Make Innovation Great Again: Creative construction and destruction of energy innovation

In 1841, ‘The National System of Political Economy’ was put forward by Friedrich List attempting to explain how Germany could overtake England in industrial development.[1] National competition and attempts to understand this competition have a long history. Today, one of the many ways this is expressed is in statistical analysis and case study research. The latest example is the Global Innovation Index 2018 which focuses this year on energy innovation. The report provides a robust account of how nations innovate and in one sense, how nations beat other nations at the innovation game.[2]

What I like about the report is that innovation in the energy sector is viewed as a driving force that must save the world from climate change. This is why the topic of innovation holds such power over the energy sector: Just maybe we hold the keys to prevent our own demise. To improve our ability to prevent the destruction of the Earth and of the human race, we must innovate. An innate desire to improve our living by harnessing ideas and technologies. Nations innovate and compete. Those that do not stagnate and decline. Those that erode the means and complex interactions speed their demise.

The Global Innovation Index (GII) project was launched by Professor Dutta at INSEAD in 2007 with the simple goal of determining how to find metrics and approaches that better capture the richness of innovation in society and go beyond such traditional measures of innovation as the number of research articles and the level of research and development (R&D) expenditures (pg 55).

In one sense innovation got us into this environmental mess. The inventions that produced steam power, harnessed coal and facilitated mass transportation created more and more CO2. We must now redevelop our global energy system to prevent further environmental destruction. What makes the topic of innovation so exciting is it brings together issues of economy, society, politics and the environment. We must find new ways accelerate and foster innovation to deploy new technologies and reduce the use of natural resources.

The Global Innovation Index 2018 attempts to highlight the winning areas and combination of factors that facilitate energy innovation. The report provides both a global snapshot of technology trends and detailed case studies of how countries and companies drive and use innovation to transform the energy sector.

The GII 2018 provides an effective snapshot of the structure that surrounds the energy sector (see below). There are two primary categories, ‘Innovation Input’ and ‘Innovation Output’. The first includes, institutions, human capital and research, infrastructure, market sophistication and business sophistication. The second, of outputs, is focused on knowledge and technology outputs in the creative process. These factors are measured and mapped to produce a scoreboard of success (and failure). The report emphasizes successful examples, but it’s important to also take the inverse view of see those that don’t or choose not to succeed.

Figure 1 Inputs and Outputs for Global Innovation Index (source: Global Innovation Index 2018)

 

On the successful side, the ultimate goal of all this coordination and cooperation is to build successful clusters of industries where, as Freeman[3] finds references to 1890 when observations of “the secrets of industry were in the air”. Likewise, the GII 2018, has a special section on clusters identified by patent filings and journal publications, these outputs represent the agglomeration of other innovative factors that lead to the outputs (see above). These inputs and outputs based around academic and industry cooperation are important for a country’s standing in the global innovation index.

Making countries worse

On the unsuccessful side – in an inverse example, if a country wanted to become less competitive and less innovative than other countries in its category or neighboring countries, it would seek to shut down and kick out institutions and people that file patents and publish scientific articles. By contrast, if a country wanted to increase its ranking as an attractive and innovative place with a cluster of innovation – where “the secrets of industry were in the air”, then it would seek to attract and build strategies and implement policies to increase the number of people carrying out these activities in their country.

France and French President Macron’s appeal and invitation to scientists after US President Trump’s assault on climate change research is an example of a country actively building up its economy. Hungary’s Prime Minister Orban kicking Central European University (CEU) out of the country or shutting down gender studies programs is an example of a country choosing to become less competitive and innovative and choosing to become closed minded and static 🙁 . Underscoring this example is that if CEU moves to Vienna then all the journal publications would be counted in the favor of Vienna and Austria (ranked 66th) which already has a strong identifiable cluster of innovation. Budapest is not even on the global list, while regional peer Warsaw is ranked 98th. (see map below and pages 204-207).

Innovation clusters and public policy and politics go together taking decades and centuries to develop. If a country or city wants to become an innovation hub and foster a more dynamic economy, then it needs to facilitate an innovation focused local environment (it’s not lost here, that the Orban government has also taken funding away from the Hungarian Academy of Sciences – thereby preventing it from excelling like it’s Polish peer)

Figure 2: Map of Innovation Clusters in Europe (Source: Global Innovation Index 2018)[4]

Politics Trumps Innovation?

Warsaw’s 98th place in the cluster ranking and the Polish Academy of Sciences as the top scientific organization (near 20% of publications), as identified in the GII 2018 report, is notable for the only location and organization in Eastern Europe (outside of Russia) to be in the top 100 (ahead of two Chinese cities). Creating the environment for top performance of a city or region requires not just industrial engineering output, but as the report states, input from the creative industries.

As Freeman identifies, “List’s clear recognition of the interdependence of tangible and intangible investment has a decidedly modem ring. He saw too that industry should be linked to the formal institutions of science and of education.”[5] Freeman quotes List:

“There scarcely exists a manufacturing business which has no relation to physics, mechanics, chemistry, mathematics or to the art of design, etc. No progress, no new discoveries and inventions can be made in these sciences by which a hundred industries and processes could not be improved or altered. In the manufacturing State, therefore, sciences and arts must necessarily become popular” (my emphasis).[6]

Clustered innovative regions and cities go together with open mindsets and fostering of relations between universities and industries. A recent conversation with Professor Andreas Goldthau highlighted this Macron initiative to both attract scientists to France and solve the world’s environmental problem.

President Macron’s speech, now labelled as the “Make our Planet Great Again” has put serious money into the initiative. France put up €30 million and Germany €15 million, Professor Andreas Goldthau is benefiting from this Franco-German partnership. He is now developing a research project to examine the impact of the energy transition on the global south. Countries that want to be competitive invest in innovative ideas in areas of education and industry to tackle are most pressing societal and environmental needs. Countries that deny or ignore these issues fail to innovate in meaningful and impactful ways that improve the lives of their own citizens and those around the world.

” Societies that manage to create or attract critical masses of talented people (inventors, entrepreneurs, scientists, engineers, researchers) and give them the tools and environments to be creative have, in the long run, come out ahead.”

Peter Engelke

The GII 2018 is a great example of how nations compete in the area of innovative energy technologies and solutions. At a deeper level, the leaders in the field demonstrate the impact decades of building up institutions and cooperation between industry and academia. The connections are not always clear, but open societies where arts and free thinking are allowed flourish, in turn they benefit the industrial output of nations. This mindset and public policy make economies grow for the benefit of societies. Conversely, politicians like Trump and Orban that attempt to control academic output and thought push the human drivers of any industrial complex out or away from elevating a nation’s innovative eco-system to a new level. Better design, better social engagement are stamped out by the political machine that only is focused on elusive industrial output.

As Freeman states[7], just because the Soviet Union put greater resources into R&D didn’t guarantee better innovation, qualitative factors affecting the national system of innovation also are at the heart of a countries industrial output. Gas pipelines and nuclear plants feed industry, but it is the social scientist or artist that develop or influence social policy to ensure industry benefits society. It is the job of the politician to create the environment for these two spheres to come together for the benefit of society and the planet.

References

[1] Freeman, Christopher. “The ‘National System of Innovation’ in Historical Perspective.” Cambridge Journal of Economics 19 (1995): 5–24.

[2] Dutta, Soumitra, Bruno Lanvin, and Sacha Wunsch-Vincent, eds. “Global Innovation Index 2018: Energizing the World with Innovation.” Cornell SC Johnson College of Business; INSEAD; WIPO, 2018. https://www.globalinnovationindex.org/home

[3] as cited from Foray 1991; Freeman, “The ‘National System of Innovation’ in Historical Perspective,” 9.

[4] Dutta, Lanvin, and Wunsch-Vincent, “Global Innovation Index 2018: Energizing the World with Innovation,” 202.

[5] Freeman, “The ‘National System of Innovation’ in Historical Perspective,” 6.

[6] List 1841, cited by Freeman, 6.

[7] Freeman, 12.

Misdirected US Sanctions for Nord Stream 2: Empower European consumers instead

The US is getting ready to impose sanctions on Russia and companies building the Nord Stream 2 pipeline, running between Russia and Germany under the Baltic Sea. According to the Wall Street Journal, the US is aiming sanctions against firms and banks building and financing the construction. This would affect European based firms as well. The imposition of sanctions is a blunt and weak tool for the US to exert its influence over European energy policy. In particular, a limp response to extract Eastern Europe away from Russia’s leverage over European gas supplies.

There are two divisions in Europe over Nord Stream 2. The pipeline is opposed by most East European countries taking delivery of Russian piped gas through the Soviet era gas system. It will enable Ukrainian transit to be discontinued, resulting in higher priced gas shipped from Germany to be delivered to the Central Eastern European (CEE) region. The former Eastern bloc countries vehemently oppose the construction (except for Hungary, which weakly does – but as a enabler of Russian policy in NATO, the EU and the world, we shouldn’t be surprised).

The German argument for the expanded pipe, is Germany (and Austria) have been buying Russian gas since the Cold War. This co-dependency attempts to exert some financial influence over Russia by enabling important market access to West European markets. In addition, energy relations provide important areas of cooperation and relationship building between countries. The resource of gas and the pipelines provide an important area of cooperation between countries.

The US government is attempting to interfere in this relationship. This is consistent US policy. President Reagan imposed export restrictions on US technology for compressor stations used to build the original pipelines from the Soviet Union to Germany and Austria. This slowed down the building and operation of the pipelines (the Soviet replacements kept breaking down), but it did not stop it. Potential US sanctions will have the same effect. They will slow down but not stop the energy relation between Russia and Germany – or the EU perspective supporting Nord Stream 2. In fact, due to the deteriorated relations between Trump and Merkel, US opposition will only reinforce German (and French) support for Nord Stream 2.

The US opposition is self-serving due to the attempt to increase LNG exports to Europe. Consistency in policy is apparent in this, but so is the self-interest to increase US LNG exports to Europe. Which is a bit short sited, since LNG is market based and only limited bilateral relationship can overrule market prices to force countries and companies to take US gas. US LNG must still be globally competitive for European firms to buy and trade US gas over other LNG sources or against Russian pipeline gas.

A view from the deck of the LNG regasification ship (FSRU) Independence sitting in the harbor in Klaipada, Lithuania

If the US move is a geopolitical gesture to ensure the CEE region, from the Baltic states to the Hungary continue to have gas deliveries via Ukraine – and bring in transit payments to Ukraine, then the US should build a new energy strategy directed at the CEE region. One of the reasons I’ve stopped writing about Russian pipeline politics is the palm on the face idea of ‘why should we even use Russian gas?’ US policy should be directed at diversification of CEE energy technology and resources. The goal should be to reduce the need for Russian gas and use alternative American (or European) energy technologies.

Obviously, this includes supporting and encouraging the building of LNG facilities. The LNG terminal in Lithuania is a great example of diversification that erodes Russian leverage over the country and places Russian gas on a market basis with LNG. The US support for the Krk LNG terminal in Croatia is also a long standing one. LNG, just as US shale gas and hydraulic fracturing technology is also obviously self-serving examples of US attempting to export technologies and services to make money. It has a hegemonic ring to it. With the CEE region already balancing EU energy market rules with Russian resource dependency, US gas exports add an extra layer of complexity which only deliver superficial moral support to the idea of gas diversification.

Instead, the US needs to more actively engaged across the whole energy system. The EU has already linked the idea of energy security to energy efficiency and innovation. In the Energy Union, the core tenet for diversification and increase of security of supply is to create a competitive integrated energy market. Investment into energy innovation (as broad and undefined as this is) is a priority. Energy efficiency measures are also pushed on countries. However, policy implementation compared to the huge scale of needs is a drop in the bucket.

Sixty-eight percent of EU imported gas is used in the heating sector, according to the European Commission. If the US wants to counter Russian influence in the CEE region, then it needs to address directly what matters to the region’s politicians and citizens. Heating bills hold a direct leverage over political decision making. A disagreement with Russia holds the potential to aggravate and increase the price of gas – and heating. Lithuania directly challenged Russia and was met with higher import prices compared to its Baltic neighbors. The answer of Lithuanian politicians and business community was building up a biomass heating industry, from forest to city. A plethora of existing (US) technologies exist to alter and lower heating bills. From solar water heating to energy efficiency measures.

Importantly, the US should engage financially with consumers in the CEE region. The US government should invest through international financial institutions, such as the European Bank for Reconstruction and Development (EBRD) and private national and regional banks, to create a ‘green’ fund for consumers to borrow or receive grants to modernize their heating (and cooling) systems. EU and national institutions are failing to make an impact in this area. The US has an opportunity to build on EU policy initiatives and through a simple financial engagement go directly to the consumers of Russian gas. Rely on the already established financial system and infuse the region with the financial resources necessary to diversify and reduce the demand for Russian gas.

The cherished ‘masonry heater’

I can speak from my own personal experience attempting to renovate my flat and install a new electricity and gas central heating system. There is government and private bank financing available, but both the terms and complexity of getting it and paying it back can be difficult for the average consumer. My main heating unit sitting in the corner of the living room dates to 1925, when the building was built. My solidarity with the average CEE citizen is deeply felt in the wintertime. There is a lack of practical and affordable funding to modernize both individual flats and buildings (as I also know with my neighbors, as retired residents are unable to take out loans).

If the US is serious about countering Russian influence and re-engage with the CEE region then they should engage financially. For example, my simple idea is to set up a €1 billion fund for the CEE region to be distributed through private banks where a mortgage and home energy improvement loan can be distributed together. The idea of how this funding facility could work is not original nor difficult to implement. The financial risks are very small for funders. But if imported gas and the politics behind it are such an issue, than reducing this dependency at the source of demand needs to be done. The other advantage of working directly with commercial banks, through international financial institutions, local politician can be avoided who have a strong track recording of stealing and misdirecting funds (Hungary, again is a very good example of this).

A €1 billion investment is certainly less complex than sanctions and enforcement of these on European financial firms. Why €1 billion? It can be more, but invest a sufficient amount that begins to change consumption patterns and puts a dent into gas consumed for heating purposes and reduces the social pressure on politicians to ensure good relations with Russia exist just to assure low energy prices in the CEE region. But by all means, find a way to avoid the dirty hands of politicians. Incentives banks that must comply with international oversight.

Avoiding the pitfalls of politics enables a direct connection to the people and undermines politicians maintaining the status quo with Russia. Hungary’s close relation is an example of a country ideologically aligned with Russia’s interests. It also must keep gas prices low to prevent social pressure for political change. Economically, the Hungarian regime is dependent on Russian energy prices. Hungarian consumers are forced by the government to maintain their serfdom to Russia through gas prices. Relieving this price pressure reduces Russia’s political leverage in the CEE region.

US interests in the CEE region should extend beyond LNG exports and terminals. The US should draw on its established strength in financial markets and begin to engage directly in the CEE region through energy investments. Reagan attempted to prevent the expansion of Soviet and Russian gas in Europe. Gas geopolitics will not go away. The US can work to undermine the long term impact gas prices have over European consumer and politicians. Constructive engagement through construction and renovating heating systems holds a larger policy impact than sanctions.