proportion ofpublic spending versus private R+D spending (60/40) could suggest 75 problems of capture, which are alsoreflected in the lack of innovation dynamic or the weak relationship between the base research centres and theproduction sector. Quite possibly, the problem of the quality of education, which as has been indicated is notentirely attributable to a problem of resources, is the area where the problems of capture (and of agency) aremost evident.Three kinds of coherences must beensured and coordinated in theinstitutional design of an innovationsystem: horizontal, vertical andtemporal. These directly tackle thethree main failures of the State:capture, problems of agency anddynamic inconsistency, respectively.An efficient National InnovationSystem requires a managing, guidingand coordinating institutionalstructure located at the top of thesystem.The creation of a NationalInnovation System forCompetitiveness is proposed, witha multidisciplinary and multisectoralcharacter that includesthe government and that advisesthe President of the Republic.75 Another alternative is that the volume of public resources is so small, as indicated in Chapter 1, that it does not manage to formsufficient critical mass to generate attractive research for the private sector.101

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Thus, the urgency of an institutional redesign that ensures a high degree of governability and coherenceof the system becomes patent. Moreover, the analysis made by the Council during 2006 reinforces the convictionthat a body is necessary to propose consistent directions that contribute to the pertinence and coordination ofpro-innovation public policies, clearly separating the responsibility of proposing policies from the tasks offormulating and executing specific programs. Additionally, and most importantly, it must verify the execution ofthe policies that the Government commits itself to. This body should also have: i) a level of autonomy thatallows the Council to notify any eventual deviations from the agreed strategy to the Government, in order tocounteract any dynamic inconsistencies of the government; ii) a very good level of auditing and evaluation 76 totackle the problems of agency, and iii) optimally, to not have any kind of commitment with private interests, totackle the dangers of capture.Best international practices show that an efficient National Innovation System requires a managing,coordinating and guiding institutional framework at the highest levels of government. This is precisely what oursystem lacks –in the opinion of external evaluators. These considerations, combined with the need to count onthe visible and permanent commitment of the government at the highest level, led the Council in February 2006to discard recommending the option of creating a sectoral Ministry of Innovation and instead suggest creating amultidisciplinary and multi-sectoral National Council of Innovation for Competitiveness (that includes thegovernment). As an advisory body for the Presidency of the Republic, it should be responsible for proposing themain outlines of a long-run National Innovation Strategy that will serve as a guiding framework for the specificpublic policies and the operation of mechanisms for supporting business innovation, the formation of humancapital, scientific research and technology transfer.THE ROLE OF THE COUNCILBefore forming the Council, it is crucial to define the best link that a body of this type should have withthe government. For this, three options have been identified.A first model may be that of simply advising. In this role, the Council recommends the strategic actions inthe area of innovation as an expert consultant and defines mechanisms that facilitate the coordination ofvarious actions related to innovation, ensuring they are consistent with one another. This is a model that, even76 The proposal is not that the Council should do the auditing and evaluations by itself, which could lead to a heavy bureaucraticmachine, but it should have the minimum capabilities needed to sub-contract those services and define and control the terms of itswork.102FIGURE 2THREE BUDGET CONSIDERATIONSThere is a consensus at the heart of this Councilregarding three budget aspects essential for a goodperformance of the body.i) It is indispensable to have a minimum butautonomous budget to fulfil its functions, although thisautonomy does not imply that the implementation ofthese funds is not subject to evaluations, for example,through external audits.ii) One of the fundamental ways in which the Councilwill fulfil its evaluation tasks in the execution of theStrategy is the recommendation of global allocationsof the entire public budget related to innovation, yearto year.ii) This recommendation will reflect the generalperspective of this Council and will seek to ensurethat the funds allocations are adjusted to the broadlines of the strategy, but without ever entering into thedetails of those allocations.In addition to proposing a strategyand making recommendations on theuse of public resources for innovation,the Council has to evaluate theimplementation of the strategy adoptedby the Government, periodically reviewits bases and directions and, above all,caution society about when the systemdeviates from the objectives laid out.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1though it can technically provide the authorities with good ideas and proposals, does not help the government toovercome dynamic inconsistency, because it does not generate any costs in the event that the Governmentdeviates from the commitments that it has made as a result of the recommendations of its advisor.A second formula is that of an autonomous body that defines long-run policies and has the means toexecute them: similar to the model of the Central Bank used in Chile. Contrary to the above, this optioncompletely resolves the problem of dynamic inconsistency, because it removes from the government sphere thecosts of implementing policies that do not bear fruits in the short-term; however, it has a significant problem: itdoes not consider that the actions of the State linked to innovation are implemented through Governmentbodies. This not only entails the risk of double dependence in public institutions, but it would also transform theCouncil into judge and jury in the design and management of pro-innovation policies, which would totallyeliminate its objectivity.Given this analysis, the Council is inclined towards a third model. It sees the Council as an autonomousbody that proposes a long-run strategy and consistent with that strategy recommends the use of all public fundsfor innovation, but the Government is responsible for deciding what commitments to actually make and todirectly execute the policies. This separation is essential, because it allows the Council to thoroughly fulfil otheressential tasks: to supervise autonomously and with the technical skills the execution of the strategy adopted bythe Government, to periodically review the foundations and directions of the strategy and, above all, to cautionsociety when the system deviates from the objectives laid out, which may be due to the failures in the marketas well as to the failures of the State or government.This design does not exclude the participation of representatives of the government in the Council. Onthe contrary, the discussion undertaken over the last six months has established the belief that the success of aninnovation policy in the country is based on political commitment at the highest level by the government, andthat it should be expressed through the active participation of the Ministries of Finance, Economy and Educationas members of this body, together with the implementation organizations, such as Conicyt and Corfo. The fullparticipation of top-level government people in the design and subsequent tracking of the strategy is preciselywhat guarantees the commitment of the Government at the highest level, with the proposed strategy, and alsosafeguards its legitimate right to correct or redesign it in accordance with its range of priorities.This participation, without a doubt, would contribute significantly to understanding complex problemswhich would correspond to this group to deal with, it would contribute to a greater degree of legitimacy for theactions of the Council and would help to avoid possible deviations from its recommendations. However, it could103

also mean an uncomfortable position for Ministers in some circumstances, especially in those where the Councilhas to evaluate the behaviour of the Government with respect to its commitments in the area of innovation.To tackle this problem, the Council initially analyzed leaving the option open for Secretaries of State toabstain from voting in situations that would be conflictive. However, as the discussions progressed, the view washeld that the Ministers be members of the Council, with the right to express opinions but not to vote, eventhough some advisors insisted that the full participation of Ministers ensures a deeper commitment from thegovernment with the work of the Council.It is important to highlight, in any case, that to guarantee that this formula of an “advisor-evaluatorCouncil” operates as proposed, it needs a legal backing to sanction the appointment of advisors, define the timethey remain in their posts, the reasons for dismissal and a system for the gradual appointment of new members;and that, eventually, guarantees tenure during that period. 77 To this, one can add a minimum budget thatallows the Council to operate fully autonomously in the production of the information required to define andrevise the National Innovation Strategy and to evaluate its implementation. [see Figure 2]CHECKS AND BALANCESThe fact that this Council gathers the viewpoints of various players of the National Innovation Systemfacilitates coordination that would not naturally exist, helps to better understand the problems and contributesto the search for consensuses and achieving an adequate balance of individual and collective, public and privateinterests.This also allows tackling the risk that the Council itself be a target for capture. One option for getting ridof this threat would be the formation of a group of “good women and men” without vested interests in the issueof innovation; but this would surely sacrifice the specific knowledge that is essential when analyzing what reallyhappens in the system. As such, the objective of minimizing the risks of capture could, in this case, lead toserious problems of information that would be detrimental to an optimal performance of the Council.The solution proposed then is to get the most out of the specific knowledge of possible members of theCouncil and to deal with the danger of capture putting all private interests together on the same table, in orderto create checks and balances. To this, at least two public policy experts would be added, who would be moregeneralist in the area of innovation, but who can contribute with a global vision that the other members maynot have.[see Figure 3]77 The Council did not reach a consensus on this point.104TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSBOX 3VOLUME 1HOW TO REGULATE POSSIBLE CONFLICTS OF INTERESTThe need for specific knowledge that can only beprovided by the participants of the National Innovation Systemopens up the door to the possibility that within the Councilpossible conflicts of interest can arise. A radical solution to thisdanger would be to form the Council only with people whohave no interest in the issue, but this makes no sense byproviding a body whose value as a specialized advisor couldbe virtually zero. Thus, we consider that the best option is toget the most out of the knowledge and information of itsmembers, being very clear, in any case, that the real danger ofconflicts of interest occurring declines to the extent that there isa clear separation of roles between the role of suggestingpublic policies for innovation of the Council, and theimplementation role corresponding to the government, once itmakes the proposals its own.This distinction is fundamental for understanding thereal scope of the recommendations that the Council mustmake on the use of the public funds for innovation every year,especially those of the Innovation Fund for Competitiveness(IFC). The consensus reached by the Council is that its taskshould be limited to recommending general lines of action thatsupport the fulfilment of the Strategy without getting involved,under any circumstances, in operational aspects of theallocation of resources. This fully matches the propositionalwork of the Council in the area of public policies, that seeks toensure a positive impact of the participation of the State ininnovation.The fact that the Council is comprised of people fromvarious spheres of the National Innovation System –government, business, scientists and academics– also helps toreduce possible conflicts of interest, which means that thelegitimate individual points of view of each member are alwaysbalanced by that of another member or various othermembers.The members of the Council are also required toadhere to all the established existing norms on administrativeprobity.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The need for a widespread participation in the Council is also reinforced by the evidence that theinclusion of players who will be the subjects of the impact of public policies improves the chances of success ofthat intervention. This is because it allows conflict situations, receptivity levels of possible beneficiaries andeven degrees of effectiveness of instruments or incentives to be foreseen in their implementation.Thus, it is proposed that the National Council of Innovation for Competitiveness be presided by arenowned expert in public policies, who should not be a public employee –who will be appointed by thePresident of the Republic and ratified by the Senate with a simple majority 78 –, and comprised of people withrenowned experience in the scientific, business, labour, educational and public policy spheres. The Ministers ofFinance, Economy and Education and the Executive Vice-President of Corfo and the President of Conicyt are alsoincluded, although only with the right to express opinions 79 .In order to appoint the advisors, the proposal is to leave the first of these appointment processes in thehands of the President of the Republic. The gradual appointment of members of the Council, should in turn seekto maintain the balance with respect to the expertise of members, which is also determined by the President ofthe Republic, although based on proposals originating from the Council itself.SEPARATION OF ROLESAs was already indicated, an essential norm for defining the role of the Innovation Council proposed is theclear separation between the tasks of proposing the designs of pro-innovation policies that correspond to it, andthe final decision and implementation that remain in the hands of the Government.Thus, the strategic guidelines presented in February 2006, confer the primary task on this Council ofpresenting a National Innovation Strategy for Competitiveness proposal to the Government containing adiagnosis of the competitive position of the country and its regions, a long-run development view, strategicobjectives and goals, an evaluation and proposals with respect to the participation of companies and scientificresearch in innovation, an evaluation of the trends related to human capital required for the fulfilment of theobjectives and the evaluation criteria for the fulfilment of the goals proposed.The fact that this Council bringstogether the visions of multipleplayers of the National InnovationSystem facilitates coordination,helps to better understand theproblems and contributes to thesearch for consensuses andachieving an adequate balance ofindividual and collective, public andprivate interests.78 As for the Council members, the causes of termination of contract must be stipulated for the President of the Council as well.79 While this proposal does not define the exact number of members, there is a unanimous opinion in the Council that the total of 17members, which is the number today, is excessive.105

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1It also includes a revision every four years of the existing Strategy, in addition to reviewing specificaspects of the Strategy in between where pertinent, and proposing directions and necessary measures to updateit, considering for this an evaluation carried out by one or more competent international bodies.Another one of the essential duties that the Council has fulfilled up to now and which it should continuedoing is to formulate every year well-grounded criteria for the allocation of public resources targeted atinnovation for competitiveness, as well as more concrete distribution proposals for these resources among thevarious programs and public funds, especially of the Innovation Fund for Competitiveness (IFC).With respect to this, it is reaffirmed that in line with the clear separation of functions, it is inappropriatethat the Innovation Council allocate and operate the resources of the IFC, and also that it should not limit itselfto recommending only how those resources should be used. On the contrary, given that innovation is a complexsystemic process, it is logical that it should take care of all the areas that comprise the core of innovation andrecommend the use of funds with that greater perspective in mind.The analysis carried out in 2006 requires us to emphasise that there are areas that lie at the heart of theactivities of this Council –such as technological transfer, basic and applied scientific research, standards, highereducation and training and production innovation– but there are also a range of environmental policies in thearea of primary and secondary education or infrastructure, for example – that are important for its work and onwhich it should at least define general positions. 80TECHNICAL CAPACITYWith this model, the value of the Council lies in its capacity to become a highly effective body forcontributing to the adequate prioritization, coordination and pertinence of policies and the endeavours of thecountry in the area of innovation. From this, one can deduce that its main capabilities are related to the role ofprospection, tracking and evaluation of innovation policies, with first-rate information on reference models inother countries and future scenarios in the area of competitiveness, and a great capacity for observing andevaluating the National Innovation System at a national (Ministries), institutional (agencies) and program level.As was already indicated, only with an adequate budget can the Council adopt the important role allottedto it in fostering –through its proposals– an innovative culture that forms the necessary foundations for the80 Thus, for example, the Council has decided to not impose in the prospective studies being undertaken, any kind of specific filter thatforces us to only look at the areas or policies that are at the heart of its work. The objective of this is to make the informationgathered a public good, so that it can serve both to foster and improve innovation, as well as to support other kinds of public policies.106

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Strategy to bear fruits. This has been demonstrated by the experience of other countries that have succeeded inimplementing long-run innovation strategies with an agreed vision.PROPOSALS FOR THE NEW INSTITUTIONAL FRAMEWORKA systemic vision is not only required to create policies and evaluate them, which provides the basis forthe formation, role and attributes of the Council, but it is also required in the implementation of policies, whichmust ensure good performance down to the details. Moreover, given that in the area of innovation both thesystem and the Government learn by doing, it is desirable that there is also a systemic vision from theGovernment about what is occurring, with the subsequent capacity to evaluate that task.The analysis undertaken by this Council during 2006 revealed that it is essential that the government getinvolved in this task and committed at the highest political level and, for that, we believe that the mostefficient formula is the creation of a Council of Ministers 81 for Innovation in the Government that is at leastcomprised of the Ministers of Finance, Education and the Economy and presided by the latter. The person whopresides should be the person clearly responsible for the endeavours of the government in the formulation of theStrategy adopted, placing special emphasis on the tasks of coordinating the actions of various public institutionsin this area and avoiding the problems of agency.In order for this person to thoroughly fulfil his/her allotted role of forwarding the Strategy, he/she shouldnot only possess a high capacity of strategic management, combining the functions of aligning the executorsaround the Strategy with vertical coherence control tools, but he/she should also be the administrator of thegeneral budget for innovation 82 , through the signing of performance contracts, executing them correctly orthrough the “purchase of services” from other public agencies or Ministries.Lastly, it is necessary to clarify that a good institutional framework model capable of dealing with thegovernability of the system should, above all, avoid duplications in decision making and ensure absolutestrategic coherence. In this sense, understanding the problem in its entirety would correspond to the InnovationCouncil, while the operational definitions in the various spheres of innovation –such as human capital, businessinnovation or science – should be made by the Ministries through their agencies, guided by the reflections ofexperts in each of the areas.It is essential that the governmentget involved in the task of innovationwith a level of commitment at thehighest level. For this, theGovernment needs to appointsomeone clearly responsible forensuring the implementation of theinnovation strategy adopted and thatminimizes the problems of captureand agency.81 For its proposal, the Council took into account the need to look for a balance between the problems of agency and dynamicinconsistency within the government.82 Operating as a Cost Centre.107

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Along the same lines, the model of Councils or Boards of Directors for specific policy decision-makingshould be strengthened, transforming them into professionalized and non-compartmentalized groups, whosegreatest value lies in defining the best way to contribute from their parts to the concrete creation of a globalstrategy. In Chapter 2, the need arose, for example, for the recommendations that define the allocation ofpublic resources in areas such as basic science or technological transfer to not only have competition to ensuretransparency and pertinence in the provision of funds, but also to have the capacity to determine as precisely aspossible what the magnitude of the public participation should be, in order to avoid leaving room for rentcaptureor cronyism. The appointment of the members of these Councils should be made by the agencies inagreement with the respective Ministries, through procedures to ensure excellence.The Council has decided that the balance of interests that underlie the public-private make-up of theNational Innovation Council itself, should be maintained at all levels of the system. It is necessary to recognize,however, that the closer these bodies are to the reality of a sector, the value of the specific knowledge that itsmembers could and should have is greater, even though that also leads to an increased risk of capture. In theface of this, the Council has taken the decision to propose privileging specific knowledge and tackling possibleproblems of capture through adequate evaluation systems. This must undoubtedly be complemented withadequate methods of information flow 83 that allow them to get to know the work of other collegiate bodiesthat, in turn, allow these intermediate councils to be informed about the discussions taking place on a nationallevel and adopt the strategies or guidelines that arise from there.This formula prevents the members of the National Council from participating in other bodies, whichwould make them both judge and jury when evaluating the performance of or compliance with the InnovationStrategy, and structure a model of accountability in accordance with its needs.All of the above, however, must respect a basic need for flexibility. The agencies cannot be rigidexecutors, because, as has already been indicated, even though the analysis of market and State failures allowswhere and how public intervention is required to be determined, it is never possible to definitively define howfar that measure must go, which will depend on very specific conditions that can only be determined throughdirect contact with reality. Only agencies that are positioned nearer to the problems, are equipped to makethat level of diagnosis, which can allow them to provide unforeseen added value over what they were originallyAs a counterpart to the InnovationCouncil, a proposal is made to setup a Council of Ministers in theGovernment comprised of, at least,the Ministers of Finance, Educationand the Economy, and chaired bythe latter. The Minister chairingmust be the person politicallyresponsible for forwarding theinnovation strategy to which thegovernment is committed.83 This may mean holding special hearings, information or work meetings, invitations to representatives of other councils to specificsessions of the National Innovation Council, or other formulas.108

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1commissioned to do, given the strong commitment and specific knowledge that they have of their fields andwhich may be unfamiliar to the Principal.Thus, it is essential that it operates within a flexible framework, albeit always with adequateaccountability to avoid capture.THE NON-SUBSTITUTABLE ROLE OF THE REGIONSTo date, the definitions on governability provided by this Strategy have made progress regarding theformulas for facing the problems of dynamic inconsistency at the level of the central government and in a firstline of defence with respect to failures of agency. However, looking down the system in search of specificanswers is still pending. It will be a central element of Volume 2 of this Strategy, which will be presented in thethird quarter of this year, as was mentioned in the presentation.The lack of clear definitions of governability and mission at the level of various intermediate institutionsof the National Innovation System and the provision of only general criteria on this in the earlier paragraphs isdue to maturity period restrictions, and the need for a sequential logic. The concepts of separation of functionsbetween the Council and the Government, the exact role of the Council and its creation, the organization of theGovernment itself at the highest level, the separation between the creation and execution of policies and otherconceptual aspects outlined earlier, must be resolved by the Government, either accepting the proposals madeherein or defining alternative steps. In the absence of these base definitions, it is somewhat premature tosuggest detailed proposals for each intermediate organization.An essential aspect of the definitions to be determined, and that must be made during 2007 based ondecisions taken by the Government on earlier issues, is the role corresponding to the regions both in the designand application of pro-innovation policies. This is why this Council has considered it pertinent to advance someguidelines for that role, as was done in the case of the executors, understanding that a lot of content is pendingto establish a regional, clear and concrete articulation.As a starting point, it is necessary to highlight that in the same way that a closer view of the concretereality contributes to defining and applying public policies, as was mentioned in the case of executors and thespecialized funds, the regions have a specific knowledge and creative potential that is indispensable for thesuccess of an Innovation Strategy for Competitiveness, since the players of innovation –firms, universities,technological centres and public institutions– interact at a local level. This is why they have to be involved inthe policy proposals and have some degree of autonomy and flexibility with respect to their specific application.However, the challenge is how to take advantage of those assets in the context of the National Strategy and howTo date, the definitions ongovernability provided by thisStrategy have made progressregarding the formulas for facing theproblems of dynamic inconsistency atthe level of the central government,and in a first line of defence towardsfailures of agency. The huge task ofproviding specific answers for thevarious components of the system ispending, especially concerning thebest participation model for theregions.The regions have a specificknowledge and creative potential thatis indispensable for the success of anInnovation Strategy, since it isprecisely at the local level that theplayers of innovation interact: firms,universities and public institutions.109

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1to ensure that the local actions overcome the threats of dynamic inconsistency into which the regionalauthorities can also slip.A fundamental basis for this must be the availability of pertinent information so that regional decisionsand their development strategies do not interfere with the general interest and that, on the contrary, synergiesare created that help to drive forward the growth of the country. The Council proposes implementing anessential study in that respect, which should be carried out during 2007, giving a geographical dimension to theanalysis undertaken in 2006 presented in the second part of this document and which has revealed productionconglomerates with development potential, as well as the efforts that the country must make to allow theiremergence, if they do not exist today, or to strengthen them, if they have already emerged. This review willallow both the capabilities that the regions have today to be quantified as well as those that, through specificefforts, will require support or strengthening for the implementation of this Strategy 84 .In any case, as additional resources are allocated for the regions, proposals will be made to distributethem through contests for the development of regional innovation capabilities. A regional contributionequivalent to the amount adjudicated (matching funds) must be considered as an essential criterion ofallocation, as already exists in some regions.The essential aspect in the development of this type of capabilities must be their pertinence at a macroregionallevel, avoiding duplications and other inefficiencies in the use of resources. Likewise, in order toincorporate the appropriate counterweights, access to funds for closing the gaps in basic capabilities mustcondition the access to funds for developing more sophisticated capabilities in those regions.The regional actions, in any case, must thoroughly fulfil an essential requirement: to fully internalizeboth the benefits and the costs of the decisions, which implies not only an informed and coordinatedparticipation with the central authorities and with their peers, but also a total adherence to the goals andbudgets strictly defined and without any possibility of supplementation 85 that, assures pertinence in theallocation of the available resources.84 In the analysis undertaken during 2006, for example, evidence of a certain non-mobility of human resources in Chile has emerged.This seriously leads to considering the allocation of resources for the formation of specific capabilities in the regions –always first-class–both to satisfy the demands for professionals arising from the development of clusters as well as to create a critical mass ofresearchers in areas where the region offers particular advantages.85 These mechanisms must stipulate in a credible manner the return to the central level when a region does not achieve the resultsexpected.110

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Concerning its relationship with the Innovation Council, the proposal is that it define macro-regions –understood as groups of regions based on the structure and competitive potential of the territories that have tobe reviewed every four years– that should constitute a natural space for harmonizing and making the regionalstrategies complementary with the National Innovation Strategy for Competitiveness.The work of the Council with the regions would be implemented through an annual session of the Councilin each of these macro-regions, represented (with the right to express opinions) by the Intendants of the regionsthat comprise it, as the most senior representatives of the Government in their region and the Presidents of theRegional Agency for Production Development. This meeting should be mainly dedicated to evaluating theprogress of the strategy in each macro-region and the dialogue with businessmen, players and local institutions,both public and private, linked to innovation.TWO PILLARS: CORFO AND CONICYTIn accordance with the above, the Council upholds the position of its first report, recognizing a publicinstitutional framework for innovation based on two main pillars: Corfo and Conicyt. This is concordant with thedecision of basing the strategy on the existing institutional framework, making adjustments and improvementsthat mainly refer to clearly defining roles and overcoming the problems of coordination presently found, asoccurs in the national innovation systems of countries such as Finland, Germany and Norway, where there are alimited range of first-rate specialized implementation bodies.Corfo has been assigned the tasks of fostering innovation and technological diffusion. In other words,formulating all the initiatives that directly affect the incorporation of knowledge through new products in themarket, or of innovations in production processes within companies, including the pre-competitive innovationthat they carry out by themselves or through scientific-technological centres. Meanwhile Conicyt is responsiblefor actions targeted at fostering the development of scientific and technological activity in the country andforming first-rate human resources for research, development and innovation.The task now is to review the role of each institution, denoted through its specific programs, dependingon the market failures that are to be corrected. Special concern is given to the case of public technologicalinstitutes, whose mission – in the opinion of this Council – must be focused on the production of clearlyidentified public goods that are necessary to favour the innovation process in companies and scientifictechnologicalcentres. For this, it must preferably channel resources to pure scientific research programs andprojects or targeted at high national impact objectives.111

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BOX 1THE NATIONAL INNOVATION SYSTEMTogether with the agents that participate directly and indirectly in the introduction of new products andtechnological processes into markets, the NIS also incorporates public policy related to this kind of activities as well aspublic and private organizations, infrastructure and the legal framework facing the players.A first approach shows three types of activities occurring within the NIS: i) on the one hand, there is the creationof the innovation policy and funding for various activities related to science and education, technological research anddevelopment, and economic development and business; ii) on the other hand, there are those who actually carry out theinnovation activity, such as universities, companies, technological Institutes, etc.; iii) however, there are alsoinstitutions dedicated to linking the funding with those who carry out the innovation activity, generally referred to asintermediary agents.Thus, within the NIS there are three types of players depending on their nearness to the policies and funding or tothe implementation of innovation.a. Agencies, and policy and funding organizations: bodies responsible for the funding of R+D activities and, insome cases, for defining policy directions. Innovation policy is born on this level, where objectives are defined, as well asmeans and policy directions. The budgets for innovation activity are also determined here. These organizations are at thehead of the pro-innovation system in Chile.b. Intermediary organizations: Guiding policies and allocating R+D funding is delegated to these. Theseorganizations allow the policies and funding to be efficiently and coherently related with the various needs of the usersof the system. An example of an intermediary is Tekes in Finland or Chile-Innova in Chile. Located at the centre of thesupport system, they orchestrate technological policy. Their nearness to the lower levels gives them a greater link to theneeds of the “client”, which allows for more personalized and efficient dealings. However, it requires greater flexibilityin terms of decision making.c. Innovators and executors of R+D: These ultimately carry out the innovation activity. This group includesuniversities, non-profit institutions and firms dedicated to not-for-profit research, among others.112

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Public Pro-innovation Institutional FrameworkIn the public domain, Chile has an institutional framework that serves as the basis of the National InnovationSystem. There we can find bodies responsible for funding and supporting the activities that universities, companies,technological Institutes and other players engage in, in various spheres of the innovation process.The most relevant institutions are the Ministries of the Economy and Education, which control the ProductionDevelopment Corporation (Corfo) and the National Commission of Scientific and Technological Research (Conicyt),respectively, which have been defined by the Council as the two pillars that must support the public institutionalframework for innovation. The Ministries of Agriculture, Planning and Health are also included in this list in areas specificto their sector, as well as others with lower levels of participation in the system.Each of these institutions has specially designed programs for fostering various spheres of the participationprocess. The funding comes from public resources, managed by each institution, targeted at supporting specific activitiesin their own spheres. Corfo, in its innovation division, focuses on technological innovation in firms, technological transferand diffusion, pre-competitive and public interest innovation, innovative entrepreneurship and attracting high technologyinvestments. Meanwhile, Conicyt is dedicated to fostering and strengthening scientific and technological research,forming specialized human resources and developing new areas of knowledge and production innovation.This is the base on which a future system should be built, perfecting its strategic direction, coordination andintegration both within the funding system and in relation to the whole national innovation system.113

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1RECOMMENDATIONS FOR ACTIONThe transition towards a Knowledge Economy and the need for a joint endeavour by the public and private sectors in the generation of innovationrequires an institutional framework that guarantees the coherence of the system and that allows the strategic objectives to be defined towards which allplayers must progress in a coordinated and collaborative manner.An efficient institutional solution necessarily requires a clear separation between, on the one hand, the responsibility for proposing a design and amodel for tracking pro-Knowledge Economy policies and, on the other hand, the task of orchestrating and executing the policies.Ensuring the governability of the system and generating an institutional structure that guides, coordinates and synchronizes pro-innovation publicpolicies is indispensable to create a National Strategy of Innovation for Competitiveness.The path to innovation requires leadership at the highest level, which integrates the various perspectives that converge in innovation and cannot betrapped by short-term pressures and urgencies.Therefore, an advisory Council is proposed comprised of the various players of the National Innovation System, dedicated to proposing, reviewingand perfecting the Strategy. This Council, together with a body at the highest government levels responsible for implementing the Strategy, provides anadequate institutional framework for guiding innovation in Chile.This model must ensure coherence at all levels, clarifying the role of each agent and ensuring that resource allocation decisions are consistent withthe guidelines arising from the Strategy.The rest of the institutional framework for innovation must be based on a clear definition of roles and take advantage of the potentialities thathave already been generated in Chile, since the development of a National Innovation Strategy requires a global viewpoint, as well as the specificknowledge of those who are nearer to the problems. This involves the executing agencies as well as the various regions of the country.However, the National Innovation System operates in an environment that may or may not produce favourable conditions for the development ofthe innovation process, which innovation also nourishes.This involves infrastructure conditions that facilitate both physical and digital connectivity, as well as providing the physical inputs required todevelop innovation processes.It also involves the incorporation of the pre-cursors of innovation to the financial markets, since these share the intangible characteristics ofinnovation.In particular, it demands a better competitive position of Chile in international markets, which requires trade policies and international relationsthat raise and support the innovation endeavours of the country.Finally, the Council understands that its mandate to propose a National Innovation Strategy will only be fully fulfilled when it completes thedetailed design of the lines of action proposed to adapt the institutional framework and the governability systems of the entire pro-innovation publicsystem and identifies, on a sectoral (clusters) and a regional level, the main deficiencies still remaining for the full development of its potential and themain specific policies required to achieve it.114

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1CHAPTER 4FROM THE CONCEPTUAL BASIS TO THE STRATEGYIn the former chapters we have presented and expanded on the conceptual basis that support the Innovation Strategy forCompetitiveness, which this Council will propose to the President of the Republic. This comprises of the strategic criteria, goals and lines ofaction which we detail here below.I. STRATEGIC CRITERIA1. Chile needs to continue evolving to attain development. The way to reach this end is the Knowledge Economy. Nonetheless, thisdoes not mean turning our back on natural resources, but to make use of those advantages as a solid starting point to begin the search for othersectors with acquired competitive advantages.2. Taking the leap to the Knowledge Economy essentially implies innovation, understood as the process of creating economic valuethrough which certain products or production processes, developed from new knowledge or the innovative combination of former knowledge,are efficiently introduced into markets, and therefore into social life.3. This new path to development assures greater growth, and also opens up the possibility of achieving greater equity, since it isfounded on the development of knowledge, an asset that can be distributed in a more egalitarian manner than that of capital or naturalsources.115

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 14. To succeed in adding knowledge to the process of production requires a systemic view and a new partnership combining privateentrepreneurial initiative with public participation oriented at assuring the provision of public goods to support innovation: human capital(through education and training; physical and technological infrastructure networks; scientific research; and an incentives framework and rulesof the game that promote technological development and a greater production diversity.5. The actions of the government must be restricted to a subsidiary role, correcting the market and system failures which affect theinnovative process: the problems of appropriability, information failures, intangibility of assets and network failures. However, it must also becareful to avoid State or government failures which could reduce its effectiveness and even make the public endeavour fruitless: dynamicinconsistency, capture and problems of agency.6. The design of public politics must take into account that all the market failures described are never static but rather dynamic. Thisnot only requires flexible and revisable instruments but also to make strategic decisions regarding the challenges that the country must face inthe future.7. Once the above criteria have been complied with, the provision of public resources for innovation must at all times seek to mobiliseequal or greater efforts from the private sector.8. The action of the State must maintain an adequate balance combining the strengths from neutral public policies and the need toincorporate selection criteria of the potentials of the national economy and the failures or obstacles faced by the country in developing them,which must emerge from a non-arbitrary analysis and not be influenced by pressure groups.9. The transition to the Knowledge Economy and the need for the public and private sectors to make a joint effort in the creation ofinnovation requires an institutional framework that ensures the coherence of the system and that allows the strategic objectives to bedefined—towards which all involved must move in a coordinated and collaborative manner. An efficient institutional solution must involve aclear division between the responsibility for proposing a tracking design and model for the pro-Knowledge Economy policies and the task ofexecuting those policies.116

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1II. GLOBAL GOALSBased on the above-described criteria, this strategy proposal sets out the following goals:1. Today, Chile can face the challenge of doubling its per capita income over the next 15 years, in order to reach US$ 25,000 (2005purchasing power parity). It would mean reaching standards of living similar to the present levels in developed countries.2. To maintain the required growth rate for Chile to reach the threshold of development, it is necessary to increase the contribution ofTotal Factor Productivity (TFP), based on the dynamics and dissemination of knowledge, on technological change, on human capital and oninnovation. In these areas - which are at the very centre of the Council's mandate - the country still lags behind in comparison to itsinternational competitors and it is therefore necessary to set out exacting goals for the next few years which are based on the lags that stillexist in Chile with respect to these nations.3. The average years of schooling for the general population must be increased to 12 by 2010 and 14 by 2021. This means increasingenrolment rates in higher education from the current 43% (for people aged between 18 and 24) to nearly 80% by 2021.4. Another innovation pillar is made up of scientific and technological research. The goal of doubling the per capita income in 15 yearsrequires increasing R+D spending as a percentage of GDP, from 0.68% (in the year 2004), to 2.5% towards the end of the period. In order toreach this level, it is necessary to double public spending on R + D as a percentage of GDP, moving from 0.36% (in the year 2004) to 0.75% -which would mean a four-fold increase in absolute terms - towards the beginning of the third decade of this century, thus becoming thedriving force moving the private sector. Therefore, the goal must be to invert the existing relationship between public and privatecontributions to total R+D investment, decreasing the first from 53% to 32%, and, increasing the second from 37% to nearly 55%, thus matchingthe level of the more developed countries.5. Supporting the strengthening of the production potential of Chilean companies should be reflected in an improvement of the country'sproduction diversity indices. At present, the main 25 export products represent 76% of total exports, whereas in countries whose per capitaincome exceeds US$ 25,000, this indicator is below 50%.6. Finally, we would propose measuring the country's progress in innovation based on international rankings that, apart from offering apoint of agreement, permit a comparison with our initial situation and with the countries that are benchmarks for us or that compete with oureconomy and that have been used as the basis for determining the indicated gaps. The three factors linked to this proposal, innovation indices117

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1(currently position 39), business sophistication (currently position 30) and higher education and training (currently position 40), should beimproved in order to reach the levels of the other indices that account for our position in the Index of Global Competitiveness of the WorldEconomic Forum (position 27 of the ranking).We should subsequently add to these global goals highlighted by the main indicators which measure innovation at an international level othercomplementary indicators linked to the specific actions that this Council shall put forwardduring 2007.III. STRATEGIC OBJECTIVES AND LINES OF ACTION118A. Human CapitalObjective:To boost the human capital training system that would include the education of technicians and professionals and promote labourtraining that would be flexible, based on competencies, and that would have the capacity to create, disseminate and adopt innovation,especially in those sectors where there is competitive potential, either already identified or to be developed.Lines of action:In order to harness our innovation capacity, the country must increase its human capital with respect to both quantity and quality. In thisarea, it is necessary for a greater proportion of our population to attain higher education, with an education aimed at guaranteeing the qualityof our technicians and professionals as creators, disseminators and users of innovation, particularly in the areas with greatest future potential.Universities and technical training centres not only contribute to the generation of human capital, they also provide a significant share of theknowledge generation and the contribution of this knowledge to our society. It is within this framework that we set forth the following line ofaction.A.1 Re-defining the allocation of resources to higher education based on the public goods that it produces: quality education, basic andapplied first-rate scientific research, linkage and extension to the production world. This re-definition must be targeted at the country'spresent and future needs both in the education of technicians and professionals and also in research and extension.Guaranteeing quality and trust in that respect is a key element for promoting and maintaining human capital for innovation. In thissense, it is imperative to identify the characteristics of the human capital required and to render the measurement criteria uniform, thus

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1contributing to making the acquired competencies visible and to decreasing information asymmetries, for example, between education centresand students, and between companies and their workers. This would also lead to matching and adapting the formation of human capital to facethe country's current and future needs, especially promoting those competencies that will be determinant for the development of certainstrategic sectors. Consequently, we propose:A.2 The creation of competence standards both for higher education and also for training, and the definition and implementation ofeducation and training accreditation systems based on given standards, and in relation to market changes and the signals put forward from thepoint of view of the strategy adopted by the Government.The ratio between professionals and technicians in Chile at present is 11 to 1, unlike the one existing in developed countries, due to theundervaluation of the returns on technical education (information asymmetry) and the fact that public financing for higher technical educationhas only recently been increased. Innovation requires greater flexibility in the formation of human capital, and it should also includeintermediate levels - a situation that does not exist in Chile at present. To meet this necessity, it is necessary to guarantee quality throughcompetence standards and prioritization by areas of higher relevance for the development of the Innovation Strategy. Thus, we put forward thefollowing line of action in the formation of human capital:A.3 Fostering higher technical education, guaranteeing quality and pertinence according to the requirements of the strategy adopted bythe government and coherence with the training systems, considering the revision of public and private financing mechanisms in order toprovide the expansion of the coverage required in this area.Investment in highly specialized human capital is an investment that brings about high yields for the country. Private investment in thearea of post-graduate studies faces pertinence deficiencies and information asymmetry closely related to the creation of knowledge, andtherefore it takes place at sub-optimal levels. All the above leaves room for the intervention of the public sector for the sake of innovation,which is why we put forward another line of action:A.4 Promotion of the formation of highly specialized human capital, especially through the support to post-graduate studies ininstitutions of excellence, defined on the basis of international standards, and on the basis of the demand arising from the existing gaps in theareas and sectors of greater potential for the country. Additionally, it considers the creation of immigration policies that allow domestichuman capital to be complemented in the areas found lacking.B. Science (R + D)119

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Objective:To promote the development of science as one of the bases of innovation, emphasising scientific research mainly applied totechnological development or focused on providing answers to production problems, especially those that are linked to the sectors where weare or should be competitive today, and those where there is a positive relationship between its potential and the effort required in order todevelop it.Lines of action:Chile must increase its research and development activities and, given their strategic relevance, both State and private companies shouldsupport them. Furthermore, the creation of knowledge, be it aimed or not at productive activities, increases the capacity to adapt knowledgecreated by others. This is why the key lines of action of this strategy proposal include:B.1 Increase of public support for basic and applied scientific and technological activity, with special though not exclusive emphasis oninitiatives proposed by production sectors (demand-driven), thus leveraging private spending.Additionally, an increased scientific activity assumes the creation of a critical mass of researchers who increase their productivity andharness network synergies. In effect, this concentration of researchers would increase spending efficiency and would decrease the transactioncosts with the business world, and also with other national and international groups that could mutually benefit from increased interaction.Consequently, the Council would like to propose the following line of action:B.2 Support for the development of scientific and technological centres of excellence integrated into national and internationalnetworks, for the formation of progressive human capital, the creation of new knowledge, linkage with productive sectors and supporting theactivities of other groups of researchers in the country. This support must be organized based on a system that would link public financing ofthe potentials and current scientific and technological centres, guaranteeing their excellence and promoting their links with the areas ofinteresting for the strategy adopted by the government.120

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1C. Innovation in companiesObjective:The development of innovative activities in companies, considering product, process, sales and organization management innovations(business models and others)…Lines of actions:Companies are the driving force behind innovation and therefore must place innovation at the heart of their business, overcoming fearand the costs of acquiring and adopting innovation. In this sense, a fundamental line of action proposed by the Council is as follows:C.1 Revision of business innovation support funds and programs with a view to increasing their efficiency, making sure that we do notreplace what the private sector can do on its own and prioritizing those sectors and areas that are highlighted in the strategy.Companies' innovative development requires that investigation and development provide support for the creation and adoption ofinnovation. Companies must have a scientific and technological supply for the development of their businesses that would allow them toidentify business opportunities. In order to facilitate the relation between both, overcoming the network deficiencies that today separatethem, this Council would like to propose the following line of action:C.2 Promotion of links between companies with business-oriented scientific and technological activity at the service of innovation,through technological partnerships, technological intermediaries (“trusted brokers”) or other instruments, and through the creation ofaccreditation mechanisms and others that would make the quality of research centres more transparent in the eyes of the private sector.But companies' interest in innovation not only depends on the possibility of having research that could provide them with innovation, it isalso inhibited by the impossibility of appropriating adapt that investment. Thus, it is more convenient to wait for others to carry out innovationand then copy it and adapt it. In this sense, it is important to:C.3 Improve the regulations on intellectual property and the development of mechanisms that guarantee innovation property rightsarising from collaborative activities.121

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The financing problems that companies face at the time of taking on innovation projects are manifold. To face them, the State can takeactions in the three following ways: the first one is through the modification of the regulatory framework, thus permitting the increase ofinnovation funding; the second one is to provide one part of this funding thus promoting the increase of private financing; and the third one,and this should be the last option, is to substitute private financing. To determine which one of the above options is the most pertinent onedepends in each individual situation on the failures at each stage of the innovation process, in addition to the individual characteristics of thecompany in question. The above has led the Council to propose the following line of action:C.4 Perfecting the financial markets in a way that would open up new financing options for innovation projects and for thedevelopment of innovation inputs (science and education) and that would facilitate trade and access to markets.The contribution to innovation by companies is limited particularly in the case of smaller firms, due to their weakness in the basiccapabilities that are prerequisites for innovation. The problems of management and funding must be solved for the company to climb up theladder to where innovation occurs. In addition, innovation implies changes that, in turn, demand a learning process. This endeavour requires anarticulated support that tackles the manifold factors involved. The lines of action proposed in this aspect are:C.5 Deepening the models of technological dissemination based on an integral support to innovation in smaller companies, thatfacilitate access to specialized technical support for the innovative development of the company, with accredited consulting systems, and thatincorporate the costs of learning or soft innovation associated to the incorporation of technologies.122

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1D. CultureObjective:Create awareness and a proactive attitude in society towards innovation, recognising it, valuing it and incorporating it as a key factor forthe development of the country and, consequently, for the well-being of all Chileans.Lines of action:The concept of innovation in Chile is still diffuse and is viewed differently in the various segments of Chilean society. However, all ofthem have a positive view associated intuitively to “new things” and “the future”, but without directly relating it to the production issue.Producing a cultural change that places the need to face the challenge of innovation for growth in the mindsets of all Chileans, impliesinforming and explaining to each public, in the appropriate language, the importance of incorporating innovation for competitiveness. Thecentral message should associate innovation with palpable benefits not only for “the economy of the country” but also for its inhabitants. Forthis, the Council proposes the following:D.1 Fostering a view of innovation for competitiveness in the public opinion that, taking advantage of its positive connotation, unifiesthe contents of the concept and generates the bases for a common language.However, for a new concept to permeate society as a whole, discussions and thoughts on the concept are not enough. It is necessary tobreak the natural barriers of resistance to change, firmly embedded in the conservative character of Chileans in these issues, and foster theadoption of innovative behaviour at every level. The emphasis should be placed on the urgency to face in a timely and adequate manner thehuge transformations brought about by the budding Knowledge Economy. As such, the Council proposes a second line of action in the culturalfield, targeted at:D.2 Fostering and reinforcing innovative behaviour in various spheres, emphasizing the will to conquer the fear of failure andunderstanding obstacles as opportunities; and establishing the urgent and inevitable certainty that development depends on the capacity forinnovation.123

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1E. Institutional frameworkObjective:Ensure the governability of the system and create an institutional framework to guide, coordinate and synchronize pro-innovation publicpolicies, allowing the formulation of the National Innovation Strategy for Competitiveness adopted by the government.Lines of action:The path to innovation requires leadership at the highest level. It must integrate the various perspectives that converge in innovationand cannot be held to short-term urgencies and pressures. The institutional framework must have the necessary elements to constantly nourishand perfect the Strategy, and create information to prioritize actions and anticipate the challenges of competitiveness. As such, the Councilproposes the following lines of action:E.1 Consolidating the National Innovation Council for Competitiveness by Law, being both multi-sectoral and autonomous, in order toface the pressures on the government and other agents for short-term results.E.2 Creating capabilities –in the Council and the Government, within the framework of the roles corresponding to each, as expressed inChapter 3– for the evaluation and the design of policies and innovation support programs, as well as for the creation of relevant informationto maintain the strategy up-to-date and to be permanently accountable to the citizenry.The appropriate institutional framework for facing this challenge must be based on a clear definition of roles and exploit thepotentialities already created in the country. Thus, a relevant line of action is:E.3 Strengthen the public institutional framework for innovation based on two main pillars, Corfo and Conicyt, clearly defining theroles based on the market failures that they seek to correct and overcome the problems of coordination presently found.This institutional framework must ensure coherence at all levels, clarifying the role of each agent and ensuring that the resourceallocation decision-making be consistent with the definitions emerging from the Strategy adopted by the government and possess all theinformation necessary to ensure the pertinence and impact at each level of actions. Therefore, the following lines of action are proposed:124

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1E.4 Creating a watchdog for managing innovation policies in the Government (Finance, Economy and Education), to ensure the strategicalignment of various institutions that participate in the public innovation system and concentrate and make the political responsibilitytransparent.E.5 Defining the institutional framework for innovation at all levels of the public system, ensuring the governability of the system, andoptimizing the management coherent with the principles of the strategy adopted by the government. This implies reviewing the role ofvarious components of the system, starting with the agencies, and the funds and public programs, and including the public technologicalinstitutes.F. RegionsObjective: To tackle the participation of the regions in creating and applying local innovation strategies with special emphasis ondeveloping the institutional framework,.Lines of action:The development of a National Innovation Strategy requires a systemic perspective –which can be provided by this Council and thecentral government – as well as the specific knowledge of those who are nearer to the problems, which involves both the executors as well asthe various regions of the country. Along these lines, the Council proposes the following measures to facilitate regional participation:F.1 Identify competitiveness lags that affect the development of sectors with competitive potential, and define the road maps toprogress in each one of them, as well as in cross-platforms that have been identified as crucial for their development, with special attentionbeing given to their regional and macro-regional specificities.F.2 Foster the participation of the regions in the creation and implementation of innovation policies, with increasing levels ofautonomy and flexibility, considering an accountability model and the wholehearted internalization of the benefits and costs of theirdecisions, incorporating bodies at a macro-regional level.125

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1126G. Infrastructure necessary for innovationObjective:Strengthen the links of the National Innovation System with its environment, allowing it to provide a favourable environment for thedevelopment of the innovative process in all spheres.Lines of action:The development of innovation requires infrastructure conditions that facilitate the physical and digital connectivity (dealing with thenetwork failures that occur in the various levels of the system) such as providing the necessary physical inputs for developing the innovativeprocesses. Thus, the following is proposed:G.1 Strengthen the development of the road, digital and energy infrastructure, for developing sectors and activities that are crucial forinnovation.Given the great presence of intangibles in the world of innovation and its prerequisites, such as human capital and science, theincorporation of these goods to financial markets must be facilitated, in order for innovation to reach the required level for Chile to take theleap to the future. Therefore, the Council proposes the following lines of action:G.2 Perfect sectoral regulatory frameworks, such as regulating competition, the environment, and the labour force, to facilitate thedevelopment and transformations that innovation requires.As indicated earlier, innovation depends on the coordination of a range of public policies. In particular a better competitive position ofChile in international markets, requires sales policies and international relations that highlight and support the endeavour of the country ininnovation. As such, the Council proposes:G.3 Identify and foster measures to improve the competitive position of Chile in international markets.The Council understands that its mandate with respect to proposing a National Innovation Strategy will only be fully accomplished whenit completes the detailed design of the lines of action proposed to adapt the institutional framework and systems of governability of the wholeof the public pro-innovation system and it identifies, at both a sectoral (clusters) and regional level, the main lags still remaining for the fulldevelopment of its potential and the main specific policies required to achieve it.

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1SECTION 2THE FIRST STEPS OF THE STRATEGYThis Council began its work in May 2006 with the priority objective of constructing a National Innovation Strategy forCompetitiveness, but also including the responsibility of preparing a budget proposal for the Innovation Fund for Competitiveness (IFC) forthe 2007 fiscal year.This double mission required an intense initial work to establish a work plan and methodology that later served as the basis for theproposal given to the government for the IFC as well as for the discussion on the conceptual bases of the strategy presented in thisvolume. Thus, the work of this Council has evolved into a feedback process between what has been, on the one hand, the analysis andresearch carried out for the preparation of this document and, on the other hand, the practical application of that learning both in theproposal made regarding the use of the public funds managed by the Innovation Fund and in the following steps that will complete themore detailed definitions of the strategy.This section presents the fruits of this work.127

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1I. THE FIRST STEP: PARTICIPATIONOne of main characteristics required when designing a strategy is that it must be collective because it requires defining clearvisions, goals and objectives to which the endeavours of all the players must be directed. Therein lays the interest of the President of theRepublic in including a participation process in the creation of the National Innovation Strategy, which will provide both technical supportand social validation to this proposal.Section 1 outlines towards where the country should advance in the next 15 years and also suggests the areas in which the countryshould concentrate its public and private endeavour to that end: education, research and development, and production diversification.However, even though the Council has already spoken with the day-to-day actors of innovation to make these definitions, it is stillnecessary to define the roadmap required in greater detail. For this, no one is better equipped than the players of the system themselvesto nourish the discussions and formulation of the strategic definitions that should guide our work over the next few years with theirknowledge, experience and particular perspectives.INFORMATION AND NETWORKSIn the creation of the conceptual bases of the strategy, one of first problems encountered by this Council, which has a general andsystemic perspective of the problems of innovation, was the lack of specific knowledge required to understand the problems that theplayers of the system experience day-to-day. This should in turn serve as a base to search for the best responses to those difficulties interms of public policies.A failure of information on this scale is an obstacle that the private sector, by itself, cannot solve, because –as has already beenseen with other cases in this document– it does not have the economic incentives to do so, since it is a highly expensive task and it isunlikely that the benefits to cover those costs can be assured. Thus, somewhat paradoxically, the Council began its task verifying if thesame market failures that hamper innovation –low appropriability and asymmetries of information– could inhibit the materialization of thestrategy it fosters.The response then was that, due to its mandate, the Council itself was responsible for gathering this information, which would formthe base for the initial work of conceptual definitions presented in this document and for the “fine-tuning” required henceforth tocomplete this strategy.128

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Furthermore, this task of the Council was understood as a way of creating temporary or permanent networks to discuss the ways offulfilling the goals proposed by the Strategy 86 , considering that interacting in networks produces externalities that benefit the individualmembers as well as the whole.And, finally, it was deemed that an actor like this Council –which does not have problems of dynamic inconsistency and agency– wasthe most appropriate agent for implementing an exercise that must, above all, be developed with a systemic and long-run perspective 87 .THE CONSULTATION PROCESSThe discussions with the players of the National Innovation System –undertaken between August and October 2006–started with aplenary session of the Council dedicated to drawing up an agenda to guide the process; various areas of research were included there,from innovation in companies to the awareness level in Chile regarding the issue.With this roadmap laid out, 8 workshops were held. The participants were invited to make concrete proposals aimed at fostering,improving or strengthening innovation in the various areas studied. People with a first-rate track record and highly experienced in theirfield were selected for each of these workshops with the objective of bringing together specialists from the business, academic, scientifictechnologicaland public sectors that would deliver a comprehensive range of approaches and levels of analysis that converge ininnovation.Through the recommendations of the participants selected, the Council gathered information on the problems experienced daily bythose engaged in innovation in Chile, which highlighted the main weaknesses and lags of the system. In total, 249 proposals for concreteactions were gathered from 173 participants in the workshops.THE DISCUSSION IN THE WORKSHOPS1. FOSTERING INNOVATION IN COMPANIESThrough its dialogue with the participants in this workshop, the Council gathered a range of issues including the conditions thataffect the life-cycle of innovative companies to directly fostering innovation in companies, through individual subsidy (seed capital, risk86 Indeed, if the problem to be resolved is complex, a possible solution may be dividing it into sub-problems, on the condition that, once resolved, the more generalvision is discussed again, exploiting as such the economies of the network.87 Either way, to avoid problems of agency, the Council delegated the creation and application of a methodology to a third party to get the most out of the potentialsof the network.129

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1capital, insurance and company incubators) and group subsidy mechanisms (development of technological extension networks and sectoraltechnological dissemination programs).The issue of incentive mechanisms for technological research and development in companies also arose during the research, such asventures, attracting investment with high technological externalities and tax incentives for contracting these services.The dialogue with the players revealed concern with issues directly linked to supporting business innovation and also with those thatform the base conditions for it to occur, thus demonstrating the systemic complexity that the Council sees as characteristic of thephenomenon of innovation.Among the proposals for concrete steps made during the course of the workshop, the participants indicated the need to: foster thedevelopment of clusters or production sectors; improve pro-innovation public administration; “have a clear and predictable framework” ofrules of the game for private investment that fosters innovation; have support instruments for technology management; and strengthenthe intellectual property system.To develop clusters of players, they proposed the formation of “tripartite commissions (public, private and academic)” to detect“weak links and obstacles” where private participation is required and “ultimately public actions”. They also indicated the urgent need tohave mechanisms for carrying out “substantive national initiatives in the area of innovation”. On the issue of pro-innovation publicadministration, they emphasized the need to “flexibilize, simplify and favour integrality” in the tools for supporting innovation, and tohave, where efficient, “decentralization schemes for the management of support funds”.All of the above demonstrated to the Council the need to introduce selectivity in policies, based on information on the future andavoiding problems of capture by certain groups that inhibit the full potential of the issues identified during the policy definition process,or that continue longer than necessary.The development of support instruments for technology management highlights the need to resolve the problems of asymmetry ofinformation, which is one of the market failures that lie at the base of the construction of this strategy. In this area, the players identifiedthe need to “develop tools to evaluate and self-evaluate the innovation capacity of companies” and “validate and certify programs forusing technology in large companies”. Finally, the importance of facing the problems of appropriability in innovation became evident inthis dialogue, expressed through demands for “facilitating the patenting processes and prior protection, and strengthening theinstitutional framework to achieve it”Among the issues for supporting innovation in companies, the players emphasized the need to foster the incorporation of innovativehuman capital into companies, from “young persons with masters or doctorates” to “retired innovative executives”. They also highlightedthe importance of carrying out steps to increase the awareness of businessmen with regard to innovation, especially of “top companyexecutives, directors and owners”; of their link with the scientific sphere and of the need to foster “innovation skills in the formation ofhuman capital”.130

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 12. FOSTERING INNOVATIVE INITIATIVES IN THE REGIONSWithin the context of fostering innovation in the regions, the Council invited the experts for discussions on the development ofregional innovation capabilities, as well as on creating and strengthening innovation networks that link the regions with each other andwith the centre, including the issues of regional third level education and the link mechanisms between companies and regional researchcentres.The discussions with the specialists on this matter revealed a great concern to ensure that the national innovation policy has anadequate regional dimension, with “decentralized and differentiated strategies and instruments” that take into account localcharacteristics. According to them, the creation of these strategies should be based on “prospective studies with a systemic territorialcharacter, with the participation of its main players” and dedicated to strengthening regional innovation systems, especially at aninstitutional level, considering the existing weaknesses when “articulating technology policies at a supra-regional level”.In the construction of regional strategies and in the design of the specific tools, the participants also indicated the need to consideridentifying the “regional requirements for public goods (necessary) for innovation” and the “areas of preferential productiondevelopment”, that translate into the need for the regions to be capable of “recognizing their main innovation potentials and productionvocations”, as well as contributing to “reducing the present and future competitiveness lags of the country”.The players agree on the complexity and special regional difficulty in “forming networks between regional centres and top-levelspecialized institutions” in science and technology, and to direct those efforts towards “resolving fundamental problems of associatedgroups of regions”. In addition, they identified the difficulties in having adequate instruments to develop “regional and territorialclusters” and “forming and/or consolidating business networks (of innovation) formed by large, medium and small regional companies”.This input has been essential for the work of the Council. The complexity and relevance of the regional issue have led to thedecision to approach it through a specific work that will be designed based on the diagnosis of the competitiveness lags present in theregions, and will be based on the approach of sectors with competitive potential. This will allow specific actions to be devised with theparticipation of regional players for the territories and regions covered by those sectors. As indicated in the conceptual bases of thisstrategy, their contributions are invaluable because of their specific knowledge of the local realities and allow for synergies thatcontribute to the success of the strategy to be created.131

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 13. IDENTIFYING AND STRENGTHENING LOCAL TOP-LEVEL SCIENTIFIC AND TECHNOLOGICAL CENTRESRecognizing the importance of top-level scientific and technological centres to face the problems of appropriability, asymmetry ofinformation and network failures that affect science and technology, the Council wanted to enrich its analysis with the contributions ofexperts. Issues concerning the need for accreditation mechanisms and measuring the excellence of the centres to orient the allocation ofresources were covered in the workshop, and of adequate instruments to support their activity, such as long-run performance agreementsfor the creation of capabilities, access systems to specialized scientific equipment and international scientific information.The specialists also highlighted the need to define a national policy on centres of excellence that considers mechanisms for“identifying”, “developing networks”, “permanence over time” and “capturing and retaining researchers”, as well as “strategicpartnerships” to stimulate the development of successful scientific technological centres. This implies possessing priority research areasthat “guide the running of centres of excellence”, through “programs of excellence (including centres) in priority development areas forChile” and “the long-term hiring of international experts” in those areas.Likewise, players linked to the scientific and technological centres indicated the need to institutionally strengthen the centres ofexcellence, especially the development of their corporate governments, as well as having an “appropriate legal framework”, which onceagain highlights the importance of defining an institutional framework that incorporates all components of the National Innovation System.Another problem revealed by this workshop is the need to have a funding system to create and maintain capabilities over the longrunin the centres of excellence. This requires the design of better instruments to fund the research projects and developing theinfrastructure and the support systems that they require; this goal has been at the heart of the analysis of this Council and of therecommendation for 2007 for a basal funding program for centres of excellence.Finally, the participants highlighted the need for measures aimed at adequately protecting and disseminating the knowledgeproduced in the centres, once again highlighting the failure of appropriability in the production of knowledge.4. SCIENCE-BUSINESS INNOVATION ARTICULATIONThe link between the scientific and the business world is crucial for innovation. This is why this field of research is included in theagenda of the consultation process with relevant players of the system. Specific issues related to improving the intellectual propertyprotection system arose in the workshop, as well as the incentives for patenting and developing technological intermediaries (brokers)between both worlds.One of the issues pointed out during the dialogue concerns the importance that the players assign to the development ofinstruments to support the science-business articulation, such as technological consortia, reviewing its “rules and norms of formation” andcreating “permanent regional roundtables, between companies and universities” to tackle technological challenges. Likewise, weaknesseswere identified in the technological transfer capabilities associated to the lack of “internationalization” of companies and scientific132

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1technological centres. The need to have specialized intermediaries between companies and the technological centres was alsoemphasised, identifying alternatives such as “technology management and transfer bodies” and a “technological broker industry”.The conversation also offered insights to the Council with respect to the criteria that indicate when it is necessary to bring researchclose to production activity and when not. This will be a fundamental input when defining the roadmaps for sectors with potential. Whenit is “adaptive and operational innovation”, it should tend towards a location near the scientific and business activity, in contrast to“radical or disruptive innovation, where physical location becomes less relevant”. In terms of the analysis categories of the Council, theplayers indicated that considering the existence of tacit knowledge in innovation activity is a key element, especially in links nearer to themarkets, among people and teams capable of adapting processes or products.5. INNOVATIVE HUMAN CAPITAL FORMATION SYSTEMThe shared concern in having an adequate system for the formation of innovative human capital in Chile pervaded the issues andproblems covered during this workshop. Its participants presented the shortfalls that must be repaired in teacher training, the necessaryskills in the labour force, the formation of advanced human capital and, in particular, the link between technical training and companies,and the education and incorporation of PhD graduates, among others.During this process, the experts came to the conviction that it is essential that the country make a great effort to improve primaryand secondary education. Emphasis was particularly placed on the training of educators and on the need to incorporate more informationthrough skills’ certification practices “with international standards”, especially of pedagogy graduates, as well as increasing the quality ofthe teaching and educational policies, and training, “capturing and retaining the best teachers”, emphasising the subjects ofmathematics, science and English.For higher education, they proposed working on the “articulation of public instruments targeted at postgraduate students” to“overcome the access gaps (gender, regions and languages)” and “directing resources towards the deficient areas” in human capital.Regarding the formation and incorporation of researchers they recommended supporting “start-up projects” for researchers, foster the“incorporation of PhD graduates into industry” and “foster the internationalization” of science and technology graduates.Another area of concern revealed was the insufficient development of innovation skills in our labour force, for which proposals weremade to strengthen the “articulation of public instruments targeted at training and labour market participation”. Technical training alsoreceived suggestions, in particular aimed at evaluating the “current system of continuous training” in order to possess a “national systemof competencies”.The needs and proposals that arose from this work corroborated the conviction of the Council that primary and secondary educationare crucial for innovation, even though they exceed its mandate.133

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The issues mentioned by the specialists in this workshop are naturally linked to the analysis of the Council on human capital anddemonstrate its strategic importance for innovation. The work identifying lags in sectors with competitive potential and in cross platformsthat support it, will allow specific measures to be defined to tackle the formation of human capital for innovation.6. MECHANISMS FOR FOSTERING PUBLIC INTEREST INNOVATIONThe discussions of the Council on public interest innovation with the players sought to identify the deficit of public policies andsteps on how to handle innovation policies around the big national problems, the role of public companies in the creation of innovationand the need to provide the knowledge required to form public policies.The analysis of the players focused on two spheres. Firstly, fostering large-scale national initiatives capable of strengthening theinnovation endeavour, in which they proposed that the Innovation Council itself “identify, design and recommend high-impact innovationprograms targeted by mission”, in spheres such as “information technologies, biotechnology, education, knowledge, health, cities”, or in“permanent public programs”, as well as in those linked to social issues, defence or public security.It also revealed the “need to establish a permanent mechanism for managing the information creation and dissemination system forthe production system”, and possess a “policy for developing broadband as a key infrastructure for competitiveness”.Secondly, the experts proposed specific actions with respect to the instruments and articulation criteria of the public sector withthe innovation system. Weaknesses were identified in the National Innovation System with respect to supporting the development of“public sector projects that impact competitiveness”, and local public interest innovations. Likewise, the need to revise the “incentives inthe concession and acquisition mechanisms” of the public sector concerning innovation was proposed, as well as to “diffuse knowledge andtechnology in whose creation or availability the State has participated”.This discussion underlined the importance of possessing a range of environmental policies, which the Strategy refers to as“infrastructure necessary for innovation”. Moreover, it shed light on the need to consider innovation in its interrelationship with thestrategic challenges facing a range of sectoral policies. Thus, the innovation policies and endeavour in Chile are strengthened and enrichedtogether with other spheres and sectors that drive public wills and resources. Indeed, as the institutional framework is strengthened andits capacity to incorporate more selective dimensions free-from problems of capture develops, other national challenges, such asovercoming poverty, fighting pollution, modernizing the State and others, arise as areas where innovation can be strengthened.134

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 17. FOSTERING THE INTERNATIONALIZATION OF THE INNOVATION ENDEAVOURWith respect to supporting the internationalization of the innovation endeavour, the Council proposed to the participants of theworkshop, the need to tackle the incorporation of national players into international technological networks, as well as the mechanismsaimed at achieving their internationalization and incorporation into global production linkages and the need to have public support forthis.In their discussions with the Council, the experts specified the need to incorporate innovation into the foreign policy priorities ofthe country, “develop and project a genuine identity of an innovative country” and “identify and remove barriers” that hinder theinnovation endeavour. In particular, with respect to the globalization of our companies, they indicated the need to create environmentalconditions and strategic capabilities in our innovative companies and scientific and technological centres that facilitate theirestablishment and operation abroad.Finally, they proposed concrete measures to create “propitious conditions for the establishment of global players in innovation inChile”, such as the formation and development of Chilean researchers, fostering immigration and the residence of foreign researchers andChileans resident abroad to complement those capabilities, within the framework of international networks.This range of proposals highlights the need to incorporate the challenge of innovation into the design of specific policies ininternational trade and cooperation. In the second phase of analysis of the Council, in light of particular requirements that arise from theanalysis of sectors with potential, specific competitiveness lags of companies can be identified regarding their operation in internationalmarkets, as well as the places where public actions are required.8. RAISING AWARENESS OF INNOVATION IN CHILERegarding the awareness of innovation in Chile, the Council started discussions with experts to analyse the development of anentrepreneurship culture that fosters the innovative spirit and creativity among Chileans. In this context, the need to establish programsfor valuing and diffusing science and technology was evaluated, as well as the need to capture ideas and projects from all spheres ofsociety.The participants highlighted the importance of the cultural issue in the change of paradigm arising from innovation. In that sense,they mentioned the need to raise awareness through school education, considering measures aimed at “highlighting and disseminatinginnovative models of education”, rewarding “innovation among children and the youth” and “fostering the incorporation of the arts” andother disciplines as precursors of innovative attitudes. They also highlighted the importance of raising awareness through third leveleducation, fostering the “development of management abilities” in university courses and stimulating the incorporation of universityprofessors into this endeavour. Finally, they emphasized the need to raise awareness through communication media, developing an135

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1“inclusive concept of innovation for competitiveness that shows that innovation depends on society and society depends on the progress ofinnovation”. It should involve moving opinion-makers to create an agenda in the media and foster the placement of innovation in societyand present innovation-related cases in the media”.The range of ideas that the guests to this workshop recommended allowed the Council to gauge the magnitude of the culturalphenomenon and the need to transform it into a pillar of innovation. The analysis of the failures and weaknesses underlying the bases ofthe strategy considered the importance of the cultural factor in each stage and of instilling a thorough awareness of making innovation atask for society as a whole.As can be seen in the description of each of the issues tackled, the participation of players through a committed and open dialogue,allowed the members of the Council to deepen the diagnosis, highlighting the complexities and interrelations of the process of innovation.These elements formed the basis of the analysis of the Council and have been crucial for defining large elements that make up theNational Innovation Strategy. But its contribution is not restricted to that; in the design of specific policies that will be worked on duringthe first half of 2007, the proposals that arose from the specific knowledge of players will be analyzed, within the guiding frameworkproposed by this Council, in other words, that the public initiatives finally proposed to the Government strictly adhere to the subsidiaryrole corresponding to the State and that has been amply defined in the first part of this report in the case of innovation. This will alloweach action to respect the relative advantages of the public and private spheres and as such converge and strengthen towards the greaterobjective that binds us: make innovation for competitiveness an instrument at the service of the economic and social development ofChile.136

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1II. BUDGET RECOMMENDATION WITH A STRATEGIC PERSPECTIVEThe resource allocation proposal of the Innovation Fund for Competitiveness in 2007 (IFC), corresponding to this Council, reflectsand materializes the criteria of the conceptual bases of the strategy presented in this document.Thus, concordantly with the systemic approach proposed throughout, the recommendation was made with the reference frameworkof the total public resources targeted at the National Innovation System. This analysis allowed a focused recommendation to be made forthe resources of the IFC, as established in the Decree that set up the present Council, but which is coherent with the system as a whole.At the same time, it fulfilled the objective of targeting the resources of the IFC at creating additionality and not a substitution ofspending, only funding those that are necessary to develop innovation in Chile and which were not being and would not habitually beundertaken by any other player of the system.Another fundamental criterion in the budget recommendation process was ordering the distribution of resources based on thespheres defined as strategic for systemically tackling the development of innovation in Chile. These arose from the lines worked on by theCouncil with the players of the National Innovation System, in the participative workshops carried out during the second half of 2006, that,as indicated in the previous chapter, include the formation of innovative human capital, business innovation, linking science andinnovation in companies, fostering science and technology, internationalizing the innovation endeavour, strengthening the scientific andtechnological centres of excellence, fostering the innovation endeavour in the regions, public interest innovation and the level ofawareness of innovation in Chile.Two main approaches were also considered, always concordant with the Strategy: first, in economic activities where live signs areidentified to create impact (clusters), and secondly, in developing conditions that foster innovation and the leveraging of resources inregions.It is important to highlight that in the creation of the budget proposal, apart from respecting the criteria established by theCouncil, a dialogue process was carried out with the various implementation agencies of programs and other players of the public sector.This translated into the review of performance evaluations of programs and of innovation instruments; discussions with evaluators of thepublic sector and successive interactions with the fund-recipient institutions. This process led to the proposal which was finally acceptedby the Government.Concerning the criteria employed for the distribution of resources, the capabilities and experiences of institutions that implementthe funds were considered, strengthening the relations that optimize the benefit derived from their capabilities. At the same time,fostering the participation of the private sector in financing the actions of the Fund was sought, in order to ensure the interest andcommitment of this sector in the development of innovation in the country.137

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The Council places special importance on ensuring transparency and efficiency in the resource allocation proposals. For this, theCouncil provides detailed budget information for the public in its website (www.consejodeinovacion.cl), including the performanceagreements approved.BASAL FUNDING FOR TOP-LEVEL RESEARCHAs a project of special importance for 2007, the Council has sought to highlight the Program of Basal Funding for which theGovernment has allocated $9,070 million pesos in the 2007 Budget Law. This program proposes a model for funding the basic operation oftop-level research centres and seeks to establish the conditions for forming critical masses of top-class scientists, to allow Chile to be onthe cutting-edge of knowledge in some specific areas. It is also hoped that the work of these centres have a national and internationalimpact, as a result of their research and collaboration networks and the formation of young scientists.This initiative is part of the public funding for research and development that the Council seeks to tackle based on the marketfailures identified, and that will result in a system capable of providing an adequate response to each of the existing links in theproduction of scientific and technological research in the country. Within that framework, the decision was made to strengthen the higherlevels, with a program targeted directly at solving the lack of funding for the basic operation of the research centres, given the highinvestment levels required at this level and the specificity of their production.This immediate measure was proposed by the Council since the evidence indicates that the specificity and indivisibility of theknowledge generated in this type of centres do not provide the necessary scale for the market or the branches of public support forindividual projects to cover all the necessary operational costs, and alongside maintaining and consolidating the critical masses ofresearchers capable of applying or producing new knowledge. The objective is that, through this mechanism, Chile can position itself atthe cutting-edge of knowledge in some specific areas with national and international impact.The design of the program recommended by the Council to the Government should ensure the transparency and excellence requiredby a level of public spending on this scale; the efficient use of resources, and targeting them towards the priority areas arising from thestrategy.THE BETS OF THE 2007 IFCThe issues recommended by the Council for the distribution of the resources of the IFC correspond to the broad budget linesreflected in the 2007 Budget Law. The total IFC budget recommendation for 2007 followed these lines which constitute the components ofinnovation, but emphasised the development of innovation in regions as a transversal strategy.This special concern is reflected in more than one budget line. In particular, the Council recommended placing special emphasis onthe regional impact of a range of budget allocation programs for fostering business innovation and science and technology. Noteworthy138

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1among these are transfers to SMEs, extending pro-innovation lines in individual companies, the development of business technologicalconsortia, the strengthening of scientific and technological research capabilities, as well as the development of pre-competitive andpublic interest innovation projects.2007 IFC BUDGET(Thousands of $)Budget Lines 2007 IFC Percentage oftotalPublic Interest Innovation 8,390,434 16%Formation of Human capital 8,961,107 17%Fostering Science and Technology 19,167,923 36%Business Innovation 10,084,682 19%Internationalization of Innovation2,571,417 5%EndeavourRaising awareness of Innovation in2,698,656 5%ChileOther 885,091 2%TOTAL 52,759,310 100%• “Public Interest Innovation”, covers initiatives such as strengthening the institutional framework of the public innovationsystem, as well as those that create the environment for the institutional framework to fulfil its mandate. Highlights in the 2007 Budgetinclude the funding of public interest projects through contests of Innova Chile, support to the development of innovation policies fromthe Ministry of Economy and the definition of road maps for sectors with the greatest economic potential, defined by the competitivenessstudy commissioned by this Council during 2006.139

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1• The proposals of this Council for improving the formation of human capital for the whole of the educational system areconcentrated in the “formation of human capital”. Within this framework, the 2007 IFC Budget includes the funding of postgraduatescholarships and the formation of researchers, the design of a program of accreditation for training, and training scholarships forprofessors and students of pedagogy that seek to improve the formation of the human capital of the future.• The area of “fostering science and technology” includes funding for the development of basic and applied scientific researchand initiatives for linking the supply of research to the needs of the production world. The 2007 IFC Budget offers continuity to the fundingof research projects aimed at production and covers the development and consolidation of technological consortia linked to the creationof scientific knowledge of interest to specific production sectors. Furthermore, it also includes the program of basal funding.• “Business Innovation” contains the initiatives that foster innovation in companies through direct funding for the generationof innovation and the incorporation of technology. The 2007 IFC includes funding for the creation of innovative businesses (seed capitaland pre-seed); supporting the development of networks of innovation funding with incentives to networks of angel investors, incubatorsand sponsorship; and funds for internships and expert international consultants to facilitate its adoption. Also noteworthy among therecommendations for 2007 are the initiatives for dissemination and extension towards smaller companies, as well as fostering goodinnovation practices among them.• The “Internationalization of the Innovation Endeavour” field is targeted at improving the competitive position of Chile ininternational markets. To this end, the 2007 IFC considers prospection and market research studies and support for the installation of salesplatforms in the most interesting international markets, as well as the design and implementation of a generic marketing program tofoster the “Chile” country brand.• With respect to the line referring to “Raising Awareness of Innovation in Chile”, during 2007 programs for fostering scienceand technology will be funded as well as an inter-institutional program for fostering a culture of innovation and entrepreneurship.• Finally, the resources directly managed by the Council are targeted at providing the information and creating spaces forinteraction with the key players of innovation in order to fulfil its mandate. Some of the most notable projects for 2007 include theimplementation of the National Innovation Survey, the specific industrial organization diagnostic and design studies for each component ofthe Public Innovation Funding System, the organization of workshops for constructing road maps of sectors with competitive potential and140

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1the cross-platforms prioritized in the competitiveness study, as well as the design of specific policies arising from the National InnovationStrategy.III. COMPETITIVENESS STUDY IN CLUSTERS OF THE CHILEAN ECONOMYBefore fully engaging in the task of creating the Strategy presented in this document, the Council understood that many of theanswers that would aid in fulfilling its task lay in the future, when globalization will increasingly trigger fierce competition, whereknowledge and innovation are the foundations of the economy and of the wealth of countries, where natural resources are not a curse andsuccess is only possible if the public and private sectors act in a coordinated and cooperative manner.Therefore, one of the first challenges imposed on the work carried out in 2006 was to bring that future to the present. This is notonly to inquire into what those dynamics of the global economy in the next few decades will be or what place Chile will occupy in thatfuture or what the most promising areas for national development are, but rather, above all, to understand what decisions must be madetoday to truly make the country a part of that future.In the earlier chapters, the analysis of market failures highlighted the need for a greater level of articulation between productionsectors and the participation of the State in the creation of public goods that are fundamental for the development of the country.However, it has also emphasised the need to take into account the sometimes very long maturity time of some public goods, such ashuman capital, science or infrastructure, that will provide the basis for any private initiative. Why? Because that long maturity periodobligates anticipating today what the demands of the future will be. The examples are clear: the education gap cannot be closed from oneday to the next; neither can a critical mass of researchers be produced to generate world-class science overnight.However, why should the State, through this Council, be responsible for this task?Firstly, because identifying the trends of the global economy and crossing that information with local capabilities is, without adoubt, an expensive and demanding enterprise. Furthermore, on top of that, as indicated in Chapter 2 of Section 1, there are enormousproblems of appropriability that prevent the private sector from having sufficient incentives to solve this great failure of information,which the State and the private sector recognize as fundamental for the development of the country.Secondly, because the public sector is interested in possessing the information needed to coordinate its supply of public goods andwhich also serve to guide private decisions on the creation of complementary goods that can also have long-term maturing processes.This was done by contracting a consultancy service, in a totally transparent and competitive manner, through a national andinternational public tender and fulfilling the procedures stipulated in Chilecompra.141

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1SEEKING ANSWERSFor Chile, looking ahead to the future is fundamental. However the task is not easy, since it is not achieved by simply stretchingforward that imaginary line of what the country has done in the past. The future is so dynamic and the speed with which changes occur isso fast that figuring out the future forces us to consider multiple scenarios, recognizing, however, that there is no strategy that can coverall the possibilities and as such it is essential to be well prepared to face the uncertainties.Therefore, to carry out this task, the Council contracted the services of an international consultancy firm and started workingtogether in the second half of 2006, and will continue working during 2007 on the preparation of a competitiveness study on Clusters ofthe Chilean economy which seeks to provide answers to various questions: what spaces exist to incubate sectors with potential? Whatfailures may be inhibiting the appearance of advantages in those sectors? And, what can the State do –through the provision of publicgoods or the elimination of existing obstacles– so that these production areas can grow and develop? Where are the lags that show spacefor improving our competitiveness?For this, the work has not been based on an arbitrary analysis nor is it captured from sectors with potential within the economy, aswell as emerging sectors. It must be made clear that not all pro-innovation funds will be allocated following this selective approach ofclusters, since indeed the other areas with a demand for developing innovation projects without selectivity of this type will also besupported.The analysis also considers the present situation of Chile, global trends, and the effort necessary for those sectors to reach theirpotential, in accordance with the capabilities of the country. And as a result of the exercise, a first map has already been produced inwhich obviously established and developed sectors, which already have clear advantages, have appeared in the economy, but there arealso other emerging ones –such as outsourcing– not based on natural resources, but which are directly or indirectly highly demanding ofpublic goods, in terms of human resources, technology and adequate regulatory frameworks.Regarding the sectors with the greatest potential –and also focusing on the development of clusters or production conglomerates inorder to highlight the problems associated to network economies–the deficiencies that may be hindering their take-off will be identified(due to insufficient provision of public goods or failures of coordination), once again comparing the national reality with the developmentexperiences of those sectors in other countries. This reveals, for example, that in Chile some components of a specific cluster that havebeen characteristic and even vital in other parts of the world have not appeared or developed yet. This may also be valid not only forsectors emerging today in the local economy, but also in the more developed sectors in which the country has great advantages 88 .88 An example of this may be: Why have mining services not appeared in Chile, in contrast to other mining countries? Is it due to regulatory problems, failures ofhuman capital, infrastructure deficits, or a low level of connectivity? Would a large copper producer have incentives to carry out this study? Are the large copperproducers responsible for developing these new sectors? Making and answering these questions is also a public good.142

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1The work of this Council with the consulting firm is targeted at resolving the grave problem of not possessing information about thefuture (because it is expensive and there are no economic incentives for the private sector to supply it); to identify what public goods andproduction conglomerates with development potential are required to strengthen them; and, finally, the question is asked, if all of that isresolved, can failures of coordination in the private sector that hinder the development of these production networks still exist.Following this path, the selectivity of some policies arises spontaneously as a need derived from the prospection of the future itselfcarried out by independent bodies (this Council and the consultancy firm) and not as a pre-imposed requirement or one arising from thepressure of private interest sectors. Additionally, and as indicated in Chapter 3, independence in the selectivity of policies is ensuredthrough the broad diversity of the members of the Council, who, on the one hand, have been appointed as experts and not as sectoralrepresentatives and, on the other hand, in the event of some kind of sectoral pressure, it is neutralized through the presence of membersfrom different spheres of society.Therefore the study underway will determine the public goods that may be common to various sectors –for example, digitalconnectivity or road networks or human capital– and will also provide the most specific answers in each of the sectors, such as forexample, what type of human capital is required in aquiculture or in outsourcing or in mining services. Thus, selectivity is necessary,because neutrality implies losing all the specificity of advantages that the country has or can have and does not allow the adequatenetworks to be formed among production sectors.This is perfectly compatible with the proposal of this Council, namely that the long-run development strategy of Chile must be anamalgam that contains “specific or selective initiatives” in sectors with the greatest development potential, together with “general orneutral initiatives” based on platforms that are common to various sectors that give the country flexibility and the capacity to adapt.The final composition of specific and neutral policies arises strictly from the analysis made today together with the consultancyfirm, but it also requires the capacity over time to add and evaluate new information for refocusing the strategy. This is precisely –aspresented in Chapter 3– one of the fundamental tasks that will correspond to the Innovation Council in the future. Anticipating the futureand taking steps in this respect are the tasks of the strategic planning that the Presidency of the Republic has entrusted to this advisorygroup.143

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1THE STRATEGIC MAPThe construction of the map of sectors with the greatest development potential of the Chilean economy started with an analysis ofhow the country should face the uncertain and changing global scenarios in the medium-term future, especially in areas such as globaltrade and global social, political and economic integration. The evaluation of the Council indicates that, beyond specific circumstances,Chile should maintain its development strategy based on opening up to international trade, on competitiveness based on innovation andhuman capital, and in making the most of advantages provided by the natural resources strengthened with a powerful injection ofknowledge.Therefore, the next step was to define what sectors have the greatest potential (which does not imply that other sectors aredisencouraged, and even less discarded) and identify the cross-platforms that are indispensable for its development, starting with ananalysis of the current conditions of the national economy.To produce the initial (long) list of potential sectors, the following sources were turned to: the work undertaken by the Council in ascenario analysis workshop 89 , information on production activity and its sectors of the Central Bank, interviews with members of theCouncil and other national experts depending on the production sectors, the available literature on the sectors with the greatestdevelopment potential in Chile, the development of national exports in recent years, the high-growth sectors in the world and those withhigh levels of development in benchmark countries for Chile, either because they have been successful in developing or because they arepowerful international-level competitors today.This initial list of nearly 70 potential opportunities was later reduced to 31 candidate sectors, subjecting them to four basic criteria:i) the consolidation possibilities of various opportunities (for example, a new type of fruit variety for export), ii) the current and expectedsize of the sector, iii) its compatibility with current or potential competitive advantages in the Chilean economy, and iv) the possibilitythat this sector could be considered a cross-platform that supports other sectors rather than an individual sector (for example, humanresources or energy).89 A scenario workshop was carried out on the 30 th and 31 st of October. The main objective of the workshop was to foster a reflection in the Council on uncertainty andthe need to be prepared for the future, and to identify the more robust sectors and cross-platforms that allow Chile to be flexible in facing an uncertain future. Thiswas done by analyzing three potential scenarios of the world in the year 2020, with diverse outcomes with respect to issues such as: globalization, the environment,trade, education, among others.The participants of this workshop were: Carlos Álvarez, Celia Alvariño, Ricardo Barrenechea, José Miguel Benavente, José Joaquín Brunner, Ana María Correa, NicolásEyzaguirre, Alejandro Ferreiro, Virginia Garretón, Javier González, Vivian Heyl, Servet Martínez, Leonardo Mena, Mauricio Medel, Mario Montanari, Alfredo Piquer,María Olivia Recart.144

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Figure 131 HIGH GROWTH POTENTIAL SECTORSFoodrelatedsectorsNaturalresourcerelatedsectorsAlimentos procesados de consumohumanoFruticultura primariaHorticultura primariaL á cteosAlimentos procesados para consumoanimalVitiviniculturaPorcicultura y aviculturaGanader í a (Bovina y ovina)Silv í colaProductos de maderaCelulosa y papelMiner í a de cobre y subproductosMiner í a no met á licaAcuiculturaSectoresrelacionadosa serviciosComunicacionesConstrucci ó nConsultor í aEducaci ó n superiorLog í stica y transporteOutsourcingMedicina especializadaServicios financierosPlataforma de negocios paraLatinoam é ricaServicios relacionados al medioambienteTurismoIndustrias creativas (relacionadas alarte, filmaci ó n, juegos, dise ñ o demoda, etc.)Comercio minoristaOtrossectoresIndustria qu í micaFarmac é uticoIndustria del pl á sticoMetalurgia145

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1A more detailed analysis based on four variables was then applied to the 31 prioritized sectors:1. The current importance of each sector in total GDP, thus defining a starting point.2. The growth potential for Chile of each sector, thus answering the question of how much each sector could contribute to GDP overthe next 10 years 90 . As such, the possible distortion created by simply analysing the present importance of each sector out of total GDPwould be corrected.3. What effort is required to attain the necessary competitiveness or what are the difficulties and the effort required to capture theincrease of GDP that could be achieved in that sector. The criteria through which the effort necessary to attain competitiveness wereevaluated:• Geographical location: refers to the effect of the geographical location of Chile as an advantage or disadvantage, taking intoaccount the location of the main markets of the products of each sector (where appropriate).• Existence of natural resources: explores whether Chile has natural resources (for example: copper reserves, quality waterfor aquiculture) that furnish it with competitive advantages in the sector.• Human capital (current and capacity to attract): defines if Chile has the quantity and quality of human capital necessary todevelop the potential of each sector. If it is necessary to attract foreign professionals to complement the Chilean labour force in areaswith shortfalls in order to close the gaps in the short-term, the criterion in turn determines if the country is sufficiently attractive forthose people.• Attracting investment (domestic and foreign): refers to the existence in Chile of incentives necessary to attractinvestments, both domestic and foreign to each sector, according to the characteristics of each.• Access to technology: determines the development level of the technology related to each sector in Chile and how easy it isto obtain it, adapt it and apply it in the country.• Infrastructure and logistics: explores whether Chile has the necessary infrastructure (roads, ports, energy or others) tosupport the development of each sector.• Association and/or connection: seeks to determine the existence in Chile of associations that foster connectivity among thevarious agents of a sector and related sectors.• Environmental sustainability: determines the potential impact of each sector on the environment; if there are policies tominimize the risks of a negative impact; and how this variable can affect the development of a sector in the medium-term future, its90 This variable is captured from two perspectives: local (which includes estimates of sectoral GDP in Chile, annual GDP growth, projected growth of Chile, Chileanexports) and global (which includes estimates of the global sectoral GDP, annual global GDP growth, global sectoral exports, projected global growth of the sector andparticipation of Chile in this growth).146

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1investment requirements, the relationship of companies of the sector with the social environment and the capacity of placing its productsin international markets.• Sustainability of advantages: depending on which are the competitive advantages that serve as a base in each specificsector, this criterion explores how sustainable these can be in Chile and how they compare with that of our main competitor countries.• Regulatory framework: establishes how developed the “rules of the game” are for each sector; what the projectedimprovements are in the short-term; and what may be required to make this regulatory framework a catalyzing element of the potentialof each sector.4. What intervention is necessary by the State to capture the potential of the sector.Only once this step was fulfilled were the 11 specific sectors with the greatest growth potential identified (see figures), whichrequire a medium or low level of effort and where there would be a significant impact of public policies, measured in accordance with thekey requirements of improving competitiveness by sector.One of the first observations in this point is that, as expected, sectors that are consolidated today in the Chilean economy appearon the map, such as aquiculture or mining, and which still have room to develop; emerging sectors appear together with these in the areasof outsourcing and financial services, sectors that are highly intensive in public goods, given their dependence on knowledge, technology,information and education.The presence of these sectors has permitted the Council to draw two preliminary conclusions:i) that this exercise is fundamental for emerging sectors where the input of public goods is more significant, because without adynamic perspective such as the one guiding this study, the strategic perspective of the country could remain only in the sectors that arestrong today and which are based on static advantages, such as the endowment of natural resources.and ii) that the emergence of these emerging sectors in various areas of natural resources has only been possible thanks to theefforts made in the past by developing public goods –such as education, expressed through the quality of human capital– and that theseassets are a wealth that the country must value and increase in the future, to continue making room for the emergence of new sectorsthat do not exist today.Today Chile is not only rich in copper, but also in solid institutions, in macroeconomic stability, in citizens with skills for work andentrepreneurship, in social peace, and in knowledge of how the world works and how the country can participate in the new internationalwork division.147

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1How were the 11 key sectors for the Chilean economy defined1. The 31 high-potential sectors were mapped in the evaluation matrix, in accordance with the current data on the Chilean GDP(Figure 2)Figura 2Potencial decrecimiento (%)0.170.160.150.14Alto0.130.120.110.100.090.08Medio0.070.060.050.040.03Bajo0.020.01PIB 20041 billón de pesosHorticulturaprimariaMetalurgiaFarmacéuticaConsultoríaServ.medioambienteAlimentosprocesados deconsumo humanoMedicinaespecializadaVitiviniculturaBovinoy ovinoOutsourcingIndustriascreativasServiciosfinancierosComunicacionesPlataforma de negocios para LAEducación superiorLogística ytransporteAlimentos proc. paraconsumo animalIndustriaquímicaLácteoProductosde maderaAcuiculturaPlásticoFruticulturaprimariaPorcicultura y aviculturaMinería no metálicaConstrucciónTurismo 1SilviculturaCelulosay papel0.001.3 Alto 1.5 1.7 1.9 2.1 2.3 2.5 2.7 Medio 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 Bajo 4.5Esfuerzo para lograr lacompetitividad necesariaComercio minoristaMinería delcobre ysubproductos(1) Dentro del sector de Turismo fue considerado el subsector de Turismo de Intereses Especiales, que tiene un dinamismo mucho mayor que el sector de Turismotradicional148

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 12. The potential size of each sector within 10 years was estimated (Figure 3)Figura 3Potencial decrecimiento (%)0.170.160.150.14Alto0.130.120.110.100.090.08Medio0.070.060.050.040.03Bajo0.020.01PIB 10 años1 billón de pesosMetalurgiaHorticulturaprimariaFarmacéuticaConsultoríaServ.medioambienteAlimentosprocesados deconsumo humanoMedicinaespecializadaVitiviniculturaOutsourcingIndustriascreativasServiciosfinancierosComunicacionesPlataforma de negocios para LAEducación superiorLogística ytransporteBovinoAlimentos proc. paray ovino consumo animalIndustriaquímicaProductosde maderaAcuiculturaPlásticoCelulosay papelFruticulturaprimariaPorcicultura y aviculturaMinería no metálicaConstrucciónComerciominoristaLácteoTurismo 1Silvicultura0.00AltoMedioBajo1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5Esfuerzo para lograr lacompetitividad necesariaMinería delcobre ysubproductos(1) Dentro del sector de Turismo fue considerado el subsector de Turismo de Intereses Especiales, que tiene un dinamismo mucho mayor que el sector de Turismotradicional149

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 13. The potential impact of each sector on GDP in 10 years was measured (Figure 4)Figura 4Potencial decrecimiento (%)0.170.160.15Alto0.140.130.120.110.100.090.08Medio0.070.060.050.040.03Bajo0.020.01Crecimiento PIB en 10 años1 billón de pesosHorticulturaprimariaMetalurgiaFarmacéuticaConsultoríaServ.medioambienteAlimentosprocesados deconsumo humanoVitiviniculturaEducación superiorMedicinaespecializada Logística yBovinoy ovinoOutsourcingIndustriascreativasServiciosfinancierosComunicacionesPlataforma de negocios para LAtransporteAlimentos proc. paraconsumo animalIndustriaquímicaLácteoProductosde maderaAcuiculturaPlásticoTurismo 1FruticulturaprimariaPorcicultura y aviculturaMinería no metálicaConstrucciónSilviculturaCelulosay papel0.00AltoMedioBajo1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5Esfuerzo para lograr lacompetitividad necesariaComercio minoristaMinería delcobre ysubproductos(1) Dentro del sector de Turismo fue considerado el subsector de Turismo de Intereses Especiales, que tiene un dinamismo mucho mayor que el sector de Turismotradicional150

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 14. Finally, the 11 sectors that stand out in their impact on GDP were established as well as the effort required to develop them (Figure 5)Figura 5Potencial decrecimiento (%)0.170.160.15Alto0.140.130.120.110.100.090.08Medio0.070.060.050.040.03Bajo0.020.01Crecimiento PIB en 10 años1 billón de pesosSectores que sedestacanHorticulturaprimariaMetalurgiaFarmacéuticaConsultoríaServ.medioambienteAlimentosprocesados deconsumo humanoEducación superiorMedicinaespecializada Logística yBovinoy ovinoOutsourcingIndustriascreativasServiciosfinancierosProductosde maderaAcuiculturaVitiviniculturaPlásticoComunicacionesPlataforma de negocios para LAtransporteAlimentos proc. paraconsumo animalIndustriaquímicaLácteoTurismo 1FruticulturaprimariaPorcicultura y aviculturaMinería no metálicaConstrucciónSilviculturaCelulosay papel0.00AltoMedioBajo1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5Esfuerzo para lograr lacompetitividad necesariaComercio minoristaMinería delcobre ysubproductos(1) Dentro del sector de Turismo fue considerado el subsector de Turismo de Intereses Especiales, que tiene un dinamismo mucho mayor que el sector de TurismotradicionalTo this list of 11 sectors with special potential in the Chilean economy, the five essential platforms for fostering the productivityand growth of Chile were added, noteworthy among which are human capital and research and development (Figure 6):151

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1Figura 6CINCO GRANDES PLATAFORMAS PARA FOMENTARLA PRODUCTIVIDAD Y CRECIMIENTO DE CHILEPlataformas habilitadoras decrecimiento económicoCapital HumanoInvestigación y desarrolloInfraestructura y recursosMarco normativo, legaly políticoFinanzas y ComercioSub-plataformas• Educación y competencias técnicas y de empleabilidad para las necesidades país• Crecimiento de la fuerza laboral chilena• Inmigración extranjera calificada e integrada, como complemento de la fuerza laboral chilena• Calidad de vida e imagen país como factor de atracción de capital humano• Costo real del capital humano• Investigación y desarrollo para las necesidades país• Transferencia y adaptación de tecnología y procesos de innovación internacionales ynacionales• Valoración y difusión de la investigación, nuevas tecnologías e innovación en el mercado• Generación y suministro de energía• Suministro de agua• Disponibilidad de recursos naturales• Infraestructura para transporte y/o distribución de recursos naturales• Infraestructura para telecomunicaciones• Derecho de propiedad• Estado de derecho• Regulación de la competencia para una economía de mercado• Transparencia en el sector privado y público• Políticas de gobierno de apoyo del gobierno al sector privado y a la inversión• Regulación de la fuerza laboral• Regulación del medioambiente• Acceso general al sistema financiero nacional e internacional• Eficiencia del mercado financiero• Comercio y acceso a mercadosLikewise an analysis was carried out on the potential impact of the State on the 11 sectors identified with the greatestpotential, in order to ensure that none of the sectors selected does not need the intervention of the State to attain development andreach its full potential. This analysis showed that the State can play a key role in the 11 sectors identified in various dimensions, so thatany sector selected among the 11 with the greatest potential will be relevant and have an impact on the public policies that the Statedefines for the future.152

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1NEXT STEPSDuring 2007, this analysis work will continue with the development of a strategy and roadmap for a total of 8 sectors. The mainspecific analyses to be carried out for each sector selected include:• Creation of value map for the sector• Analysis of the current situation of the sector in Chile• Analysis of the sector in benchmark countries• Identification of bottle-necks and opportunities• Definition of long-run perspective• Construction of roadmapLikewise, once the 8 sectors are analyzed, the need to develop each sector through the 5 cross-platforms will be identified in orderto finally consolidate the development needs for each platform.To begin this in-depth study of the list of 11 selected sectors –carried out during 2007– the Council chose two: aquiculture andoutsourcing based on three aspects: i) their high potential for contributing to the GDP of Chile in the long-run; ii) the possibility ofextracting knowledge applicable for the creation of the strategy based on the reality of a more consolidated sector and another emergingone (that implies a higher risk), and iii) the possibility of analyzing sectors whose development depends on various cross-platforms, to alsomaximize the analysis of its development needs.The learning from these two sectors will allow the other sectors to be identified, and to finally define the integrated roadmap.Lastly, the organization and processes will be established to ensure the results are implemented in each sector; and the necessarybases will be laid to ensure the continuous development of the analysis for the future.153

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1IV. OTHER STUDIES COMMISSIONED BY THE INNOVATION COUNCILIn accordance with the guidelines of the report of the Innovation Council for Competitiveness presented in March 2006, a series ofstudies were required to serve as an input for a long-run strategic definition. The requirements and opinions of the present Counciloutlined the development of the studies presented hereunder.a. Review of the Innovation Policy of ChileIt was undertaken by the OECD. Its objective is to characterize the current situation of Chile in various scientific and technologicalfields with the objective of obtaining a clear vision of the economic performance of Chile in the key areas of the innovation dynamic.Furthermore, in order to characterize the current performance of our National Innovation System (NIS), the objective is to tackle aspectsmainly related to:a) National innovation activities, using indicators that are widely used in the specialized literature to characterize the scientific andtechnological activity of a country.b) The current networks of institutional support for science, technology and innovation in Chile.c) The innovation support policies implemented in the country.b. Study of the scholarships systemDuring 2006, the preparation of a design proposal of a coordinated system of postgraduate scholarships in the area of innovationcommenced. It covers the institutions that currently provide scholarships, organized into a network, and includes the role of educationalinstitutions in Chile and abroad as well as the beneficiaries of the system.This study includes a review of successful international experiences in the formation of advanced human capital for innovation thatserves as a base for the definition of a policy proposal, with specific emphasis on the scholarships system, and guidelines for a strategy toimprove the human capital for innovation in Chile.154

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1c. Study on Intellectual PropertyAs is well known, intellectual property is comprised of a series of personal and/or commercial property rights that assign to theauthor and other owners the disposal and exploitation of their work and services. This study, still in its initial stages, covers the issues ofindustrial property, as well as intellectual property as it relates to the National Innovation System. The objective is to develop a proposalfor redesigning the intellectual property system, with the goal of possessing effective and efficient tools of incorporation into thetechnological markets and of copyright protection arising from the innovation process in the country. This study should produce its findingsduring 2007.d. Analysis of the innovation phenomenonAn analysis of the Innovation Phenomenon in Chile in the last ten years has also started. It reviews the results of the fourth versionof the Survey of Technological Innovation, in order to get a first approximation on the behaviour of companies in the field of technologicalinnovation.Specifically, a detailed estimate was made of private spending on research and development activities for the years 2003 and 2004,so there is already a reliable base for estimating spending on this kind of activities for the country as a whole.The survey allowed R+D spending to be measured and characterized. In particular, calculating aggregate spending on R+D (2003-2004) by funding sector, sector of implementation, kind of research, location of the research (within or outside the country), productionsector, export orientation and geographical location. The database allows for crosses that are relevant for analysing the inputs andinnovation itself, such as disaggregating the type of research for each production sector (basic, applied or experimental development)undertaken, which allows the intensity of the spending on innovation to be measured at a general level, size level, geographical locationand export orientation level.The same survey allowed completing the database that is necessary to carry out an econometric study that will allow the innovationphenomenon to be understood in greater detail. The evolution of the phenomenon (given that there are three previous innovation surveysand one on R+D spending), the causes and effects of innovation in Chile, in light of different variables studied at an international level, inother words the productivity of the spending on innovative activities, substitution versus leveraging produced by public spending on thismatter, as well as an analysis of the innovation phenomenon in the cluster chosen in the study mentioned in this appendix.Additionally, in this matter, the foundations of the next survey on innovation and R+D, for the years 2005 and 2006, are alreadyprepared for its next implementation. The survey, directed at all sectors of the economy with the exception of trade, was re-structured inlight of the international statistics and standards measurement guidelines, and especially of the survey undertaken in the OECD countries,which is a global benchmark in this area.155

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1156e. Analysis of the Industrial Organization of Scientific Technological CentresThe Council deemed it necessary to have an analysis of industrial organization with respect to the production of R+D (research anddevelopment) in Chile, especially of the supply side, highlighting the distortions in access to the main inputs, especially funding, first-ratehuman capital and large-scale equipment. The analysis places special emphasis on public funding and the relevant obstacles.As indicated earlier in this report, identifying market and State failures in the production of R+D and other scientific-technologicalactivities (dissemination, formation of human resources and support activities) is not trivial, since that activity occurs in most casesassociated to the production of other services.As such, the results of this study will constitute one of the relevant inputs for the design of a scheme of basal funding, and for thedesign of that policy. It seeks to improve the competitive conditions among centres of excellence, making the funding mechanisms of theiroperation transparent, especially those linked to their strategic medium-term management capabilities, thus anticipating eventualinefficient cross-subsidies from their owners (public or private) or specific research and development projects.f. Institutional redesign of Technological InstitutesA recent study deals with the institutional redesign of Technological Institutes.Public technological institutes have a very important role within the NIS, such as providing the State with relevant information tofulfil its regulatory functions in the field of natural resources and the environment, provide public infrastructure, especially in the field ofnorms and metrology, stimulate innovation through the creation of spin offs, transfer and development of technologies for companies,dissemination of technologies for SMEs, among others.The recommendations of the Council, presented in March 2006, included a proposal to strengthen the public technologicalinstitutes, differentiating the functions that each should develop according to its mission, which must be previously reviewed andredefined in accordance with a global or systemic perspective within the NIS, of which the Technological Institutes form an importantpart.The above relates to a perception that these public bodies have lagged behind in terms of their pertinence, opportunity andcoverage of their public functions according to their original mandates. This is due, among other factors, to the rapid global progress inscience and technology and the indisputable leadership of private companies as the main agents of national production activity. As such,it is necessary to understand and accept the new competitive environment and redefine the missions of institutes in this context.Likewise, this should go hand in hand with strengthening the capabilities and competencies of the institutes.Therefore, the objective of this study is to prepare a proposal of institutional redesign of Public Technological Institutes based on a

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1diagnosis of their situation in terms of the pertinence of their lines of action, and the organization of their production, andrecommendations of action —in light of international experience — to maximize their contribution to the NIS.This study will once again be put out to tender in 2007 since the first attempt was declared devoid of tenders.g. Diagnosis of the Innovation Culture in ChileThe strategic guidelines presented by the Council in February 2006 included the need to foster and strengthen a culture ofinnovation in Chile. In order to define the corresponding lines of action, a consultancy firm capable of producing a qualitative andquantitative diagnostic study on the culture of innovation in Chile was contracted.The first stage identified the perceptions and attitudes of Chileans regarding innovation and answered the following questions:What do they know? What do they think? What do they hear? What do they feel? and, How do they discuss the issue?The second stage was based on the results obtained in the previous stage, where the concepts and variables that are relevant tooperationalize the cultural dimension of innovation were identified. These data formed the basis to create a quantitative instrument formeasuring the attitude of Chileans towards innovation through the range of concepts and attributes they associate to it.The study –which will conclude during the first half of 2007– will be a fundamental input for proposing a diffusion strategy to raiseawareness and foster a proactive attitude in society towards innovation, recognizing it, valuing it and incorporating it as a key factor forthe development of the country and, therefore, for the well-being of all Chileans.They collaborated with the National Innovation Councilfor Competitiveness in the production of this document:Edición: Hugo Arias V.Authoring support: Katherine Villarroel, Marcia Varela,María Teresa Troncoso.Study Team: Pablo Hernández and Jocelyn Olivari.157

TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1BIBLIOGRAPHYCHAPTER 11. Auty, R. (1993) “Industrial policy reform in six large newly industrializing countries: The resourcecurse thesis,” World Development, vol. 22, Nº 1, Oxford, Pergamon Press.2. Banco Mundial (2006), World Development Indicators.3. Bosworth, Barry y Susan M. Collins (2003). “The empirics of growth: An update.” Brooking paperson Economic Activity, Nº2.4. Cohen y Soto (2000), “Growth & Human Capital: Good data, good results”. Discussion papers Nº3025, CEPR.5. Cuddington, J., R. Ludema y Sh. Jayasuriya (2006) “Prebisch-Singer Redux,” Neither curse nordestiny: Natural resources and development Lederman y Maloney eds. Stanford University Press.6. De Ferranti, D, G. Perry, D. Lederman y W. Maloney (2001) De los Recursos Naturales a laEconomía del Conocimiento: Comercio y Calidad de Empleo, Banco Mundial.7. Fondo Monetario Internacional (2006). “World Economic Outlook Database”. Septiembre. 2006.8. Foro Económico Mundial (2006). Global Competitiveness Index 2006-2007.9. Consejo Nacional de Innovación para la Competitividad (2006) Lineamientos Estratégicos. Gobiernode Chile, febrero.15810. Hausmann, R., J. Hwang y Rodrik, D. (2005) "What You Export Matters". NBER Working Paper No.W11905, diciembre.

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TOWARDS A NATIONAL INNOVATION STRATEGY FOR COMPETITIVENESSVOLUME 1CHAPTER 21. Benavente, J.M. (2004b). “Antecedentes para el Diseño de una Política Tecnológica.2. Nacional”. Informe Final. Comisión de Hacienda. Senado de la República.3. Chamlee-Wright, E. y D. Lavoie. (2002) “Culture and Wealth of Nations” Cato Policy Report, Enero-Febrero.4. Eyzaguirre, N., M. Marcel, J. Rodríguez y M. Tokman. Hacia la Economía del Conocimiento: Elcamino para crecer con equidad en el largo plazo, Revista Estudios Públicos Nº 97. Centro deEstudios Públicos (CEP). Santiago, 2005.5. Landes, David. (1999) La riqueza y la pobreza de las naciones. Javier Vergara Editor. Argentina.6. Stiglitz, J. (2002) El malestar en la globalización. Taurus, Buenos Aires.CHAPTER 31. OECD (2005) Governance of Innovation Systems, Volume I, Synthesis Report. OECD Publishing.160