1 The innovation system in the telecommunications sector A comparative approach: France – South Korea David Flacher, Cédric Durand, Romain Lestage Paris.

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The innovation system in the telecommunications sector

A comparative approach: France – South Korea

David Flacher, Cédric Durand, Romain LestageParis 13 University

CEPN (CNRS UMR 7115)

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Main issue

Is the French institutional context favorable to telecommunications industry and IT development ?

The dynamics of innovation can be explained by many characteristics of the environment such as: Institutions including

Routines, conventions, rules, types of governance More « established » institutions, organisations…

National and international context History (and thus technological path)

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Content of the presentation

1) Stylized facts: divergences in terms of performances between Korean and French ICT sectors

2) Can these stylized facts be explained by the trajectories of the National System of Innovation (NSI)?

3) Do the French and Korean NSI fit well fit well for the development of the telecommunications and IT sectors?

4) Conclusions et perspectives

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1- Divergence between France and Korea : stylized facts

1st stylized fact Infrastructures and usages are more developed in Korea than in

France Exemple: Broadband subscription in 2006 (OECD)

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1- Divergence between France and Korea : stylized facts Broadband subscription on mobile phone in 2005

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1- Divergence between France and Korea : stylized facts

Web 2.0 (blogs by languages in OECD countries in 2006)

E-government…

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1- Divergence between France and Korea : stylized facts

2nd stylized fact Innovation (particularly hardware innovation) is more dynamic in the

Korean telecommunications sector

Exemples Patent registrations

Triadic patent families (OECD)

• Parallel patent applications in the USA (USPTO), EU (OEB) and Japan (JPO) patents offices

• Induces a selection of the main innovations in order to lower the bias due to national applications

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1- Divergence between France and Korea : stylized facts

Innovation is more oriented towards ICT in Korea

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1- Divergence between France and Korea : stylized facts

3rd stylized fact Equipment manufacturers are at the core of the Korean ICT strategy

Exemples Share of ICT manufacturing in the total value added of manufacturing

sectors (OCDE, 2008)

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1- Divergence between France and Korea : stylized facts Strong and improving position of Korea in ICT

international trade

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1- Divergence between France and Korea : stylized facts

4th Stylized fact France appears to be in a better

position for services

(with the exceptions of games, mobile TV and e-payment)

(Lee & Chan-Olmested, 2004)

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1- Divergence between France and Korea : stylized facts

Services exportations (OCDE, 2007) :

147Software

195Communications services

3011Computer and information services

KoreaFranceRank

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1- Divergence between France and Korea : stylized facts

In short Opposite paths in France and Korea in the 1990’s

France position becomes weaker in the international competition In the ICT manufacturing sector In the associated innovation In ICT exportation

Rapid improvement of Korea’s position in the same fields and in the diffusion of usages

This suggests that there is a cumulative relation between on the one hand manufacturing development and, on the other hand, infrastructures deployment, innovation and the diffusion of new usages(it also suggests that services do not necessarily play a central role).

To what extent divergence between the trajectories of French and Korean National Systems of Innovation could explain such divergent paths?

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2- National systems of innovation trajectories as an explanation

Three historical periods After world war II

State-led Innovation System (IS) in France and in Korea

Since the 1980’s Divergent IS paths in a context of economic

liberalization

Since the end of the 1990’s Reconfiguration of IS in a context of liberalization of

the telecommunications industry

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2- National systems of innovation as an explanation

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2- National systems of innovation as an explanation

Identification of strategic sectors and “Grand Projets”

Coordination mixing private/public entities: Public banks, planning

commission, incentives (loans, subventions, public orders, supports for exportations…)

Grandes écoles (with high level of selection)/Universities strong public/business

networks based on a common educational background of the elite

CNRS (basic research) / Specific labs for applied research (CNET, CEA, CNES)

Outcome Constitution of world-class national

champions; Building of significant technological

advantages for the country as a whole.

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2- National systems of innovation as an explanation

Autonomy (technological take off, substitution of importation), employment and growth

Method Promotion of exportation and

limitation of importations Big family owned firms (chaebols) but

depending from the State Massive investment in

Primary and secundary education (in the 1950’s and 1960’s)

Resarchers education (in the 1970’s) through the creation of national institutes

Technological catch up (but not yet innovation driven system) Reverse engineering, partnerships

(USA), specific equipments Applied research for the development

of local solutions (substitution) Restriction of FDI Independent

management and push Korean firms to develop their own techniques.

Outcomes Rapid industrialization (through assimilation of

foreign technological capabilities) First generation of high profile researchers and

engineers

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2- National systems of innovation as an explanation

Advantages Long term investments Significant outcomes (in sectors like railway, airspace, electricity,

telecommunications…)

Limits Anticipation of changes is more difficult since the elite (in France) and

the chaebols (in Korea) are not specialized enough SME are not really taken into account The system does not fit well with bottom-up innovation

Small scale, flexible and decentralized types of innovation and of innovative firms

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2- National systems of innovation as an explanation

Second period: since the 1980’s

In France Dislocation of the IS which implies

State has lower control on the big firms R&D public expenditure turns down (and public institution de-

specialization) Interruption of the main industrial programs Development of European policies (and of the EU market)

Economic situation: Development of finance-led capitalism (relying on market funding and on

shareholder value maximization) Liberalization, privatization et internationalisation of firms ownership Slowing down economic growth

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2- National systems of innovation as an explanation

In Korea, since the 1980’s R&D is getting more and more self-governed by firms (in a

context of economic growth) Firms expenditure for R&D is growing fastly Creation of research labs networks (including foreign labs) and reverse

brain drain of Korean researchers previously installed abroad

Institutional evolution adequate to changing strategy From learning and catching up approach … to technological accumulation and innovation

State remains active and voluntarist Public funding and fiscal incentives for the firms Important R&D public programs at the technological frontier Growing public expenditure for higher education Public institutes

Concerning R&D strategic fields (both basic and applied resarch) Working with private firms (ETRI…)

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2- National systems of innovation as an explanation

Main outcomes: R&D expenditures (as a share of GDP) (OECD, 2008)

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2- National systems of innovation as an explanation

Patent applications (OECD, 2008)

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2- National systems of innovation as an explanation

R&D public expenditure (as a share of GDP) (OECD, 2008) :

importance of military expenditure (mainly nuclear ones) in France

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2- National systems of innovation as an explanation

Third period: since the middle of the 1990’s

In France Deep transformation of the IS

From a vertical (i.e. sectoral) to an horizontal approach Towards a regional (territorial) approach From top-down to bottom-up approach

In Korea IS more and more driven by private firms Reconfiguration of ministries.

Funding research more and more through projects rather than through lump-sum system

Creation of « research councils »in charge of planning, funding and assessing public labs

Creation of technological regional clusters

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2- National systems of innovation as an explanation

Advantages of a de-verticalized and territory-oriented approach: Fits better with applied research and patent applications Fits better with small and/or decentralized innovations

Limits Research leading to short term profitability is privileged reduction of public researcher's autonomy => restraint for

creativity and initiative Constraints due to « Project » organization (administrative tasks…) Low public expenditure (in terms of jobs and lump-sum financing)

Possible State initiatives are more limited

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2- National systems of innovation as an explanation

Summarizing Strong divergent paths between French and Korean

IS… France

Stagnation of R&D effort dramatic reduction of state-led intervention in technological

development Korea

Growing efforts and initiatives in terms of R&D Shift from Learning System towards Innovating System

(defining strategic fields of intervention)

… even if common trends can be pointed out Liberalization and growing space for private initiatives R&D more and more oriented towards shorter term

applications but Korea is resisting better to those trends

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3- Innovation systems: ICT and telecommunications

general context since the mid-nineties Liberalization of the telecommunications industry Strong ICT growth

In brief The Korean IS is quite consistent… … while French IS is characterized by a « multi-sided

institutional dualism »

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3- Innovation systems: ICT and telecommunications

In Korea Fostering competition… … but competition is consistent with innovation and

industrial policies No independent regulator of the telecommunications industry

KCC depends on the Ministry of Information and Communications (MIC) and will be merged with KBC (in charge of contents)

Governmental agencies (depending on MIC) implement political priorities: Defining policies (KISDI). Organizing public/private R&D partnerships (ETRI) Managing and financing innovation (IITA)

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3- Innovation systems: ICT and telecommunications Strategic and important orientation defined by the State

For the operators: Promotion of facility-based competition (this policy was helped by the

high density of the population)

« no » unbundling of the new infrastructures Infrastructure : allows technological differentiation Unbundling only on previous generation infrastructure in order to

push competitors to adopt new techniques For equipment manufacturers

Limitation of FDI during a large period Public investments, support for « national champions », incentives to

develop ICT manufacturing sectors (See the exemple of WCDMA et CDMA 2000 licensing)

Development of local standards in order to protect the national market

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3- Innovation systems: ICT and telecommunications

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3- Innovation systems: ICT and telecommunications

Exemples of programs KII (started in 1995, already ended)

IT 839 : 8 services, 3 infrastructures et 9 technologies (in progress) Large ICT education programs, research…

Aims Higher GDP per capita Employment Position Korea on strategic fields (for international competition)

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3- Innovation systems: ICT and telecommunications

In France Multi-sided institutional “dualism” between

a) institutions in charge of competition and institutions in charge of innovation b) national and european institutions c) even between contents and telecoms regulations

a) In the mid-nineties: liberalization of the industry France Télécom (DGT) is loosing its position at the top of an « industrial

hierarchy »With its own advanced research center (CNET) and stong partnerships with

equipment players (Alcatel et Thomson), research centers and « universities »

Creation of an independent NRAwith the main goal of developing competition(considered as the way to improve efficiency)

This independant NRA may induce counterproductive effects on innovation and thus dynamic efficiciency. Why ?

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3- Innovation systems: ICT and telecommunications

Specificities of sectoral regulation in France

Asymmetrical regulation in order to favor the entrance and the development of FT competitors

Three ideas FT retail prices should be too low ( prevent « squeezing ») Wholesale prices not to high (cost oriented and non discriminatory

prices)( resale of FT services and development of competitors market shares)

Favoring « ladders of investment » climbing for competitors Progressive replication of networks Tools: bitstream access, unbundling…

Asymmetrical regulation should then disappear (and should be replaced by the only application of competition law)

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3- Innovation systems: ICT and telecommunications

Main outcomes Lower incentives to invest

Into new infrastructures For the incumbent (which value option “invest” into new techniques

is reduced by the possible unbundling of its NGN) For the competitors (unbundling can be a better solution than

investing)

Into R&D Reduction and transformation of R&D effort by operators (FT)…

Lower effort: From 3.5% of the revenue in 1997 to 1% in 2003 (according to OECD)

R&D more oriented on short term applied projects and services equipment manufacturers are realizing a part of R&D previously

realized by FT but equipment manufacturers R&D and public R&D spending do

not compensate the lower efforts of FT

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3- Innovation systems: ICT and telecommunications

The two other important institutional dualisms

b) between national and european institutions

This is true both in terms of Pro-competitive sector specific regulation Innovation policies

Sprinkling european fundings dedicated to R&D No clear industrial strategy at the EU level (public orders, national

specializations…)

c) between contents and telecoms regulations Digital dividend and convergence in the ICT ecosystem should

induce more coordination

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3- Innovation systems: ICT and telecommunications

While in Korea… Sector specific institutions are all depending on the ministry (MIC)

(which can coordinate competition and innovation oriented policies)

Able to gather stakeholders around a common strategic vision

The priorities are implemented through coherent incentives to innovate and to invest with a medium-long term perspective(with the risk of an excess of investment?)

This vision gathers a top-down and a bottom-up approach thanks to MIC coordination This support from MIC to innovation can get the upper hand on pro-

competitive policies. Conversely, pro-competitive policies are mainly guided by innovation

and investment logics.

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4- Conclusions et perspectives Divergent paths in terms of performances between countries

Looking for explanations in the institutional arrangements (at national and sectoral levels) Institutional consistency in Korea Multi-sided institutional dualisms in France

competition/innovation France/UE Telecommunications/content…

In France, these institutional dualism reinforce the negative effects that results from the change in the governance of the IS (de-verticalization and

bottom-up approaches)

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4- Conclusions et perspectives

The regulator should thus take more into account innovation problems instead of

only fostering effective competition understand that fostering competition is one of many other tools be in charge of an industrial and innovation policy (which is not

the case for the moment)

In France, the regulator (ARCEP) seems to be more and more interested by investment and innovation but…

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3- Innovation systems: ICT and telecommunications

ETRI fields of interest