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Article Contents

1. introduction, 2. research background, 3. research design, 4. kuwait’s innovation system, 5. discussion and conclusions: breaking out of the r&d trap, acknowledgements.

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Systems of innovation, diversification, and the R&D trap: A case study of Kuwait

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Husam Arman, Simona Iammarino, J Eduardo Ibarra-Olivo, Neil Lee, Systems of innovation, diversification, and the R&D trap: A case study of Kuwait, Science and Public Policy , Volume 49, Issue 2, April 2022, Pages 179–190, https://doi.org/10.1093/scipol/scab073

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The relationship between research and development (R&D) investment and economic development is well established. Yet, at a global scale, the resource-rich countries of the Gulf Cooperation Council are consistent outliers in this relationship, combining rich-world national incomes with R&D expenditure of developing countries. This paper uses a case study on Kuwait to illustrate a particular form of developmental trap, a version of the resource curse, which makes it irrational for private business firms to invest in R&D and innovation. Based on an analysis of the literature and secondary data, focus groups, and an original survey of large manufacturing firms, we argue that a narrow focus on R&D-led diversification of economic activity ignores the systemic problems faced by Kuwait and, particularly, the unsuitable supply of skills and capabilities provided by the national education and training system.

The link between research and development (R&D), innovation, and economic development is well established. In general, there is a close relationship between R&D expenditure and GDP per capita, as richer countries invest more in R&D ( Fig. 1 ). Yet, there are a small number of exceptions: in particular, the oil-rich states of the Gulf Cooperation Council (GCC) combine rich-world GDP per capita with the R&D spending of developing economies. These nation states have found an alternative route to prosperity, based on the exploitation of hydrocarbon natural resources, but it is one which is unlikely to last ( Porter 2003 ). Rapid increases in the global supply of oil, due to new technologies and the shale oil industry, have threatened traditional producers ( Mirzoev et al. 2020 ). There are also well-known technological, environmental, and socio-economic reasons—in particular, the shift to renewables and low-carbon electricity—for why oil wealth is unlikely to sustain high living standards in the long term. 1

Kuwait and selected countries: GDP per capita vs. R&D expenditure.

Recognising the problems challenging an oil dependent economy, the Gulf states have made multiple attempts to diversify their economies towards knowledge-based, private sector activity ( Mahroum and Al-Saleh 2015 ). The aim of increasing private sector R&D has been justified as a way to address two of the major challenges faced by the GCC countries: a lack of diversification in the economic structure and an expensive public sector ( Ennis 2015 ). Notwithstanding the long history of these attempts, few of the GCC economies have managed to diversify into R&D-intensive activities ( Carvalho 2018 ). Despite the significant sums invested in foreign consultancy and considerable policy support to incentivising business firms to conduct R&D, spending on innovative activities remains low.

This paper examines why this is the case in Kuwait, a country with the sixth highest GDP per capita in the world (2016), but where business R&D is at levels that would be expected in a much poorer country. There have been multiple attempts to diversify the economy into R&D-intensive sectors, but all have broadly failed. Instead, more than 80 per cent of government spending is funded by fossil fuel revenues, the fourth highest in the world ( World Bank 2019 ). Our primary research question is: what are the barriers to private sector R&D in Kuwait? We use mixed methods and multiple data and information sources to answer this question: an in-depth review of the literature and of policy documents, interviews and focus groups with key stakeholders, and an original survey of business firms.

Rather than seeing fossil fuel revenues as an asset that can be harnessed to incentivise R&D activity, we argue instead that Kuwait is in a form of developmental trap—the ‘R&D trap’—as the economy is locked into a set of circumstances that make it economically irrational for firms to invest in R&D. In addition, in the oil sector, current efforts in energy-technology R&D are still inadequate in relation to the scale of challenges and opportunities ( Holdren 2006 ). The sector is dominated by multinational enterprises, and the bulk of innovations are originated in upstream activities, such as service companies based in developed countries ( Perrons 2014 ), and deployed as off-the-shelf and established technologies to downstream firms elsewhere.

We argue that because the problems faced by Kuwait are systemic, so must the response be. There are strong processes of institutional inertia ( Uyarra et al. 2017 ), which apply both at business and government levels and prevent firms from breaking through into R&D-intensive activity. Therefore, a gradual diversification strategy that starts from sectors and capabilities already established is likely to be more effective than an attempt at a radical shift into entirely unrelated industries and competencies.

To support this argument, we draw on both the literature on national and regional systems of innovation, which has largely ignore GCC countries, and that on diversification and rentier states. In so doing, this paper contributes to the literature by applying the innovation systems’ perspective to Kuwait, by extending the debate on diversification and rentier states to include R&D-based policies—traditionally seen as vital for diversification, but under-explored—and by presenting original evidence on the relationship between innovation input and economic development output in the Kuwaiti case.

The remainder of the paper is structured as follows. In Section 2 , we briefly recall our conceptual framework based on the systems of innovation approach and how it relates to barriers to business R&D expenditure in a country like Kuwait. Section 3 then describes our mixed method approach, whilst Section 4 offers an overview of the main findings. Section 5 concludes with a discussion of the implications for policy in Kuwait and in similar contexts.

2.1 The systems of innovation approach

Our theoretical basis is the systems of innovation literature. This argues that innovation is not simply a function of the actions of individual actors, such as firms, entrepreneurs, or universities, but also their dynamic interactions and networks (e.g. Freeman 1987 ; Lundvall 1992 ; Nelson 1993 ). Compared with a narrow focus on the individual economic agent, the system of innovation approach involves the consideration of history and evolutionary processes, allows comparisons between very different social and techno-economic organisational structures, and highlights the importance of institutions in innovation processes ( Edquist 2004 : 485). It focusses on systemic interactions in the generation and diffusion of innovation, which have long been recognised as key determinants of technological and economic performance of countries and regions, which cannot be explained only in terms of strategies and performance of firms ( Iammarino 2005 ). These interactions help exchange knowledge between different actors, encouraging the creation and diffusion of new ideas, solving coordination problems, and reducing the barriers to innovation ( Autio and Thomas 2014 ).

The conceptualisation of the National Systems of Innovation (NSI) has undergone numerous stages over time: from its original conception as a system of components and relationships to a functional approach that also considers sub-functions or activities that contribute to innovation (e.g. Galli and Teubal 1997 ). However, when it comes to differences in structural and institutional features of socio-economic systems—as, for example, in the case of emerging or developing countries or peripheral regions—the NSI conceptions need to be adapted in a bottom-up and place-sensitive perspective, particularly when applied to contexts that lack, partially or wholly, some of the components, relationships, and functions that a ‘full’ innovation system is supposed to have (e.g. Iammarino 2005 ; Lundvall et al. 2009 ; Tödtling and Trippl 2018 ). Since scholarly definitions of NSIs have too often been interpreted rigidly and linked to innovation measured in terms of macroeconomic performance, the only way forward according to widespread policy practices has been to maximise the amount of inputs to innovation, instead of understanding how (and which kind of) innovation takes place and is transformed into economic outcomes ( Lundvall et al. 2009 ) and how to build local technological and institutional capabilities (e.g. Adeoti 2002 ; Watkins et al. 2015 ). Following the evolutionary perspective, a NSI can be conceived as

[…] an open, evolving, and complex system that encompasses relationships within and between organisations, institutions and socio-economic structures which determine the rate and direction of innovation and competence-building emanating from processes of science-based and experience-based learning ( Lundvall et al. 2009 : 7).

This latter definition appears particularly relevant to represent socio-economic systems profoundly different from those in the ‘iconic Triad’ in which the NSI concept was first elaborated. Emerging and developing countries, especially when strongly endowed with abundant natural resources, must first develop suitable capabilities for orienting the pattern of economic coordination and specialisation towards higher rates of learning capacity and competence building ( Jensen et al. 2007 ).

Beyond new knowledge creation through R&D, complete and functioning innovation systems encompass—capability building through education and training, organisational capacity in both public and private sectors, density of market and non-market networks, and policies and mechanisms to ensure institutional adaptation to internal and external change of a variety of categories of actors (e.g. Chaminade and Padilla-Pérez 2017 ; Choi and Zo 2019 ; Edquist 2004 ; Perez 1985 ; Spithoven and Knockaert 2011 ). A functioning innovation system is seen as a necessary pre-condition for ensuring that private sector R&D expenditure can first occur and then translate into successful market outcomes.

2.2 NSI in rentier states

Research on systems of innovation indicates the importance to refer to the wider set of national institutional and economic structures, which shape the ways in which individual actors act and interact ( Allard et al. 2012 ; Lundvall et al. 2009 ; North 1990 ). This point is particularly relevant when considering the GCC states, where structural conditions hinder the ability of firms, states, and other actors to effectively build and complete NSIs ( Osman 2015 ). Building and maintaining a knowledge base is a complex and difficult undertaking and itself only one step towards achieving a genuine NSI ( Brinkley et al. 2012 ; Gackstatter et al. 2014 ; Liu and Chen 2003 ).

While there are multiple research institutions in GCC economies, there are few incentives for the private sector to engage in R&D and commercialise research ( Hertog 2013 ). Initiatives to spur R&D by establishing dedicated research centres, such as the Kuwaiti Institute for Scientific Research (KISR), have had success in specific research areas. These centres are mainly populated by foreign researchers and are insufficient in relation to the huge task of providing an adequate base for the supply side of R&D; the availability of local researchers and PhD students is very limited; and the collaboration between research institutes, industry, and the government to facilitate knowledge sharing and commercialisation is weak, as are their overall relations and communication channels ( Brinkley et al. 2012 ). The limited commercialisation is also partly due to the status of intellectual property laws in the GCC region, which have been defined as lax and as lacking enforcement ( Osman 2015 ).

Kuwait nationals are guaranteed public sector employment with higher salaries and better working conditions than in the private sector. As a result, they have little incentive to support policies promoting private sector development. In contrast, there is a more positive attitude towards entrepreneurship, business growth, and innovation development in relatively poorer or larger GCC countries (Bahrain, Saudi Arabia, and Oman), where a higher share of the population is likely to be employed in the private sector ( Herb 2009 ). This sharp dichotomy between private and public spheres of the economic system distorts motivations for seeking higher education or engaging in life-learning capability upgrading ( Osman 2015 ). GCC countries cannot perpetuate the current mechanism where the natural wealth is distributed by providing lucrative jobs in the public sector. Hence, the social contract needs to be revised to address future employment challenges ( Forstenlechner and Rutledge 2010 ).

More generally, it has been put forward that the failure of Arab Gulf societies to develop technological and institutional capabilities to foster innovation is primarily due to their ‘rent-dominated’ political cultures: the more democratic governments become in these countries, the more likely they are to lead their people to the promised land of technological self-sufficiency ( Zahlan 2006 ). However, in the case of Kuwait, the democratic government alone was not enough to spur economic growth that is not based on its natural endowment. Advancing simultaneously on social and economic structural changes can achieve faster and sustainable economic development ( McMillan et al. 2017 ), and Kuwait is currently lacking in both.

Kuwait holds generally free and fair parliamentary elections with near universal adult suffrage for citizens. Its parliament is the strongest in the Gulf and among the strongest in the Arab world. At the heart of the parliament’s power lies the ability of a majority of elected members to be able to express a vote of no confidence in individual ministers. However, this structure tends to have the counter effect to lead to political deadlock and to paralysis of large-scale projects that would benefit the whole economy ( Al-Mutairi et al. 2020 ; Herb 2009 ; Osman 2015 ). This hinders the government’s ability to deliver on the established development strategies and leads to a general uncertainty about state commitment to innovation policy, further reducing the confidence of the business firms and their willingness to make investments in R&D.

The innovation systems’ view emphasises that internal and external networks and flows of resources (e.g. Iammarino 2005 ; Lundvall et al. 2009 ), international flows of foreign direct investment (FDI), and talent are crucial for economic growth and for the development of a strong knowledge base. Kuwait badly lags behind the UAE—and all other GCC states—in FDI. Foreign firms in Kuwait complain consistently that it is a more difficult and less profitable place to do business than its neighbours in the Gulf, in particular Dubai ( Herb 2009 ).

Furthermore, GCC countries heavily rely on highly qualified foreign workers: however, while attractive pay may attract foreigners, knowledge workers are also motivated by other sets of incentives and culturally more open and diverse environments ( Brinkley et al. 2012 ). The rigid labour and migration policies create obstacles to recruiting and retaining talent, transferring knowledge and facilitating the contribution of high-skilled foreigners to knowledge creation and innovation ( Osman 2015 ). The current system in all GCC countries promotes importing low-skills labour to meet national urgent and short-term needs ( Muysken and Nour 2006 ). This business practice hinders long-term investment in horizontal and general purpose technologies and R&D-related projects, which could automate routinary work done usually by low-skilled labour, contributing to upgrading local skills and capabilities.

To investigate the barriers faced by Kuwait in its attempts to diversify into R&D-intensive activities, we use a mixed-methods case study approach. Official data on Kuwait is limited and unreliable, so the case study approach allows us to triangulate information from multiple sources. While it is not possible to generalise from a case study ( Yin 2011 ), some comparative reflections can be drawn for some GCC economies. Moreover, a case study allows us to take a more nuanced approach to understanding the activities and motivations of actors in the Kuwaiti innovation system.

We draw on three principal sources: (1) a review of secondary data and previous literature on the country, (2) a series of focus groups/workshops with key business and policy representatives carried out in January 2019 and January 2020, and (3) an originally designed survey of large firms in R&D-intensive manufacturing industries. In the following, we set out each of these in more detail.

3.1 Review of secondary data and documents

We first sought to build up as broad a picture as possible of Kuwait’s circumstances. Statistical information came from international sources, such as the World Bank, alongside domestic information on, for example, the sectoral structure of the economy. We also reviewed key policy documents and mapped out the relevant institutions in the Kuwait NSI. This was used to provide the ‘big picture’ of the economic system of Kuwait and to guide and motivate activities (2) and (3). 2

3.2 Focus groups and workshops

We complemented our review of policy documents and secondary data with two focus groups with business firms and government or quasi-government agencies in January 2019. The objective of these focus groups was to solicit insights from the key innovation actors in Kuwait (including selected large firms) to understand the current situation regarding private R&D investments and their promotion. These direct engagements with key Science, Technology, and Innovation (STI) stakeholders were critically important to understand the general STI direction in Kuwait and helped in designing the data collection reported in Section 3.3 below. We also tested our emerging findings at a workshop attended by Kuwaiti policymakers in January 2020. These activities allowed us to develop a more detailed and nuanced overview of the strategies and choices of actors; in doing so, we considered their opinions and the rationales for their innovation behaviours.

3.3 Survey of R&D intensive manufacturers

Official data on R&D in Kuwait is poor; thus, to develop an understanding of the extent to which firms are engaging in R&D, we carried out an original survey (during spring and summer 2019) of forty two large firms operating in manufacturing industries likely to have different degrees of R&D intensity. The initially targeted population was large manufacturing firms (i.e. those with more than 249 employees) since R&D investment was the main variable to capture: it consisted of all ninty large manufacturing firms included in the database provided by the Public Authority for Industry in 2018. The response rate on this first firm list was about 24.4 per cent, with twenty two firms participating in the survey after several reminders. Another 130 firms were identified based on a private database owned by a Kuwaiti firm specialised in surveys in the GCC countries: 50 firms responded, and 20 firms of those fulfilled our criteria. Therefore, our final sample was 42 firms.

Although the objective was to conduct face-to-face interviews, other methods were offered as additional data-gathering mechanisms once the firm refused to meet in person. These included telephone interview and an online questionnaire. More than 40 per cent of the firms accepted face-to-face contact, and each interview lasted for an average of one hour; the rest opted for phone interview. The majority of the interviewees were senior managers. Participant firms were asked if they were willing to be involved in more in-depth conversations to elaborate beyond the semi-structured interview base, and six firms accepted. These in-depth interviews generated additional qualitative data and provided further insights.

4.1 R&D activity in Kuwait

Kuwait’s R&D expenditure is low even by the standards of the Gulf. Estimates of R&D spending by international organisations differ but consistently show this problem. The World Bank estimates that, in 2014, only 0.4 per cent of Kuwait’s GDP was spent on R&D compared to a Middle East and North African average of 0.93 per cent and an OECD average of 2.4 per cent.

Official survey evidence is consistent in showing low R&D investment. The 2017 Kuwait innovation survey—which sampled firms of all sizes and sectors—shows that across the Kuwaiti economy, only 9.3 per cent of firms invested in R&D ( KISR 2017 ). The figure is, for obvious reasons, much higher amongst large firms in R&D-intensive sectors. In our own survey, 78 per cent had conducted internal R&D activities in the previous three years. Yet, while firms did conduct R&D, expenditures were often small: only four out of the forty two interviewed firms declared an annual R&D budget of KD 100,000 (around 300,000 Euro) and above; fewer than 5 per cent of firms had more than twenty R&D staff, and fewer than 20 per cent reported technological innovation as a result of in-house R&D operations. Despite being in R&D-intensive sectors, most of these firms had few internal R&D capabilities: more than one-third of the interviewed firms did not have a dedicated department or organisational unit to handle R&D and innovation activities.

In-house R&D is only one form of innovation-oriented activity, and in a resource rich economy such as Kuwait, it might be that firms are simply buying in new technologies from elsewhere. Yet this does not seem to be the case. Figure 2 below shows the share of firms declaring to have conducted other forms of innovation activities. Most businesses were risk averse and did not invest in new or emerging technologies: apart from in-house R&D, the top innovation activities include the acquisition of machinery and equipment and investing in strategies and training activities; only two firms reported having purchased intellectual property rights (IPRs).

Types of innovation activities.

4.2 Institutions and policy context

How have policymakers responded to this poor R&D investment? Kuwaiti policymakers have paid lip service to the idea of diversification and launched a number of grand national plans. Following a fad of similar ‘visions’ from other gulf states ( Olver-Ellis 2020 ), the latest plan is the Kuwait Vision 2035, launched by the Supreme Council of Development and Planning in 2017. The plan aims to encourage ‘the private sector to lead diversification efforts towards a knowledge economy, where economic growth is driven by technological innovation, research, development and the creation of globally competitive high value-added sectors’ ( Olver-Ellis 2020 : 6).

Kuwait Vision 2035 has been developed utilising the strong historic traditions of a pioneering nation in trade and entrepreneurial activities. On the basis of the discovery of oil and the accumulation of an enormous amount of wealth, the relatively open culture, and the capacity to invest in infrastructure, Kuwait aspires to exploit its strategic geographic location, as a gateway to the north of the GCC region, to transform itself into a financial centre and a regional trade hub. The essence of this transformation is driven by an essentially high-tech-oriented strategy, building on Kuwait’s existing strengths, especially in terms of its ability of raising and generating capital both onshore and elsewhere through well-established institutions such as the Kuwait Investment Agency (KIA).

Although the pillars of the Kuwait Vision 2035 address innovation in terms of encouraging both human capital and a diversified sustainable economy, there is a need for a clear capability-building centred strategy that could take full advantage of the national aforementioned strengths—both hard (wealth, infrastructure, and location) and soft (open society, trading roots, and creative culture) components—by building, strengthening, and diversifying the skills and capabilities necessary for structural change to occur (e.g. Al-Nakib 2015 ).

The Kuwait NSI displays a configuration in which the government’s role is central ( Fig. 3 ). The government has direct control of STI through the influential Ministry of Finance that approves all the budgets allocated to research and leaves very little autonomy to STI institutes. The Ministry of Higher Education is the governing body of the main players on the supply side, and this includes the already mentioned KISR, the Kuwait University (KU), and the Public Authority for Applied Education and Training. Private universities are as well governed by the General Secretariat of Private Universities Council, a government body led by the Minister of Higher Education, who is also the Chair of the Board of Trustees of KISR.

Kuwait’s NSI.

A host of government bodies have been created and conferred functions to pursue STI policies. For example, the Kuwait Direct Investment Promotion Authority aims to leverage the potential of innovation-based inward FDI into Kuwait for the purpose of enhancing technology transfer. Moreover, the Public Authority for Industry has embarked on large initiatives to establish science and technology parks involving the private sector, whilst the Kuwait Authority for Partnership Projects has the mandate to facilitate public–private relationships. In addition, The National Technology Enterprises Company, a fully-owned subsidiary of KIA, has the purpose of transferring locally technology and know-how by investing in foreign high-tech firms.

With the lack of a central body to guide STI strategies, the General Secretariat of the Supreme Council for Planning and Development (GSSCPD) and the Kuwait Foundation for the Advancement of Sciences (KFAS) endeavour to coordinate and mobilise public and private resources to make progress in STI to contribute to the industrial diversification agenda. GSSCPD is the central government body that is responsible for leading the country’s planning process as mandated by an Amiri Decree No. 33 in 2004, and it reports to the Supreme Council for Planning and Development (SCPD). New research centres have been established in the last few years as part of GSSCPD’s effort to improve the quality of the national development plans, such as the Kuwait Public Policy Centre, the National Development Research Centre, and the National Observatory for Sustainable Economy Centre. SCPD is chaired by his Highness the Prime Minister or his Delegate, and its membership includes the Deputy Prime Minister and Foreign Minister, the Minister of State for Cabinet Affairs, the Governor of the Central Bank of Kuwait, representatives from the private sector and civil society organisations, and various other Ministries.

To address the challenge of the lack of coordination between all these different innovation actors and to improve the framework conditions, the government established in 2017 the Permanent Committee for Streamlining Business Environment & Enhancing Competitiveness. This national committee has been dubbed ‘Tahseen’, which means ‘improvement’ (in Arabic), and among its members it includes the GSSCPD, the Kuwait Municipality, the Central Bank of Kuwait, the General Directorate for Customs, the Capital Market Authority, the Kuwait National Competitiveness Committee, and various Ministries. The mission of this committee is to design initiatives to address the weaknesses highlighted in the Ease of Doing Business (EDB) index of the World Bank. The outcome was noticeable and showed encouraging progress (Kuwait joined the Top-20 Improvers in the World in EDB index 2020 out of 190 economies), giving support to continue implementing reform in the direction of a coherent coordination and clear governance of the Kuwait NSI components.

Although the government has shown interest in innovation-driven development strategies, this has not been fully reflected in the rolling Kuwait national development plans. There is a lack of specific innovation targets, for example, to clarify the role of innovation in processes of economic diversification and a still too fragmented governance structure that hinders clear task assignment and responsibility. Providing generous budgets to public research and academic organisations in addition to engaging large firms to fund KFAS is not enough to stimulate R&D and innovation in the private sector.

The non-business providers of innovation, represented by few research institutes and universities led mainly by KISR and KU, create most of the knowledge base for the Kuwaiti NSI. Both organisations have tried to address the gap of commercialisation by establishing dedicated organisational units. KISR has the mandate to conduct applied research with a special emphasis on petroleum resources, water, energy, and the environment, which are aligned with the enduring national challenges. KISR’s research budget in 2017–8 was 53.3 million KD (around 145 million Euro), while KU’s research budget was only 4 million KD (around 11 million Euro) in the same fiscal year ( OECD 2019 ). KISR has been leading the R&D strategy in Kuwait, and it has devoted a lot of its effort to registering patents; however, very limited attention has been paid to the developmental side to exploit the generated IPRs. KU has also invested in IPR-generating activities, but commercialisation has yet to materialise, demonstrating the persistent technology-push orientation as opposed to a market-pull technological demand. This confirms the firms’ perceptions that local universities, including private ones, are largely teaching institutions and research activities remain weak. However, recent new initiatives to promote R&D have been launched in KU and private universities such as the Gulf University for Science and Technology and the American University of Kuwait.

The in-depth interviews with selected firms confirmed the enduring frustration due to state bureaucracy and red tape of government procedures for business. For instance, the issue of allocating land kept surfacing in most discussions. The lack of STI infrastructure and customised programmes to sponsor R&D and innovation activities were also stressed as critical areas. On the other hand, more than two-thirds of the surveyed firms were not aware of existing government schemes for stimulating R&D and innovation, and most interviewees could not figure out how to take advantage of them due to the lack of expertise in innovation management. Finance remains a major concern, and this was reflected in the response to the potential government options to promote private R&D: the preferred option among the interviewed firms was R&D grants, followed by spurring university–industry collaboration and attracting foreign talent in research.

Although there are various institutions playing important roles as innovation actors in the Kuwaiti NSI, there is no general direction and fragmentation of responsibilities to ignite the necessary changes that would enable the country to embark on an STI-led journey. This is partly due to the lack of a national innovation policy and any centralised framework to guide such endeavour. There has been an effort to establish an STI council to address this issue, but it has been delayed and eventually abridged to a national committee, which is still being discussed.

4.3 Human capital and the education system

R&D lies at the heart of the innovation system approach, as does capability-building, that is, the provision of education and training, creation of a diversified human capital, production, and reproduction of skills, life-long learning, and training in the labour force to be used in innovation and R&D activities. Yet, a major problem Arab Gulf countries face is that existing workforce’s skill levels are low by world standards ( Davis and Hayashi 2007 ). A deficient and obsolete education system and the large share of unskilled and semi-skilled foreign workers (and the complementary lack of foreign high-skilled workers) are serious deterrents to the implementation of strategies to reduce the dependence on foreign technologies and oil exports ( Muysken and Nour 2006 ). An effective NSI require the recognition, agency, and action of its civil society, citizens, and foreign residents; however, such developments are hindered by the reality that these features are largely absent from the education system of a country such as Kuwait ( Al-Nakib 2015 ). First of all, a largely segregated schooling system and a curriculum that both conflates nationalistic values over cultural diversity and promotes compliance over critical thinking tends to preserve the current balance of power and undermine Kuwait’s democratic, diversified, and knowledge-based development ( Al-Nakib 2015 ). The current educational systems by and large do not prepare the students adequately for either pursuing further studies or engaging actively in a new sustainable economy for the future ( Hvidt 2015 ).

The aspiration to a ‘knowledge economy’ boosted school enrolment rates and adult literacy in the past few decades but failed to foster civic values, skills, and creativity. It has become increasingly apparent that the quality of education, curriculum development, teacher training, expansion of vocational and technical education, and ultimately the creation of a pluralistic educational framework, all would contribute to the strengthening of the Kuwait NSI structural change (e.g. Alhashem and Alkandari 2015 ; Al-Nakib 2015 ; Safwat 1993 ).

Furthermore, public sector wages set a ‘reservation wage’, and citizens in Kuwait, the UAE, and Qatar rarely work for less. It is not surprising that the business sector—as also emerged clearly from both our focus groups and firms’ opinions (see section below)—has little incentive in employing citizens; this is especially true for those with fewer skills. Expatriate wages in the private sector, with the exception of the most skilled labour, are well below the level paid to citizens in the public sector ( Fasano and Goyal 2004 ). These labour market features provide no incentives for organisations to invest in transferring knowledge to nationals ( Bunglawala 2011 ), and hamper risk-taking private ventures such as entrepreneurship that generate value added ( Hertog 2010 ). Indeed, as discussed below, the most important problem perceived by business firms is the general lack of skills and capabilities for innovation.

Including ‘Creative Human Capital’ as one of the key pillars of Kuwait Vision 2035 ( SCPD 2009 ) expressed the awareness of the government of the importance of diverse and updated capabilities in Kuwait’s future. However, this long-term investment should be reflected in an education system deeply reformed and designed to boost innovation in the long term through the diffusion of new skills (e.g. ICTs, STEMs) and inventiveness from early stages of schooling and capacity-building delivered via up-to-date university curricula and specialised training programs (e.g. Al‐Atiqi and Alharbi 2009 ; Al-Nakib 2015 ; Wiseman and Anderson 2012 ).

4.4 Firm-level barriers to R&D investment

Our survey’s primary aim was to identify firms’ perceptions about the main barriers to R&D and innovation ( Fig. 4 ). The insights from the focus group sessions and the in-depth interviews complemented the survey results, although the themes that surfaced in the focus groups’ discussion were not based on guided questions. The themes discussed in this section, along with the survey results, include the following:

Cost is not the key obstacle to innovation but the lack of skills

Urgent need for effective research-industry collaboration;

Lack of R&D infrastructure;

Mismatch between the educational outcomes and the industry skill needs;

The work culture hinders innovation and entrepreneurship.

Obstacles hampering innovation activities.

The survey showed that the most important barrier indicated by the interviewed firms was costs. A version of the Dutch disease exists in countries like Kuwait, as apparent affluence is associated with increased costs—making diversification harder. Our findings are in line with the Kuwait Innovation Survey, where 43 per cent of firms declared to be hampered by high costs, 42 per cent indicated lack of funds within the enterprises or group, and 35 per cent lack of funds from outside ( KISR 2017 ).

However, in line with recent empirical studies on European countries (e.g. D’Este et al. 2012 ; Iammarino et al. 2020 ), the issue goes well beyond financial constraints. KFAS offered several programmes to sponsor private sector R&D activities during the last five years, and most firms were not able to take advantage of such programmes: only one firm declared to have benefited from the KFAS innovation schemes. In one of the stakeholder engagement sessions (focus groups), a KFAS representative openly supported this view:

The issue is not money rather the lack of qualified staff who can conduct and manage firms’ R&D activities.

Indeed, the ‘lack of qualified personnel and skills’ ranked second among our interviewees, and it is consistent with the low percentage of employees with STI-relevant skills declared by the surveyed firms (e.g. only one firm had half of their staff with STEM degrees). In the focus group conducted with key innovation actors, R&D funding agencies and research organisations expressed the lack of beneficiaries of their diverse programmes. One of such actors from the supply side claimed that:

The lack of highly skilled human capital in R&D and innovation management is the main issue and not finance.

During the in-depth interviews with six firms, all managers expressed their dissatisfaction with the quality of the Kuwaiti tertiary education, especially when compared to foreign universities. One HR manager stated:

Graduates from local universities have no practical experience, they are disconnected from the industry. I visited one university in Sweden, and I saw how the students are tinkering with expensive industrial equipment.

According to our survey, more than half of the firms have less than 10 per cent staff graduated from foreign universities. Another crucial factor commonly raised is the lack of significant research outputs from the local universities. One plant manager claimed:

Even when research is conducted, it is not necessarily aligned with the industry needs

Building the right capabilities and fostering linkages and communication between research, education, and industry—thus strengthening the NSI pillars—seem thus to be far more important objectives than financial aspects. In 2018, Kuwait was ranked 120 out 140 countries in the Labour Market index of the GCI. Actions regarding labour mobility and skills migration schemes are absolutely necessary to attract and retain appropriate competences and capabilities in the short term while investing in education and training in the longer term as part of coherent reforms for sustainable economic development and growth.

Another major issue, not addressed directly through the survey but emerged in the reflections of both interviewees and focus groups, is the national business culture. Kuwaiti people, even before oil, are traders by nature and the national mentality of ‘quick wins’ still dominates business affairs, having been even intensified by the oil discovery ( Al-Nakib 2015 ). The weak R&D and innovation investment by firms (even the large-sized ones, as the survey shows) reflects this culture, where Kuwaiti businesses are not keen to commit to long-term and uncertain investments.

4.5 Systemic barriers

Collaboration and industry–university linkages in various areas of knowledge creation and diffusion in particular play an important role in addressing the aforementioned NSI challenges (e.g. D’Este et al. 2012 ; Schiller and Liefner 2007 ). However, current practices in Kuwait do not reflect any progress in this respect. Collaborations with academic and research organisations reported by the large firms are very weak (43 per cent do not have any type of collaboration), and internships and student dissertations are the most common collaborative channels ( Fig. 5 ).

Collaboration with academic and research organisations.

Again, this is in line with the Kuwait innovation survey, which highlights this general issue ( KISR 2017 ; OECD 2019 ); from our survey, external collaboration for innovation in large firms is neither internalised nor institutionalised. These findings are critical since large firms are usually the model of aspiring small and medium enterprises. Urgent priorities are both improving the dialogue between industry and university on human capital provision, new skill needs and curricula, and strengthening the academic and research system towards international standards.

Lack or weakness of systemic linkages was also reflected in the response to the potential government options to promote private R&D: among their most preferred options, firms indicated R&D grants, followed by spurring university–industry collaboration, and attracting foreign talent in research.

This paper has combined multiple sources to investigate the question of how a country such as Kuwait may increase private sector R&D. Basic data on R&D spending in Kuwait is often inadequate, and our research can only be seen as a first step to addressing this question, which will only become more urgent over time. The global health crisis due to COVID-19 has brought disruption to the global economy. Importantly, it has highlighted that rentier nation-states, such as Kuwait, cannot continue to depend on a sole income from perishable natural resources that proved to be unstable in the past as well due to the oil price volatility. Hence, there is now an even more urgent call to adopt a capacity-building strategy at the system level to improve its resilience in such a dramatic double whammy supply-demand shock and most importantly to ensure sustainable economic growth.

The need for economic diversification in the Gulf is longstanding and obvious: countries such as Kuwait need to move from a dependence on oil exports to knowledge-based activities that will sustain the economy over the long-term. Yet, the roads taken so far have been, largely, dead ends. A mini-industry of foreign consultants has emerged, writing reports advising on diversification into innovation-intensive activities, science parks, and incubators. However, as stand-alone policies, these initiatives, although well intentioned, have little chance. Public-funded R&D activities are not an end in themselves but need to be considered alongside bottom-up and downstream activities in firms and other organisations and in their interactions. Without considering the wider innovation system, isolated efforts are doomed to fail. This development trap is a self-reinforcing process where a lack of incentives to conduct innovation creates conditions that hinder the development of the wider ecosystem, which, in turn, would provide incentives to create innovation.

In simple terms, Kuwait is in a special kind of ‘development trap’: firms will not increase R&D investment because it is not economically rational for them to do so; in turn, it will not become economically rational until a wider set of actors, relationships, and institutions have evolved into a coordinated system. Yet, institutional change and alignment of objectives is a very slow process ( von Tunzelmann 2009 ), and some of the framework conditions—such as changing societal attitude towards risk-aversion, diversity, and creativity—can take generations. This is a specific form of the resource curse that has been well documented in literature ( Frankel 2010 ), but that in the case of Kuwait occurs in a context in which, for example, the public sector provides easy access to contracts for the private sector, the education system fails to produce updated skills or be attractive to foreigners, and networks for knowledge creation and diffusion are sparse.

Although many previous research studies showed that countries endowed with natural resources could face various challenges, as has been the case of Kuwait, there is still a debate about whether the resource curse is inevitable, with some arguing resources are an opportunity if managed well ( World Bank 2008 ). Norway is an excellent example of developed countries, and Botswana’s strategy in dealing with diamond discovery is also a great example among developing countries. Lederman and Maloney’s (2006) reviews of the related empirical evidence demonstrated that natural resources could be utilised as an economic development lever when combined with the accumulation of knowledge for economic development and growth.

A systemic problem requires a systemic solution: indeed, the features of the Kuwaiti NSI are often not there or are incomplete, even in comparison with the GCC neighbours. In a high-cost and high-revenue economy like Kuwait, with a very peculiar social contract between citizens and government, investments in R&D are simply too risky given the little incentives and uncertain returns. While there is a literature that considers innovation policy instruments in a decontextualised fashion (e.g. Bloom et al. 2019 ), doing so risks ignoring both the systemic factors that drive innovation and the importance of a ‘policy mix’ for innovation processes ( Flanagan et al. 2011 ). There are plenty of examples of supply-side innovation policies, which have lacked any consideration of the local context and its fundamental conditions and thus failed (e.g. Pugh et al. 2018 ). If Kuwait is to break out of its development trap, efforts to increase R&D investment alone would be futile and often wasteful. Focusing on strengthening the effective NSI actors and their functions and developing their relationships by adopting a place-sensitive approach to maximise the existing local potential seem to be the correct strategy to compromise between short-medium and longer-term goals. Kuwait’s initiative to establish a national STI committee by following best practices in innovation-led strategies (e.g. those in South Korea) can be critically important to enhance the governance of innovation processes in the country. However, to succeed in addressing the issue of a disarticulated NSI, this national committee should be empowered to define the national agenda for innovation and coordinate the efforts to advance innovation in Kuwait as part of its diversification strategy.

Throughout our research and fieldwork, a core theme was the unsuitable supply of human capital by the Kuwait’s education and training system, a pillar of the NSI as a whole. To institutionalise and reinforce the Kuwaiti NSI, an in-depth rethinking of the education system at all levels, and beyond formal education, is needed. Kuwait’s aspirations for a ‘knowledge economy’ are frustrated by an underdeveloped and obsolete human capital formation system, which lags behind other GCC economies and is unable to provide the adequate STEM and STI skills to industry, as well as the managerial and organisational capabilities for the required institutional change both in the private and public sectors. While Kuwait has already attempted many rounds of educational reform, strengthening initiatives on inclusive education and redressing imbalances in religious-based learning vis-à-vis academic improvement have become a necessity ( Al-Ajmi 2019 ; Wiseman and Alromi 2003 ). More generally, underpinning any innovation-led diversification process must be the competences of the people of Kuwait in a system able to promote critical and innovative thinking rather than nationalist identity ( Hvidt 2015 ). This is not simply about short-term skill supply but about balancing this supply in the longer term with expertise required in any economic transition. Without developing such skills and capabilities, any serious attempt to gradually change the social contract to spur a more creative, open, and entrepreneurial society and to restructure innovation governance will be jeopardised.

This paper received funding from the Kuwait Programme Academic Collaboration Grant from the LSE’s Middle East Centre, under the project “Towards promoting private R&D investment in Kuwait”, funded by the Kuwait Foundation for the Advancement of Sciences (KFAS).

We are very grateful to KFAS for funding and would like to acknowledge the precious help from Shaikha Al-Fulaij, Sulayman Al-Qudsi, Toby Dodge, and Ian Sinclair.

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Lessons from Tesla’s Approach to Innovation

• Nathan Furr

There is a method to the madness.

Tesla has shifted the auto industry toward electric vehicles, achieved consistently growing revenues, and at the start of 2020 was the highest-performing automaker in terms of total return, sales growth, and long-term shareholder value. As a technology and innovation scholar, the author has studied how innovators commercialize new technologies and found that Tesla’s strategy offers enduring lessons for any innovator, especially in terms of how to win support for an idea and how to bring new technologies to market. To understand Tesla’s strategy, one must separate its two primary pillars: headline-grabbing moves like launching the Cybertruck or the Roadster 2.0 and the big bets it is making on its core vehicles, the models S, X, 3, and Y.

Few companies have attracted as much scorn and adoration as Tesla. When Tesla launches a product like the Cybertruck, the reception tends to be divisive: Critics see it as further evidence that founder Elon Musk is out of touch and doomed to fail, while supporters buy in — within a month Tesla received 200,000 preorders for the new vehicle. Compare that with the Ford-150, the world’s best-selling car in 2018, which sold just over 1 million vehicles that year.

• Nathan Furr is a Professor of Strategy at INSEAD and a coauthor of five best-selling books, including The Upside of Uncertainty, The Innovator’s Method, Leading Transformation, Innovation Cap i tal , and Nail It then Scale It .
• Jeff Dyer is the Horace Beesley Professor of Strategy at BYU’s Marriott School of Management. He is the lead author of the best-selling book, The Innovator’s DNA , and coauthor of The Innovator’s Method .

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Enterprise financialization and R&D innovation: A case study of listed companies in China

• Yue Liu , 
• Jinzhi Liu ,  , 
• Lichang Zhang
• Business School, Hunan Institute of Technology, Hengyang 421000, China
• Received: 19 January 2023 Revised: 14 February 2023 Accepted: 16 February 2023 Published: 02 March 2023
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In financial asset allocation, enterprises adjust their investment in R&D innovation according to their motives and the external environment. Based on a review of the literature related to enterprise financialization and R&D innovation, this paper proposes research hypotheses through theoretical analysis first; then, taking China's A-share non-financial listed companies from 2010 to 2019 as research objects, this paper explores the relationship between enterprise financialization and R&D innovation with a quantile panel data model; further, the heterogeneous relationship between the two under different business cycle phases is empirically analyzed. The following conclusions are drawn. First, there is a dynamic relationship between enterprise financialization and R&D innovation, varying with different financing constraints. Second, the dynamic relationship between enterprise financialization and R&D innovation stems from the motivation difference in enterprise asset allocation. Third, there are significant differences in the dynamic relationship at different business cycle phases.

• enterprise financialization ,
• R&D innovation ,
• dynamic relationship ,
• financing constraints ,
• business cycle

Citation: Yue Liu, Jinzhi Liu, Lichang Zhang. Enterprise financialization and R&D innovation: A case study of listed companies in China[J]. Electronic Research Archive, 2023, 31(5): 2447-2471. doi: 10.3934/era.2023124

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R&D in the ‘age of agile’

Today biopharmaceutical innovation is advancing at breakneck pace, with opportunities to address diseases once considered intractable using technologies that were previously restricted to the realm of science fiction. These advances have delivered measurable impact to the lives of hundreds of millions: for instance, US life expectancy at birth increased by 3.4 years between 1990 and 2015. 1 “Life expectancy,” National Center for Health Statistics, Centers for Disease Control and Prevention, updated May 2017, cdc.gov.

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Moreover, there is no sign of this innovation slowing. The past ten years have been exciting ones: we have seen the evolution of immuno-oncology from a niche therapy to mainstream (PD1 therapies are forecast to be worth $30 billion within five years 2 EvaluatePharma, accessed December 2017, evaluategroup.com. ), the dawn of cellular therapies (with over 500 clinical assets 3 PharmaProjects, accessed December 2017, pharmaintelligence.informa.com. ), and the promise of gene therapies able to target individual mutations (such as for severe combined immune deficiency). There are now over 4,000 unique assets in clinical development 4 PharmaProjects, accessed December 2017, pharmaintelligence.informa.com. and almost 1,700 investigational new drug applications (INDs) were filed in 2016, up from 1,300 in 2007 5 “Number of Original Investigational New Drug (IND) applications received in the quarter,” US Food and Drug Administration, accessed December 2017, accessdata.fda.gov. (Exhibit 1).

What’s more, this innovation is taking place against a backdrop of unprecedented health-system change and seismic shifts in stakeholder expectations. This combination of pace and volatility has been experienced by other innovation-driven industries disrupted by the advent of digital, coupled with rising customer expectations. In most of them, we detect a strong focus on “agility” to speed the development of products that better meet customer needs. The attractiveness of agility stems from its potential to increase time spent on value-added work and ensure decisions take days, not months, to enable faster reallocation of resources and to enhance engagement—all of which ultimately translates into dramatically reduced time to market.

This applies equally to pharma where companies are actively experimenting across the value chain with how agile principles can drive a step change in performance—not least in R&D. Inevitably, given the capital-intensive nature of pharma R&D, companies require a stable “backbone” of technical competencies in any R&D operating model; however, there are significant opportunities for companies to become nimbler and to outpace the competition in bringing valuable medicines to patients.

Shifts in the pharma landscape

So why is now the time to reevaluate pharma R&D ?

Diversification and acceleration of innovation

Over the past decade, R&D horizons have expanded as a wider range of players has begun to pursue innovative therapies and solutions, using a broader set of technologies.

At the heart of this democratization has been the dramatic increase in the availability of venture-capital (VC) funding for early-stage biotechs (Exhibit 2)—this has increased from $4.0 billion in investments in 2007 to $9.8 billion in 2017 (seed to stage C). 6 BioCentury Online Intelligence, BCIQ, August 29, 2018, bciq.biocentury.com. As these projects have matured, both the number and proportion of trials initiated by non–top ten players has increased, from 4,500 trial starts in 2007 (72 percent total) to 5,900 in 2017 (85 percent total)—see Exhibit 3. 7 ClinicalTrials.gov, accessed December 2017.

Along with, or perhaps because of this democratization, innovation has diversified with the industry’s pipeline moving from one dominated by small molecules and monoclonal antibodies to a plethora of new technologies (Exhibit 4). Products based on cell and gene therapies now make up 12 percent of the global clinical pipeline—an 11 percent compound annual growth rate from 2007 to 2017. 8 PharmaProjects, accessed December 2017, pharmaintelligence.informa.com.

In the context of this increasingly varied and fast-moving innovation landscape, we believe the most successful players will be characterized by the following:

• Continuing to move from in-house discovery to “differentiation through identification.” Companies such as Celgene are at the vanguard of this trend, with an explicit focus on search and development. Celgene has almost 40 publicly announced R&D partnerships and a distributed R&D model with investment at the earliest stages of development in a “buy-to-build” model. 9 34th Annual J. P. Morgan Healthcare Conference, Celgene, January 13, 2016. While it is essential to maintain core capabilities in house to select the winners, a lack of unencumbered late-stage assets will push players to look for new ways to access innovation. By adopting a more “VC-like” approach, pharmacos can more nimbly enter and exit focus areas (whether defined by pathway, disease, or modality) and explore broader swathes of the innovation ecosystem over a given period.
• Increasingly virtualized R&D models. Collaboration with external partners allows pharmacos to access specific expertise and minimize the buildup of infrastructure, particularly where a portfolio is spread across multiple modalities. Indeed, we are now seeing the emergence of purely virtualized biotech where no lab or clinical work is done internally (for example, Alkeus, Velocity, Virobay, and Tioga). While major pharma companies will retain in-house capabilities, there is opportunity to further outsource both basic science and clinical research, particularly for non-core areas.
• Rapid decision making and reallocation of resources. Accelerating innovation cycles and increasingly diversified portfolios drive a need for consistent assessment of value and subsequent resource allocation. In the most competitive arenas—such as PD(L)1—success will depend on resource allocation both in terms of assets and indications, while adaptive trial design will be used to rapidly home in on winning assets and deliver a step change in speed to market.

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Explosion in volume and quality of data.

The exponential growth in data and analytical capabilities continues unabated with expanding opportunities around data linkage. However, as data availability expands, so does the complexity of the required analysis, for example, to understand the biological interdependency of multiple pathways. We broadly see data being applied in three contexts within the R&D space:

• Deepening disease and patient understanding. There is an increasingly rich pool of patient data to tap into, including genomic, proteomic, microbiome, and biomarker data. The deCODE database 10 deCODE is a biopharmaceutical company based in Reykjavik, which aims to identify human genes associated with common diseases by using comprehensive medical records from the Icelandic population, which is an unusually genetically isolated population. The company was acquired by Amgen in 2012. has demonstrated the utility of large-scale genomic data to identify therapeutically relevant mutations, while organizations such as NashBio are developing longitudinal linked genomic and clinical data. In oncology, there is a race to use data to drive a step change in diagnosis and treatment rates: for example, the company GRAIL uses blood tests to identify circulating tumor-derived DNA (ctDNA) and diagnose asymptomatic patients based on tumor-derived peripheral nucleic acids. “Lifestyle companies” are also amassing vast pools of data: 23andMe now has genomic data on five million patients 11 23andMe.com, accessed July 2018. and iCarbonX promises longitudinal genomic, proteomic, and microbiome data based on the fitness industry. Together these patient and disease data should enable pharmacos to develop significantly tighter, evidence-driven disease hypotheses, enabling an earlier discussion on the value a medicine might deliver to patients and payers.
• Designing better therapies. A wealth of data now exists to inform lead identification and optimization, spanning drug libraries, formulation, and clinical pharmacological data sets. Founded in 2012, the British company Exscientia aims to automate drug design using machine learning to design millions of compounds and pre-assess them for potency, selectivity, and absorption, distribution, metabolism, and excretion (ADME). Such an approach has the potential to generate molecular candidates in a quarter of the time taken by traditional methods, thereby reducing the amount of preclinical experimentation required.
• Running more agile studies. Patient data sets are transforming as traditional electronic-medical-record (EMR) data sets are augmented by sophisticated linked data sets and new forms of data collection. For instance, databases, including Crossix, can link claims, EMR, prescription, and media data for over 250 million US consumers to facilitate market segmentation, channel optimization, and campaign measurement. 12 “Crossix launches Audience Fusion™ to unlock full power of health programmatic offering,” November 16, 2017, crossix.com. Meanwhile, we also see new streams of data generation using patient sensors and disease-related apps to support patients in trials and beyond. The pharmaceutical industry is using pooled historical trials data to inform trial design (for instance, the Transcelerate Placebo SOC database 13 This is an initiative through which pharmacos can share de-identified clinical trials data for patients receiving placebo or standard of care (that is, patients not receiving novel therapy). ); this enables early-stage single-arm studies against matched historical controls and helps to optimize the design of inclusion/exclusion criteria and endpoints for pivotal studies. These patient data sets are allowing companies both to design accelerated clinical programs (using increasingly sophisticated surrogate endpoints) and also to course correct and accelerate programs midflight (through comparison with historical studies/records). As a consequence, clinical trials are able to move at a pace that five years ago would have been considered extraordinary.

Capitalizing on these opportunities necessitates availability of both broad and deep data sets (combining both internal and external data) as well as access to specialized analytics capabilities.

Designing an agile transformation in pharma R&D

Shifting and diverging evidence requirements for payers and regulators.

The past ten years has seen patient access to medicines shaped by two, sometimes divergent, themes:

• Regulators moving faster to bring medicines to patients. Regulators are increasingly willing to expedite review processes and approve drugs on more limited data, particularly in areas of high unmet need. The number of US orphan designations has increased from 121 in 2007 to 477 in 2017, 14 US Food and Drug Administration, accessdata.fda.gov; https://www.accessdata.fda.gov/scripts/opdlisting/oopd/ and European Medicines Agency, ec.europa.eu, accessed August 2018. particularly concentrated in oncology and rare diseases (Exhibit 5). Further, accelerated pathways have led to increasingly rapid drug approvals as highlighted by the approval of Tagrisso (osimertinib), in under three years after entry into the clinic. 15 ClinicalTrials.gov; and Drugs@FDA, US Drug and Food Administration, accessdata.fda.gov. In addition, real world evidence (RWE) has become increasingly central to regulators, and the FDA’s Sentinel initiative 16 Sentinel is an electronic initiative to monitor the safety of drugs proactively post-launch using a distributed data approach to securely access data from electronic medical records and insurance claims. has expanded to include data on 193 million patients to allow rapid identification of safety signals.
• Sustained payer focus on value and evidence. In both the United States and Europe, relentless payer focus on value continues. This pressure is greatest in Europe where clinical efficacy alone is now insufficient for reimbursement and launches may be restricted to subpopulations. Looking forward, European market access pressure is expected to increase with increasingly frequent use of post-launch drug reassessments and uncertainty around combination pricing, while the 2017 Valletta declaration 17 Alliance of mainly southern EU countries that aims to explore strategies for jointly negotiating prices with the pharmaceutical industry. It currently includes Cyprus, Greece, Ireland, Italy, Malta, Portugal, Romania, and Spain. heralded a potential move toward multilateral pricing agreements. The US payer environment is also at a stage in its evolution where there is significant consolidation among both payers and providers and increasing use of care pathways, while formulary restrictions are expanding to include specialty products—all of which makes future adoption of levers such as value-based pricing more likely.

This evolving payer and regulator landscape requires companies to take a more sophisticated approach to trial design and payer engagement by considering key market and regional variations. Signs of a divergence between US and EU trial design are already evident in areas of highest pricing pressure. For example, Janssen is conducting parallel EU and US clinical programs as Darzalex (daratumumab) expands into first-line multiple myeloma therapy (based on divergent standard of care 18 ClinicalTrials.gov. ). More broadly, successful players will be those that engage their market-access functions early, collaborate with regulators to explore new types of evidence, and build sophisticated understanding of total payer cost base.

Read our latest thinking on agile pharmaceuticals

Fundamental changes to the r&d operating model are required to position pharmaceutical companies for success.

This fast-evolving external landscape, combined with sustained cost pressures and shareholder expectations, are driving pharmacos to operate in a more nimble, agile way to increase their “metabolic rate” and improve their R&D productivity.

Given the inherent complexities of R&D and the investment levels at stake, shifting the R&D operating model is tough. Nevertheless, we have observed several industry players moving swiftly to make material shifts in the way they operate and have laid out the key elements here.

Increasing the metabolic rate of ‘strategy’:

• more VC-like external sourcing model to access the broadest spectrum of scientific progress, rapidly enter and exit focus areas, and balance the internal R&D risk profile, including novel partnerships with other pharmaceutical companies, biotechs, technology players, and investors
• softening of therapeutic-area (TA) boundaries with flexibility to explore biological pathways that present opportunities across multiple disease areas
• differentiated, fit-for-purpose asset strategies based on the unique requirements of the asset and disease (for instance, use of RWE, single-arm studies, predictive biomarkers)

Flexing the ‘structure’ to meet the needs of the portfolio:

• overall organizational flexibility to deal with internal and external interchange and to allow rapid acceleration of priority programs
• flexing the makeup of project teams to optimize delivery against the asset strategy (given its experimental stage and targeted biological pathway)—this could include adding, for example, data “translators” or external partnership relationship managers to the team, and including commercial representation earlier in the life cycle (for example, in the case of accelerated-approval assets)
• reducing internal infrastructure (for instance, via external strategic partnerships) to enable greater flexibility in capability and capacity, in order to follow the innovation opportunities and to access cutting-edge technologies and nimbly explore new areas

Accelerating processes, governance, and mind-sets to drive to decisions:

• evolving governance models and systems to support real-time decision making (for example, to support asset acceleration) based on interim clinical read-outs and external opportunities/threats (rather than conforming to fixed governance cycles and a requirement for final clinical read-outs following database lock)
• embedding integrated-resource-management solutions to provide real-time insight on the progress of clinical programs, create transparency on their current resource allocation, and, importantly, enable rapid reallocation decisions informed by the potential portfolio impacts of those decisions
• resetting the governance mind-set to one where rapid decision making is seen as a key source of competitive advantage—characterized by an increased willingness to accelerate (or deprioritize) trials based on interim data

Turbocharging the operating model with data and analytics:

• ensuring a step change in the level of investment in data sets and analytical capabilities, with incubation investment potentially ring fenced
• establishing partnerships with a full gamut of tech players to access cutting-edge data sets and analytics
• embedding digital and analytical teams across the organization to allow faster and earlier decision making, empower asset-development teams, and elevate the position of digital and analytics leaders within internal governance

Embedding the capabilities for success:

• building expertise, particularly around digital and analytics, but also in core scientific areas requiring more fluid inflow (and outflow) of talent as the portfolio evolves—including with talent from beyond the industry
• shifting the mind-set to embrace different ways of working for each asset (rather than one size fits all), seeing external partners as true collaborators, and being ready to deprioritize programs when better opportunities arise (even if a project continues to meet predetermined stage gates)
• creating new incentive models linked to project success and individual performance in a project context, rather than the performance observed along functional reporting lines

Activating agile R&D

Collectively these changes would represent a fundamental shift in the R&D operating models of “traditional” players and require new ways of thinking, working, and leading. Therefore, players may elect to focus first on a specific set of enablers with priorities determined by their starting point and final aspiration. Regardless of which approach is adopted, a structured approach to any agile transformation is essential to maximize impact and minimize disruption. Typically, this includes three key steps:

• Diagnosis. Assess the current level of agility across the areas outlined above to identify areas of strength and gaps where an opportunity exists and, importantly within this, call out differences by TA, geography, or platform and identify any ongoing efforts.
• Aspiration setting. Define the target end-state and the time frame for achieving it, including laying out which agile approaches will be implemented and where in the organization—and also how success will be measured.
• Agile transformation. Adopt agile techniques to trial and refine prioritized interventions, with clear senior operational sponsorship and interim targets—then scale successful approaches at pace.

Across these areas, the breakdown of established silos is an important unifying theme. First, the concept of a TA will become increasingly less important in R&D as the interrelationships between different disease states are further clarified. Targets and technologies will be important across multiple indications, and R&D organizations must evolve to reflect this. Second, functional lines will become less important within R&D organizations as resources are fluidly deployed against projects informed by data. The makeup of these teams will be highly dependent on the needs of an asset and its development plan, and we will therefore see new combinations of functions collaborating to bring drugs to patients. Finally, the division between the internal and external world will become increasingly blurred as pharmacos build external partnerships across all aspects of development and draw on talent from beyond the payroll to bring the best-available capabilities to key projects.

Roy Berggren is a senior adviser to McKinsey, Edd Fleming is a senior partner in McKinsey’s Silicon Valley office, Harriet Keane is a consultant in the New York office, and Rachel Moss is a partner in the London office.

The authors would like to thank Valentina Sartori, Katarzyna Smietana, Shail Thaker, and Jonathan Usuka for their contributions to this article.

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Promoting Innovation: The Differential Impact of R&D Subsidies

• Published: 18 September 2023
• Volume 23 , pages 187–241, ( 2023 )

Cite this article

• Reda Cherif 1 ,
• Christoph Grimpe 2 ,
• Fuad Hasanov   ORCID: orcid.org/0000-0002-2023-4547 3 &
• Wolfgang Sofka 4  

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We investigate the effect of R&D subsidies on firms’ innovation by ownership, industry, and firm size using German firm-level data. The impact of R&D subsidies is heterogeneous across industries for multinational corporations (MNCs) and domestic firms. This heterogeneity is robust using various estimators. Domestic firms have a larger response in R&D spending in low-tech and medium-term manufacturing, while the effect in high-tech manufacturing is larger for both domestic and foreign MNCs. In knowledge-intensive services and technological services, the response of domestic firms and in some cases foreign MNCs, is greater than that of domestic MNCs. In terms of patents, foreign MNC subsidiaries tend to have a larger count in high-tech manufacturing.

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The determinants of innovation performance: an income-based cross-country comparative analysis using the Global Innovation Index (GII)

Intellectual property rights and R&D subsidies: are they complementary policies?

Data availability.

The Community Innovation Survey dataset analyzed during the current study is not publicly available due to confidentiality of the firm data. European Patent Office provides patents statistics at this link.

Given that the amount of the subsidy is not available in the dataset, we have evidence that the multiplier on R&D spending is positive but not necessarily greater than one.

The Aschhoff ( 2009 ) also notes that there are no data on the projects not selected.

The survey does not provide information on the subsidy amount. The related question in the survey introduces government subsidies as support for R&D and/or innovation with a short description. Then, respondents choose the funding source. Within our context, a government R&D subsidy can be obtained from the federal government or one of the 16 state governments in Germany in which the firm operates. Firms might obtain multiple grants from one or multiple government sources, but this information is not available in the survey.

The extreme values of the following variables—firms above 100 years of age as well as observations above the 99 th percentile of the distributions of the number of employees, patent stock, share of R&D in sales, and exports—are dropped.

The estimation results between the matched sample and the unmatched sample that excludes outliers are in general similar.

We use cumulative patents data over the subsequent 5-year period in the regressions to mitigate the noise from the volatility in the yearly data and the effect of concurrent R&D projects (see David et al. 2000 and Gkotsis and Vezzani 2019 ).

We also perform a sensitivity analysis of the regressions using 3-year, following Gkotsis and Vezzani ( 2019 ), as well as 7-year ahead patents. Our results are broadly robust, where, as expected, the coefficients are smaller for the 3-year ahead variable and greater for the 7-year ahead one. Results are available upon request.

We also attempted a zero-inflated negative binomial estimation as many firms do not do R&D or patent, but estimations did not converge. Zero-inflated negative binomial regressions require the definition of a condition determining zeros. Firms’ R&D and patent propensity is typically determined by the technological and institutional conditions of the industry (Arundel and Kabla 1998 ; Fontana et al. 2013 ). We capture these industry differences by calculating the share of firms in an industry (two-digit NACE) that filed for EPO patent applications between 1995 and 1999, prior to our estimation sample.

Most firms have one observation in the sample while other firms generally have a couple of observations across different years. Since the number of observations is much smaller and data are sparser, we use panel regressions as a robustness check. We purge fixed effects and only estimate the models for R&D spending. There are only a few hundred observations for patents regressions, so the coefficients are imprecisely estimated.

We also test whether results are sensitive to the choice of the matching estimator by using the Gaussian kernel matching but find that the results are similar. Matching estimations can be inefficient when they only use the nearest neighbor observation. We repeat the matching procedure using a Gaussian kernel matching procedure. Kernel matching does not rely on individual control observations for each treated firm but uses the weighted average of all control observations (Caliendo and Kopeinig 2008 ). Differences in the propensity score between a treated firm and control observations serve as weights and the kernel distribution determines how averages are calculated.

We use psmatch2 command in Stata (Leuven and Sianesi 2003 ).

When the dependent variable is ln(1 + R&D spending) and R&D spending is close to zero, the dependent variable essentially becomes R&D spending. The coefficient estimate on the R&D subsidy dummy of 0.0002 then implies that the impact on the R&D spending level is €0.2 million.

The detailed estimation results are in Appendix Table 15 .

iOLS results assume a hyperparameter of one ( \(\delta =1\) ) and Bellego et al. ( 2022 ) provide a method to search for an optimal parameter.

The iOLS estimations are robust whether the sample uses weighted or unweighted observations unlike PPML regressions. Fixed effects iOLS regressions are broadly consistent too although more coefficients are imprecisely estimated (Appendix Table 14 ).

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Acknowledgements

The authors thank Grazia Santangelo for excellent feedback and David Amaglobeli, Rodrigo Cerda, Ruud de Mooij, Mauricio Soto, and Yue Zhou for helpful comments. The work on this paper started when Wolfgang Sofka was a Visiting Scholar in the Institute for Capacity Development of the International Monetary Fund. He thanks the IMF for its hospitality. The views expressed here are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. All errors are our own.

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Cherif, R., Grimpe, C., Hasanov, F. et al. Promoting Innovation: The Differential Impact of R&D Subsidies. J Ind Compet Trade 23 , 187–241 (2023). https://doi.org/10.1007/s10842-023-00400-7

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How Financial Frictions Hinder Innovation

May 7, 2024 • 5 min read.

A recent study co-authored by Wharton’s Thomas Winberry reveals that financially constrained firms face a trade-off between investing in existing ideas and pursuing new ones.

• Finance & Accounting

When it comes to funding, existing projects tend to take precedence over innovative ideas, according to a study by Wharton and University of Maryland experts. The researchers analyzed project funding patterns at publicly listed U.S. firms between 1975 and 2018 and developed a model to explain their findings. In their paper, “ Capital, Ideas, and the Costs of Financial Frictions ,” they delve deeper into this discovery.

“Financial markets tend to fund the implementation of existing ideas or investment-intensive projects but often fail to adequately fund the discovery of new ideas,” said Wharton finance professor Thomas Winberry , who co-authored the paper with Pablo Ottonello, an economics professor at the University of Maryland.

While innovative ideas are abundant, securing funding for them can be challenging. “If you have a revolutionary new product idea, it’s relatively easy to attract investors and scale up,” Winberry explained. “However, if you’re still exploring ideas and don’t have a tangible product to showcase, you’ll need to rely on internal resources or alternative financing sources, which can be harder to come by and more costly.”

Making the Case for Business Innovation

In the long run, economic growth is driven by new ideas that push the technological frontier, the paper noted. While new firms bring many of these ideas, existing firms also play a significant role. However, they face a trade-off when choosing between scaling up production using existing ideas and innovating with new ideas. As these two spheres compete for funds, firms must make choices based on their financial constraints, shaped by internal resources and the frictions they encounter when raising money from banks or public markets.

According to Winberry, the distinctive feature of their study is its exploration of the competition between investment and innovation within firms. Most growth models focus on innovation financing in isolation, without considering the competition for funds from other activities, he noted.

“There hasn’t been enough focus on how imperfections in financial markets can hinder growth,” Winberry continued. “We’re trying to make the case that financial markets do indeed impede growth significantly. If we can identify ways to address these imperfections, it could have a pro-growth effect on the economy.”

Firms balance the trade-off between investing in tried-and-tested projects and innovative ideas based on the financial frictions they face. Financial frictions can take various forms; the paper focuses on the limits of firm borrowing against collateral. Other frictions might include debt-equity ratios guiding bank lending, the creditworthiness of a firm’s management, or psychological biases against specific industries or types of firms.

“We’re trying to make the case that financial markets do indeed impede growth significantly. If we can identify ways to address these imperfections, it could have a pro-growth effect on the economy.” — Thomas Winberry

The study examined how financial frictions distort the mix of investment and innovation at both the firm and economy levels. It tracked investment-intensive activity in physical assets like plant and equipment, and innovation-intensive activity using R&D expenditure and patenting activity as proxies.

Firms attempt to overcome financial frictions with internal resources; the paper uses net worth as a measure of these resources. “Firms with low net worth are more likely to be affected by financial frictions, as they need to borrow more to finance their investments than firms with higher net worth,” Winberry explained.

The Pecking Order of Growth

The authors found evidence of this in their empirical study of publicly held firms. “Empirically, we find a pecking order of firm growth: Firms are investment-intensive when small and have low net worth but become more innovation-intensive as they grow and accumulate net worth,” Winberry said. The paper’s model supported this finding.

In addition to studying the effects of financial frictions on firms, the authors also assess the macroeconomic impact. Without financial frictions, the economy’s growth rate would be about 40 basis points higher per year, or approximately 0.4%, according to their model. Assuming a 2% annual GDP growth rate, the absence of financial frictions would increase it to around 2.4%.

“That’s because more firms are innovating, more new ideas are being discovered, and more new technologies are emerging. Ultimately, that’s what drives long-term growth,” Winberry said. “If you accumulate 2% growth versus 2.4% growth over 20, 30, or 40 years, those are significant differences in terms of GDP.”

Winberry traced the evolution of small firms with low net worth into a state where they are ready for innovation-intensive investments. “Over time, they build up their productive capacity and eventually reach a natural scale. Then it makes sense for them to start looking for their next idea.”

The paper does not offer specific policy recommendations, but Winberry suggested that removing or reducing financial constraints can spur innovation. Policymakers can achieve this by subsidizing innovation expenditure or enabling innovation by requiring fewer financial resources from firms, he said.

He noted that over the past five or six decades, the U.S. has made it easier for firms to invest with increases in investment tax credits and depreciation allowances. “We’ve changed a lot through the tax code to provide an implicit subsidy to investment. The more you do things like that, the more innovation you’ll get, and ultimately, higher growth.”

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IMF Working Papers

Conflicts and growth: the r&d channel.

Author/Editor:

Publication Date:

May 10, 2024

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Violent conflicts are typically associated with a long-lasting drag on economic output, yet establishing causality based on macro-data remains as a challenge. This study attempts to build causality in the conflict-growth nexus by exploiting within-country variation across industries’ technological intensity. It identifies a channel through which conflicts can impact growth, i.e., by hindering R&D activities. The analysis is based on industry-level data from two-digit manufacturing industries for a large sample of countries over the last four decades. The results show that conflicts lead to a decline in labor productivity growth, particularly in industries with higher technological intensity. The estimated magnitude of the differential effect of conflicts on labor productivity growth in high-tech industries is large. Moreover, the additional labor productivity loss in those industries in the years of conflicts does not seem to be offset in the post-conflict period neither. The findings offer insight into the observed patterns of durable declines in income in the aftermath of conflicts, considering the role of technological progress and innovation in long-term economic growth.

Working Paper No. 2024/098

9798400276569/1018-5941

WPIEA2024098

Please address any questions about this title to [email protected]

• News & Analysis on Food & Beverage Development & Technology

What is next for alternative proteins? Strategies for engaging with consumers, enhancing nutrition and moving beyond nuggets, patties and sausage

10-May-2024 - Last updated on 10-May-2024 at 14:22 GMT

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Joining the FoodNavigator-USA team at Future Food-Tech Alternative Proteins ​ June 17-18 in Chicago ​ will be more than 700 founders, investors and food brands from 42 countries who are pioneering the alternative protein segment and who together will explore how protein diversification can help transform the future of food.

What do consumers want from alternative proteins? ​

As part of a packed agenda, Senior Editor Elizabeth Crawford ​ will moderate on June 18 the session – Consumer Deep Dive: Championing Strategies for Increased Acceptance and Adoption, during which a panel of experts will share strategies to increase awareness and education of the benefits of alternative proteins and explore how to improve transparent storytelling, marketing and consistent nomenclature to effectively influence dietary and behavior change.

Joining her will be Jo Lepore ​, global director, foresight & capabilities exploration at McDonald’s; Suzi Gerber ​, principal investigator, consumer behavior and ESG Investing at Tufts University; Thomas Brennan ​, partner at McKinsey & Company; and Rob Morasco ​, vice president, innovation, at Sodexo Campus.

Together they also will discuss:

• What alternative protein products do consumers want to see on the shelves? How can the sector create trustworthy products that can compete with established incumbent food brands?
• In what ways can the widespread adoption of alt proteins be positioned as an instrumental factor in achieving Net Zero commitments?
• How can the sector leverage consumer segmentation, predictive analytics and big data to anticipate consumer preferences and needs to optimize pricing strategies and personalized recommendations?

A deep dive into the future of seafood ​

FoodNavigator-USA Deputy Editor Deniz Ataman ​ also will moderate on the main stage on June 17 the panel discussion Transforming Seafood: Overcoming Global Challenges to Mitigate a Fragile Supply Chain Through Tech and Innovation. The conversation will build on her ongoing coverage of the diversification of the seafood segment, including a merger between Umami Bioworks and Shiok Meats ​ to scale cultivated seafood production and recent investments in plant-based seafood, including AQUA Cultured Foods and Oshi as well as innovations by Bettafish ​, such as a tuna alternative made with seaweed and fava bean protein.

Joining her will be Lou Cooperhouse ​, founder, president and CEO of BlueNalu; and Mihir Pershad ​, CEO of Umami Bioworks.

They will explore:

• What is the role of plant based and cultivated seafood in boosting the Blue Economy and building resilient seafood supply chains?
• How can alternative seafood manufacturers ensure the consistent delivery of high-nutrient products to meet the growing demand for sustainable and nutritious protein sources?
• What are some of the advances in nutritional feeding strategies that can result in healthier products in the future?
• Considering the current and future challenges to our global seafood ecosystem, how can food technologies such as cultivated seafood provide a superior value proposition to both consumers and customers? How can the alt seafood sector utilize market feedback to further strengthen their product offering?

Where is there room for innovation? ​

On June 18, FoodNavigator-USA Senior Correspondent Ryan Daily ​ will explore what is next for alternative protein in her breakout: Moving Beyond Taste, Texture Mimicry: Why Alt Protein Needs To Innovate Outside the Analogues.

Many alternative protein products on the market currently mimic their animal-based counterparts, but as the market for patties, nuggets and grounds become saturated, industry players need to look beyond taste and texture parity and embrace one-of-a-kind flavor experiences that animal-based protein cannot deliver.

In Daily’s breakout, she will ask:

• How alternative protein companies can find areas of whitespace innovation and create products that are not simply animal-based copycats?
• What type of education will be needed for consumers to try and adopt a new product that they have never seen before?
• What are the market risk and opportunities of creating a product that has never been seen before?
• How alternative protein companies can build a business case for going beyond animal-based analogues to attract investors?

To provide answers and insights will be Miri Eliyahu ​, senior research analyst – food & beverages at Euromonitor, Jamie Valenti-Jordan ​, CEO at Catapult Commercialization Services, Fazeela Abdul Rashid ​, partner at Revolution; and Elysabeth Alfano ​, CEO at Vegtech Invest.

Learn more about the event and register at https://www.futurefoodtechprotein.com/ ​. 

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