The OECD report is in the end unable to solve the puzzle.

The puzzle is important, because our understanding of what takes place in the Norwegian innovation system may have serious repercussions for Norwegian innovation policies. If it turns out that the puzzle is caused by fundamental misconceptions as regards measurements or the role of innovation in the economy, it may even have consequences for innovation policy development in other countries.

The following discussion will present some possible explanations for the puzzle.

Overestimating the role of R&D?

There is general agreement that TFP reflects some kind of innovation related activity, being that interpreted as a result of research, competence development, technological development or innovation. One possible explanation is that both the EU Trend Chart and the OECD Commission put too much emphasis on the research part of TFP.

A large number of the European Innovation Scoreboard indicators are indirectly focusing on R&D, as the word “high tech” refers to companies with high investments in R&D as a percentage of turn-over. To score well for indicators like “high tech manufacturing R&D”, “university R&D funded by business”, “employment in high tech sectors”, “high tech exports” and “patents”, you need a large number of high tech companies or alternatively a few Nokias or Ericssons.

The reason for the selection of EIS indicators may be traced back to a continued tendency in innovation policy to follow a technology push approach to innovation and growth. This means that even if “the linear model” officially died in the early 1990’s there continues to be a belief that R&D driven innovation is more “valuable” than other forms of innovation.

This view is partly also reflected in the OECD report, as it says that: “Part of the puzzle is that the Norwegian economy has all it takes to support large, vibrant and profitable R&D-intensive industries, but possesses relatively few.”

Note the vocabulary used here: “vibrant and profitable R&D-intensive industries”. What if Norway instead possesses “vibrant and profitable knowledge-intensive industries” that are not R&D intensive?

The role of the industrial structure

This figure shows how Norwegian industry is dominated by primary industry. Primary industries here include oil and gas (courtesy of Mark Knell, NIFU STEP).

Indeed, this is the case. Norway has an industrial structure dominated by highly knowledge intensive industries (meaning industries making use of advanced knowledge and technologies) but that do not invest much in R&D compared to some other industries.

The following illustration developed by the OECD illustrates the phenomenon:

If one assumes that all OECD-countries have the same industry structure, then Norwegian industry is the fourth most R&D intensive industry in the OECD. The reason is that if you benchmark each branch of industry separately, Norwegian branches of industry are performing well compared to the rest of the OECD.

A counterargument would be that although Norwegian industry is profitable today, it is dominated by “sunset industries” that will not be able to compete in a more high tech oriented global arena.

Still, there is reason to believe that the World will ask for Norwegian fish, oil and gas also in the future. And, if the OECD report is correct in its assumption that Norwegian companies are “very apt at taking advantage of existing technological opportunities and translating them into greater efficiency,” then they are – in fact – innovative and competitive.

It should also be noted that the most referred to indicator for innovation in the EU, R&D as a percentage of GDP, is highly problematic also for other reasons. The Norwegian GDP is “too big”.

Johan Hauknes made a calculation of what the R&D percentage of R&D would be if Norway had had the same economic growth as Sweden? The answer is 3 percent according to this calculation.

Underestimating the amount of R&D

There is another possible explanation for the Norwegian puzzle that may seem to weaken the argument given above. What if Norwegian industry underreports its investments in R&D? What if the Eurostat numbers are wrong?

The argument goes like this:

Many Norwegian firms focus on tailor-made products and services, and not mass-production. In a car or mobile phone manufacturing company it is relatively easy to identify what is R&D and what is not. The production process is not R&D.

When you develop a unique sub sea drilling platform, however, or develop the mobile phone network of Bangladesh, a significant proportion of that activity is in fact developmental work, even according to the strict definition of the Frascati manual.

Based on discussions the Research Council of Norway and Innovation Norway have had with large companies like Telenor and Aker Kværner it seems likely that these companies do not report these developmental activities as R&D to the Bureau of Statistics. Instead they focus on the activities taking place in designated R&D units, and these activities are becoming less and less important in these companies.

This will obviously not pose a benchmarking problem if companies in all countries misreport their activities in this way. Still, we have no reason to believe that they do, and even if they did, with the industrial structure of Norway this skewing of data will have a much larger effect than in many other countries.

The Research Council of Norway and Innovation Norway now plan a study of this phenomenon in order to get a more correct picture of Norwegian R&D investments.

However, to give the reader an idea of possible consequences, we would like to draw attention to the fact that the development of the Ormen Lange field in the North Sea is estimated to NOK 60 billion. In comparison Norwegian industry now reports R&D investments of NOK 13 billion annually. Admittedly not all of the 60 billion invested in Ormen Lange will be R&D, but even a small proportion of unreported R&D may change the overall national picture.

In other words: It might be that Norwegian industry is R&D intensive after all.

Other types of innovation

If we abandon the strong R&D focus, and instead take all types of learning and innovation into consideration, one may make the following argument:

Even if we accept the premise that Norwegian companies do invest relatively little in R&D, they do invest in other forms of competence development, including the active use of new technology and machinery and of highly educated manpower.

A Norwegian fishing boat may serve as an example for the active use of technology developed elsewhere. The fisherman is not very R&D intensive, but the ship he makes use of is filled with advanced technology, including GPS, radar, sonar, radio communication, satellite phone etc. etc.

Many Norwegian companies make use of other forms of learning as well, for instance based on customer/supplier relationships, “old boys and girls networks”, conferences etc.

Moreover, many Norwegian firms focus on incremental process innovation instead of radical product innovation. Process innovation is not part of the composite indicator set used by EIS.

Finally, it could also be that many Norwegian companies, like – for instance – the ones found in the food and furniture industries, focus more on marketing, branding or design than in-house R&D.

In the service sector we find a large number of companies that do no R&D, and that even find the term research “alienating” . They do innovate though, presenting new business concepts, making active use of ICT, and following (or even leading) current fashion trends.

A disciplined macroeconomic policy

This is not an unknown argument, but it should be stressed that Norwegian macro-economic policies must have had a positive impact on innovation. Norway has avoided the “Kuwait-syndrome” and an overheating of the Norwegian economy, due to a very sober and disciplined economic and fiscal policy.

The economy has also been opened to strong international competition. Competition is indeed the mother of innovation, as it allows companies that do not perform adequately to die, and thus allowing its human resources to move to other parts of the economy.

The main exception to this rule is the agricultural sector, but in this respect Norway is no different from other European countries.

Socio-cultural framework conditions

Another possible explanation for the Norwegian puzzle may be found in socio-cultural framework conditions. This is an area where we have few, if any, indicators and our analysis must therefore be based on qualitative research and more or less well grounded hypotheses.

Still, it is reasonable to believe that the following factors have strengthened the innovative capability of the economy as a whole:

• Social stability, which allows planning.
• An egalitarian culture which allows disagreement and discussions.
• Positive attitudes towards cultural diversity and entrepreneurship.
• A strong welfare system.
• A just and predictable judicial system.
• Low crime rates and not much corruption.
• Relatively transparent regulatory frameworks.
• Low technology thresholds: People make active use of new technology (PCs, mobile phones, the Web etc.)
• Reasonable tax levels (considering that the public sector cover expenses that the companies would have to carry themselves elsewhere).
• A fairly efficient public sector.

Currently there is a discussion in Norway (and elsewhere) regarding “the Nordic model”. The Nordic Model has been presented as “the third way”, meaning an alternative to Anglo-Saxon liberalism and French social conservatism.

One possible historical explanation for the Norwegian model can be presented as follows:

Since the 1930s there has been a strong political drive towards upwards social mobility in Norway. This philosophy is rooted in social democratic thinking, but is also accepted by most moderate parts of the political spectrum.

This means that there is not the same distance between the social and political elite and “the common man” as in many other societies. This makes it easier for most people to take active part in social processes and voice disagreement.

An important part of this social policy has been to raise the level of education. Not only is the ideal that everybody should be guaranteed work; education at the first and secondary levels is free, on the third level strongly supported by the state.

If we accept the idea that education is more than acquiring specific skills (specialization), and that it is also a matter of “learning to learn”, then the fact that large proportions of the populace has secondary education and that university and college participation is among the highest in the world, may explain some of the flexibility of the Norwegian economy. People can more easily move from one company or institution to another.

This means that the fear of unemployment is not that acute, which again means that the labour organisations may more easily accept that some companies go under or applaud the international orientation of the economy.

The social policy has led to relatively high wages for unskilled labour. This, combined with the high educational levels, encourages innovation. Companies look for ways to replace expensive labour with automation (robots in industry, automats in parking lots, Web based banking etc.)

This innovation frees labour that can be used in more high skilled and profitable activities.

This innovation also gives Norwegian companies an advantage on international markets vis-à-vis companies in countries that continue to have a large and cheap social “underclass”.

This presentation is not meant as the last word in the debate on what explains the success of the Norwegian economy, but does illustrate the complexity of social and economic systems of this kind.

Conclusion

The explanation for the Norwegian puzzle is probably not found in one of the hypotheses given above, but in a combination of these and others. This underlines the need for a broad-based innovation policy that takes looks at both macro-economic and micro-economic phenomena and that also takes broader social and cultural factors into consideration.

Although it is far too early to make any final conclusions, some “lessons” are becoming clearer:

• Unless the Norwegian industry’s underreporting of R&D is dramatic, one has to go beyond research to understand what learning and innovation in these companies is about.
• The centre of attention should move from the production of inventions and ideas to the use of knowledge. The learning capacity of a firm (its absorptive capacity) is of essence.
• Research is as important as ever, but it should not only be understood as a factory for inventions. Research is also a tool for learning. “Failed” R&D projects may be “successful” learning projects if the competence building involved helps the company solve important problems later.
• Learning and innovation are based on knowing where to find, how to understand and how to make use of knowledge. Access to competences is important, and hence also the interactions in the innovation system.
• Competition is important. The goal must not be to save every company, but to encourage competition that allows the weakest companies to go under and the innovative ones to thrive.
• The quality of human resources is important, but this quality is not restricted to educational levels or work experience. It is also a matter of cultural attitudes, and the individuals’ ability and will to change behaviour.