Why Do Some Countries Innovate Better than Others? A New Perspective of Science, Technology, and Innovation Policy Regimes and National Absorptive Capacity
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1. Introduction
Nations’ competition in technology and innovation has drawn rapt attention from the academic and business communities as the great power rivalry between the U.S. and China has intensified in recent years. Looking back at the history of technological competition among nations, stories of nations’ rise and fall kept being told while lessons kept being learned. Great powers take technology and innovation as the cornerstone to gain unsurmountable leadership in the geopolitical chess game. During the Cold War, the U.S. combined huge investments in defense-related R&D [1] and government funding initiatives such as “Small Business Innovation Research” (SBIR) and “Small Business Technology Transfer” (STTR) to promote public—private partnership in technology and innovation. The primary purpose is to improve the general environment, encourage universities and public institutes to conduct basic research, and induce private enterprises to engage in applied research and commercialization [2,3].
Small countries take technology and innovation as the cornerstone to launch, catch-up, and secure their advantages in the global competition. Taiwan provides effective public R&D funding towards targeted industries like semiconductors and ICT products [4], and utilizes government policies to enliven innovative activities from SMEs in the high-tech sector [5]. Ireland strives to create an innovator-friendly environment to attract foreign direct investment (FDI) to foster science and engineering research [4,6]. South Korea combines technology-driven policy [7], innovation-driven policy [8], and the “Green New Deal” [9] to launch an all-front advance in industrial and green innovation. Israel’s “neo-developmental state” model leverages pilot agencies and policy innovations to trigger structural transformation of the “science-based industry” and eruptive growth of high-tech sectors [10,11].
With the challenges of climate change and resource depletion growing more intense and imminent, it becomes more urgent for countries not only to innovate in technology but also in sustainability. The European Union’s “The European Green Deal” aims for full decarbonization and equitable development through spillover effects triggered by policy mix designs [12]. South Korea declared the ambitious “Green New Deal” to envision a national green engineering mega-project in green urbanization, green industrial development, and low-carbon renewable energy [9]. Norway skillfully adopted a policy mix of regulation, financial incentives, and consultancy services to facilitate the transition to green buildings in the construction sector [13]. Finland successfully raised energy efficiency by adopting creative policy instruments [14], and launched the Mobility as a Service (MaaS) policy experiment [15] to further move towards a low-carbon society. Clearly, sustainable innovation has been a critical part of countries’ competitive advantages in the era of sustainability transition.
Why do some countries innovate better than others? Scholars in innovation research (IR) apply different approaches to unravel this puzzle. From the perspective of innovation systems [16,17], the theory of national systems of innovation (NSI) traces its intellectual roots to neo-institutional theory [18] and evolutionary economics [19], and looks into how technology and innovation are created and diffused in an input–output mechanism composed of existing institutions [20]. All these institutional arrangements facilitate interactive learning [21] and determine “the scale, direction and relative success of all innovative activities” [22].
From the perspective of collaborative networking, the theory of “The Triple Helix” model explores the overlaying communications and expectations among universities, industries and government at the network level, leading to the reconstruction of institutional arrangements for national innovation and policymaking [23]. From the perspective of competence building, the theory of “national innovative capacity” (NIC) explores how a nation’s internal environment and fundamental infrastructure affect a nation’s potential to produce, commercialize, and diffuse technological innovation [24].
Scholars in other fields of social science seek to employ new perspectives that might help solve the puzzle of national innovation performance. The theory of “varieties of capitalism” claims that countries with a more liberal economy tend to induce more radical technological change while countries with a more coordinated economy tend to produce more incremental technological change [25], though this claim was not fully supported by empirical evidence [26]. The influence of other factors, such as political decentralization [27], international linkages [28], and the degree of individualism [29], on national innovation performance has also been explored.
All these theoretical approaches attempt to explore the roles of environment, institutions, infrastructure, actors, and linkages on national innovation performance. They are concerned about the political structures, economic institutions, and social fabrics in which national innovative processes are embedded, as well as the constraints and costs imposed by their mutual embeddedness. They stress the division of labor, coordination, and cooperation between the public sector and the private sector in promoting innovation activities that help trigger radical and incremental innovation. However, several important aspects in the national innovation function are not fully addressed.
First, the existing theoretical approaches recognize the important role played by public policies, but mostly focus on the role of economic policies [22], R&D policies [21], or industrial policies targeting specific sectors [30]. There exists some degree of insufficiency in the literature that addresses national innovation from the perspective of generalized STI (Science, Technology, and Innovation) policies with common characteristics that transcend country borders. Second, the existing approaches mainly take a neo-institutional perspective [31], and stress the overwhelming role of institutions in embedding innovative organizations [32], facilitating interactive learning between users and producers [21], and regulating how policies shape innovation processes [33]. However, institutions alone may not account for all the major driving forces behind STI policies. There exist policy values, key agents, policy paradigms, policymaking mechanisms, governance modes, and embedded culture that jointly set up the foundation of STI policies. Third, although the existing approaches stress the role of institutional learning [34], knowledge spillover [33], and knowledge transfer [35], they tend to adopt the micro-analytical level that centers on interactive learning and creative forgetting [34]. What is not fully recognized is the fact that a country as a whole constitutes the “national learning system”, which features the incremental process of technical change driven by the absorption and diffusion of technological knowledge [36]. This kind of ability in knowledge absorption and diffusion may be critical in converting and translating STI policies into concrete innovation outcomes.
Hence, this study aims to address these research gaps and extend the existing approaches by adding the new perspective of country-level STI policy regimes and knowledge absorption dynamics to address two core research questions:
RQ1: How do a country’s STI policy regimes affect its performance in innovation outputs?
RQ2: How does a country’s capacity in knowledge absorption factor into the national innovation function?
To investigate these research questions, this study first proposes the concept of dual STI policy regimes, and hypothesizes that both a democratic policy regime and a meritocratic policy regime act as positive contributors to national innovation performance. Second, this study introduces the concept of national absorptive capacity (NAC) as a key moderating factor of the national innovation function, and hypothesizes that potential NAC (PNAC) and realized NAC (RNAC) moderate, in opposite directions, how a democratic policy regime and a meritocratic policy regime affect national innovation performance.
This study is expected to make positive contributions to the existing research on national innovation in several ways. First, this study introduces a new conceptual framework of national innovation that contains STI policy regimes and NAC. The society-centered democratic policy regime and the state-centered meritocratic policy regime differ in various dimensions, promote innovation through different channels, and may play complimentary roles to each other. Second, this study brings theories of knowledge search, technology spillover, and organizational learning into the research on national innovation, and reinterprets these theories with new theoretical and policy implications at the national level. Third, this study enriches STI policy research on what a country should do to promote innovation. This study argues that a country needs to establish an ambidextrous set of STI policy regimes in both democracy and meritocracy, and use its NAC as the leverage to construct an innovation ecosystem capable of both exploration and exploitation.
The rest of the paper will proceed through five sections. In Section 2, the relevant literature is reviewed, a conceptual model is constructed, and six major hypotheses are established. In Section 3, the collection of the panel data from OECD countries is clearly delineated, the variables are operationally defined, and the statistical models are specified. In Section 4, fixed-effects regression of panel data is conducted, the empirical results are presented, and a robustness analysis is conducted. In Section 5, theoretical and policy implications of the empirical results are discussed. In Section 6, all the major findings are summarized, research limitations are discussed, and suggestions on future directions of research are proposed.
6. Conclusions
This study builds a theoretical model with six major hypotheses and conducts a quantitative analysis of how countries’ STI policy regimes along with their NAC jointly determine their innovation performance. The findings show that both democratic and meritocratic policy regimes have significant positive effects on national innovation performance, with the democratic effect being more significant. The findings also show the opposite moderating effects of potential and realized NAC on the connection between STI policy regimes and national innovation performance. All these carry crucial theoretical and policy implications, as stated in the previous section.
This study carries some limitations. First, this study uses OECD countries as major sources of sample data, and so the major findings may be more applicable to developed countries than to developing countries or under-developed countries. Further analysis of non-OECD emerging economies like BRICS countries may be needed to expand the empirical evidence. Additionally, this study uses panel data from 2010 to 2022 across OECD countries and assumes a continuous path of industrial development and technological advance. However, there may have been some key events or critical policy shifts in a country that sent shockwaves to the supply and demand sides of innovation, which form a considerable part of the variance in differences in national innovation performance, but are not accounted in the panel regression models.
As for the continuation on the very topic of national innovation performance, this study suggests several future directions. The first is a more nuanced analysis of the effect of STI policy regimes on innovation output. Different STI policy regimes may have different effects on different innovation outputs. For example, a democratic policy regime might be more conducive to radical innovations, while a meritocratic policy regime might be more conducive to incremental innovations. The second is a more detailed analysis of how a country’s absorptive capacity interacts with STI policy regimes to affect national innovation performance. This may require a more subtle model of a country’s knowledge search activities, as well as their scope and depth. The third is a more historical approach. A country’s STI policy regime, absorptive capacity, and innovation performance may have a much longer and a more complicated relationship that quantitative data alone might not suffice to identify. A qualitative analysis of a country’s historical innovation path may also be needed to clarify how these factors play into the national innovation function. Finally, the high causal significance but low explaining power of the empirical results in this paper demonstrate that the full set of determinants of a country’s performance in innovation outputs may be much larger than what the existing research has identified. Hence, the daunting task to solve the “missing piece to national innovation rate puzzle” [28] truly demands more joint efforts from innovation scholars from diverse fields in social sciences. This paper marks only the beginning of such renewed endeavors and wishes to see more remarkable research on this intriguing topic in the near future.
Traditional thinking tells us that in order to raise innovation outputs, a country ought to double down R&D investments and create an innovator-friendly environment [33,198]. All are necessary but not necessarily sufficient, as this study finds. A country needs to establish a balanced set of dual STI policy regimes to encourage both exploration and exploitation. A country also needs to leverage its absorptive capacity to trigger more knowledge exposure and technology transfer. The optimal combination of STI policy regimes and absorptive capacity shall contribute to induce more innovation in knowledge, technology, and sustainability.
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