Fuelling Creativity: Innovation, Participation and Entrepreneurship

A discussion paper prepared for the Canada Roundtable on the Future of the Internet Economy
Ottawa, October 2, 2007

Don MacLean
Associate, International Institute for Sustainable Development

The views expressed in this paper are those of the author, and do not necessarily represent the views of Industry Canada or the Government of Canada.

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Introduction

The purpose of this paper is to facilitate discussion and stimulate debate on one of the key themes on the agenda of the June 2008 OECD Ministerial Conference on the Future of the Internet Economy.

The task facing OECD Ministers is to design and coordinate policies that will help guide the development of the Internet economy so as to maximize opportunities for businesses, public service agencies, civil society organizations, and citizens in OECD countries to address effectively the economic, social and sustainability challenges they face in the medium- to longer-term.

The Roundtable provides an opportunity for stakeholders to provide input that will help develop Canada's position for the OECD Ministerial on the theme "Fuelling Creativity: Innovation, Participation and Entrepreneurship".

Context

The concept of creativity is often thought of in conjunction with the products and services of the arts, entertainment and media sectors. In the framework of the OECD Ministerial it also covers a wide range of other topics including

• scientific discovery
• technology research and development
• product, service and process innovation in all business sectors, in government, and in public services
• business and social entrepreneurship
• increasingly, the activities of Internet users (both individuals and organizations) as creators of products, services, and content

Policies that support and stimulate creativity in all these different areas in ways that enhance economic productivity, competitiveness, and sustainability are one of the keys to the prosperity of OECD countries in the Internet economy. There are three long-term strategic challenges driving this policy imperative.

• Economic challenges arising from changes in the structure of the global economy that are providing new business opportunities but also putting increasing competitive pressures on OECD countries on a wide variety of fronts – in particular, the challenges derive from the rise of China, India and other new economic powers that are moving up the value chain in the manufacturing and service sectors; becoming significant generators of innovation; emerging as important markets for goods and services produced elsewhere; placing increasing demands on global supplies of energy and natural resources; and becoming major players in international trade and commerce as well as important targets for investment and sources of capital.
  
  
• Social challenges arising from the changing demographic profile of OECD countries and the new learning and skill requirements their populations face as a result of changes in the global economy and the rise of the Internet economy – in particular, the increased productivity that will be needed to support the health care and other social needs of an aging population, as well as to improve education and training to meet changing job requirements, foster creativity, and more effectively develop and deploy the skills of the immigrants who make up an increasingly important part of the work force in many OECD countries.
  
  
• Sustainability challenges arising from the need to reconcile continuing economic growth and attendant demographic changes with finite physical resources – in particular, with the preservation and protection of the natural environment; more efficient use of energy and natural resources; the prevention and mitigation of natural disasters; and the effective management of the security issues resulting, at least in part, from increasing competition for scarce natural resources.

The Internet has a number of essential attributes that distinguish it from previous communications media and help make it a tremendous platform for supporting the broadly-based scientific, economic, social, and political creativity that will be needed to respond successfully to these challenges.

These attributes derive from the Internet's original design and the culture that grew up around the development and use of the Internet during its formative years. They are based on an architecture that supports all forms of communication and maximizes the role of end users in the communications process. This architecture enables creativity to take at the edges of the network and facilitates direct, end-to-end communications among users – thereby fuelling product, service and process innovation, particularly as the power, capacity and intelligence of the information processing and communication tools available to users increases.

In the 15 years since the invention of the World Wide Web and the development of browsers began the process of transforming the Internet into a widely-accessible public communications medium, we have seen significant examples of Internet-enabled creativity in areas as diverse as B2B and B2C e-commerce, e-science, e-government, e-health, e-education, and e-living.

Less visible to the general public but arguably more significant have been the private applications of the Internet and other information and communication technologies (ICTs) made within private and public organizations to improve operational efficiency, supply chain management, R&D performance, and product and service innovation. The OECD has found conclusive evidence that during the last 10-15 years, investments in the Internet and ICTs – when accompanied by complementary investments in skills development and organizational transformation – have increased the productivity of firms in all industry sectors, enhanced competitiveness, and contributed significantly to GDP growth.ⁱ

The macro- and micro-level benefits that have accrued to OECD countries, consumers and citizens from investments in the development and use of the Internet and other ICTs are clear. However, experience has also shown that there are Internet-related economic and social costs that have to be taken into account in determining policy for the Internet economy.

During the decade since that 1998 OECD Ministerial on E-Commerce, we have seen examples of the potential of the public Internet to unleash "creative destruction" on established industry, market and social structures.ⁱⁱ

This impact has been particularly visible in the entertainment and communications industries whose products and services have been the most significant drivers in the world-wide growth in demand for public Internet access and higher bandwidth. While providing benefits to large numbers of users, these forces of creative destruction have also harmed the interests of some producers, and generated various forms of backlash that in some cases could erode the Internet's longer-term potential as a creative medium.ⁱⁱⁱ

Another prominent example of the creative destruction that has accompanied the rise of the Internet economy has been the use of private IP-based networks and other ICTs to outsource back office business services and front-line customer support, often by offshoring it to developing countries that have much lower labour and operating costs.

The outsourcing and offshoring of customer service functions have benefited consumers by lowering prices and improving at least some aspects of customer service. Job opportunities have been created in regions where they were previously lacking. However, these benefits have come at the cost of job opportunities in other regions, helped put downward pressure on salaries and other employment benefits, and given rise to concerns about quality of service and confidentiality of personal information. In some OECD countries, these Internet- enabled changes have become part of a more general debate about outsourcing and offshoring in other industry sectors (e.g. in manufacturing and pharmaceuticals).

A third example of the Internet's potential for creative destruction has been the increasing economic marginalization of firms, particularly small and medium-sized enterprises (SMEs), that have been slow to adopt Internet-based business tools in their dealings with suppliers and customers, or to integrate into Internet-based value chains at national, regional and international scales.^iv

Clearly, there is still plenty of work to be done in Canada and other OECD countries to manage these issues, as well as to complete the e-commerce and other e-agendas that came out of the 1998 OECD Ottawa Ministerial and other more-broadly based events, such as the 2003-05 World Summit on the Information Society.

However, in seeking to develop forward-looking policies that will help realize the full potential of the Internet to support creative responses to the long-term economic, social and environmental challenges facing their countries, it is important for OECD policy-makers to fully appreciate the evolving nature of the Internet and its changing relationship to economic and social structures.

The medium- to longer-term opportunities and challenges that are likely to result from the evolution of the Internet are most visibly demonstrated at present by the evolution of the World Wide Web, one of the principal applications that runs on the Internet.^v

• Web 1.0, which was invented in the early 1990s, enables Internet users to find information and access on-line services that are created or provided by suppliers, often as an extension of their off-line activities, by using tools such as browsers, portals and search engines. Along with e-mail, Web 1.0 applications are still the main use of the Internet for many users.
  
  
• In Web 2.0 applications, which have begun to emerge in the past couple of years, users themselves create, distribute and share content, using tools such as blogs, mash-ups and peer-to-peer file sharing, as well as by participating in social networks, virtual worlds, and massively multi-player on-line games (MMOGs).
  
  
• The impact Web 2.0 has already had in fields as diverse as journalism, the media and entertainment, politics, advertising, social relationships, and scientific research suggest that the creative potential of the Internet, and its transformative effects on economic and social structures, are likely to be much greater in the next ten years than they have been in the past decade.

At a more fundamental level, the Internet itself is in the early stages of a similar evolution.

• Looking retrospectively, we can see that the first generation Internet – which dates back to the invention of TCP/IP in the mid-1970s –essentially provided a platform for moving existing economic, social and political structures and relationships on-line – e.g. B2B supply chains; B2C marketing, sales and service; education, health care and other public services to citizens; knowledge, information, communication and entertainment products and services to consumers.
  
  
• Looking prospectively, we can see that the second generation Internet that is now in its formative stages promises to provide a platform for significantly transforming economic, social and political structures. It will do this by greatly enhancing the features that make the Internet such a powerful tool for innovation, entrepreneurship and participation – i.e. by enabling creativity at the edges of the network, increasing openness across boundaries, and flattening or inverting of hierarchical relationships.

A number of initiatives are underway in various OECD countries to develop the second generation Internet, or 'Internet of the future'. These initiatives aim to take advantage of the opportunities presented by the ever-increasing capacity of the information processing, storage and communication technologies that underlie the Internet. Key challenges include: improving Internet security and quality of service; seamlessly integrating the Internet into mobile communication environments; extending the Internet to include not just people and information objects, but all manner of physical objects (the "Internet of Things"); developing more effective ways of identifying, organizing, storing; finding, sharing and representing digital information; increasing the intelligence of Internet-based applications and services; and integrating info-, bio-, nano-, and geo-technologies.^vi

If these challenges are met, the applications, products and services supported by the second generation Internet will enable truly transformational changes in economic and social structures. They will do this by progressively mirroring and merging the physical and virtual worlds, and by exponentially expanding our ability to represent, model, understand, and manage the interaction among all of the parts that make up our natural and human environments.

The history of the Internet's evolution to date indicates that the most effective policy for maximizing Internet-enabled creativity is to let the creative juices flow as freely as possible. The general challenge facing OECD policy makers as they consider the potential of the Internet to continue to fuel the widest possible participation in economic and social creativity is two-fold:

• to reduce or eliminate barriers to Internet access by the largest number of people for the widest range of uses possible
  
  
• to provide appropriate enablers, inducements, and incentives to foster Internet-based creativity.

When considering what mix of policies will maximize creativity, entrepreneurship and innovation in the Internet economy, OECD policy-makers also need to be aware of potential 'creativity show-stoppers' – of the kind we have already seen arise in relation to the first generation Internet – in order to address them proactively so that they do not become obstacles to progress. Events such as the Canada Roundtable should serve as an early warning system that helps policy-makers anticipate and address issues that could potentially stand in the way of realizing the Internet's creative potential.

Focus Issues

The 2008 OECD Ministerial Conference will not have sufficient time to deal in depth with all of the issues related to the general challenge of enhancing creativity in the Internet economy. Rather than engaging in a general discussion, the conference will focus on three or four main issues that are at the top of the current OECD agenda, with the aim of producing actionable results. Participants in the Canada Roundtable therefore are particularly invited to provide input on the following topics.

Enhancing innovation

During the past couple of decades OECD countries have paid a lot of attention to the challenge of enhancing innovation in economic and social activities. In the process, they have developed a good understanding of the different factors that enable innovation at the different stages of the innovation process – i.e. basic science, R&D, commercialization, diffusion and use.

The basic set of policy issues related to the challenge of enhancing innovation does not change fundamentally in the Internet economy. The topics that policy makers need to address still include:

• creation of an enabling environment, including a competitive tax regime, an intellectual property rights (IPR) regime that encourages innovation at all stages in the process, and a strong education system
  
• investment in technology
  
• complementary investments in skills development, organizational structures and processes, and management practices
  
• access to markets
  
• access to angel/venture/investment capital
  
• an innovation culture
  

However, the Internet changes the way innovation happens and therefore the specific challenges and appropriate policy tools. The essential attributes of the Internet that make it such a great platform for innovation – its openness, an architecture that supports creativity at the edges, and its capacity to flatten/invert hierarchical relationships – are interacting with evolving market structures, business strategies, organizational models, and workforce skills (particularly the skills that are innate to the "Internet generation" as a result of their lifelong exposure). As a result of these interactions, the closed, proprietary, linear model of innovation that developed during the industrial era is being transformed into an open model with very different attributes (e.g. open source software, outsourcing and insourcing of business functions, open innovation and other forms of collaboration).

These changes will require innovative responses from OECD policy-makers in the form of policies aimed at removing barriers to openness and collaboration and stimulating the new kinds of creative activities enabled by the Internet. Roundtable participants may therefore wish to consider the following kinds of questions:

• What policies are needed to spur the development of new business models, innovation in global supply chains and other forms of entrepreneurial activity based on the possibilities presented by the participative features of web 2.0?
  
  
• What issues are likely to arise with respect to the development of the second generation Internet and the new kinds of applications, products and services it will enable, such as ubiquitous networks that link people, information resources and things in macro and micro meshes? What policies are needed to manage the evolution of the Internet of the future?

Leveraging Digital Content and Services

As in the case of innovation, OECD countries have paid increasing attention in recent years to the development of digital content and services, recognizing that:

• the economic and social sectors that produce digital content and services (i.e. science, the cultural industries, other industry sectors, government, social services, and increasingly individual users and social networks) are a growing part of the Internet economy
  
  
• the products of these sectors increasingly provide the foundation for all economic and social activities in the emerging knowledge society.

As in the case of innovation, the different functions that are involved in the production of digital content and services, the ways in which these products and services are monetized, and the economic characteristics that set the cultural industries somewhat apart from other industry sectors do not change fundamentally in the Internet economy.

• The production of digital content and services continues to involve the functions of creation, production, marketing, distribution, exhibition, and rating.
  
  
• The Internet economy, as it has evolved to date, continues to exhibit the same basic mechanisms for capturing the monetary value of content products and services – advertising, subscription, pay-per-copy/use, or public subsidy.
  
  
• In the Internet economy, the production of digital content and services continues to exhibit economic characteristics that set it somewhat apart from other economic activities – e.g. elevated risk/reward ratios, the central importance of IPR.

However, the way these functions are structured in the Internet economy and the way IPR, monetary other mechanisms necessary to sustain markets for digital content and services are deployed puts a new spin on the issues facing policy makers and the options available to them (e.g. creative commons licensing, digital rights management).

As in the case of innovation, the Internet attributes of openness, creativity at the edges and flattening/inversion – when combined with other economic and social factors such as the skills, attitudes and other attributes innate in the "Internet generation" – tend to transform the closed, vertically integrated, proprietary model of content creation developed during the industrial era and carried forward into the era of non-networked digital content (i.e. CD-based audio, video, games and other applications software) into an open system that requires different kinds of policy responses to key issues.

Roundtable participants may wish to consider the following questions:

• What barriers/issues exist with respect to leveraging digital content and services? What policies are needed to remove these barriers?
  
  
• What policies are needed to encourage user created content?
  

The Role of Broadband

The Internet economy is enabled by a complex set of ICTs that include input/output, processing, storage, and communication technologies. The power and capacity of all these technologies, in absolute terms and in relation to size and cost, has increased at an exponential rate for several decades. This trend is forecast to continue for at least the next 5-10 years. The impact of these technologies on the economy and society, not only of OECD countries but the world as a whole, is such that they have been identified by economists as "General Purpose Technologies" whose effects have been matched throughout history by only a small number of other technologies, most recently electricity.^vii

The key to maximizing the value of these technologies in the information economy – specifically to fuelling creativity, enhancing innovation and leveraging digital content and services – is the development and deployment of the higher-bandwidth communication technologies, commonly known as 'broadband', that are needed to carrying the exponentially-increasing volumes of digital information that are produced and consumed by the Internet economy.

We have already seen the rate at which demand for communications capacity has increased, as the Internet has evolved from a first generation technology, in which email and web browsing were the main applications, to a second generation technology dominated by peer-to-peer file sharing, social networks, and other elements of the participative web. As we evolve toward the second generation Internet and future generations of the web, demand for communications capacity will increase yet again by orders of magnitude.

Responding to this demand will require higher capacity fibre optic and wireless communications media.^viii It will also require higher capacity addressing systems, better ways of organizing information, and more powerful and intelligent ways of finding it. In other words, one of the greatest challenges for innovation and creativity is the evolution of the Internet itself at its different layers.

This challenge is unlike any communications challenge we have faced previously. Roundtable participants may wish to consider the following questions:

• How are communications bandwidth requirements likely to change as we evolve from web 1.0 to web 2.0 and towards the second generation Internet?
  
• What obstacles/issues exist or are likely to arise and what policies are needed so that broadband communication technologies can play their enabling role to the maximum extent possible?

Conclusion

Ten years ago, Canada led the OECD in the development of e-Commerce policy for first generation Internet products and services – one of the main results of our national focus on the Information Highway and Internet during the 1990s. This focus also made us early leaders in the deployment of broadband technologies.

Today our position has slipped. Canada is now in the middle of the pack – or even lower – on many general measures of digital opportunity and achievement, as well as those specifically related to the subjects on the agenda of the OECD Ministerial Conference.

The 2008 Ministerial – and the renewed focus the Canadian government intends to place on productivity and innovation – gives us an opportunity to be leaders once again in developing policy responses to the critical issues raised by the triple challenge of fuelling creativity, building confidence and benefiting from convergence in the Internet economy of the future.

The Canada Roundtable gives stakeholders an opportunity to familiarize themselves with the OECD approach to these issues, to advise on the positions Canada should take at the 2008 Ministerial Conference, and to engage in a process that will shape the policy and regulatory environment of the Internet economy in OECD countries for years to come.

NOTES

ⁱ See Industry Canada, "The Challenge of Change; Building the 21st Century Economy", Conference Background Paper, 2004 National Conference on e-Commerce to e-Economy, Strategies for the 21st Century, pp.4-5. Available at http://www.e-economy.ca/epic/site/ec2ee-ceace.nsf/vwapj/the_challenge_of_change.pdf/$FILE/the_challenge_of_change.pdf

ⁱⁱ The phrase 'creative destruction' was coined by the economist Joseph Schumpter to describe the process by which entrepreneurship and innovation drove economic growth, sometimes at the expense of established companies.

ⁱⁱⁱ During this period, in addition to their impact on established business models and value chains we have seen two other major classes of disruptive effects that have given rise to issues that are also on the agenda of the OECD Ministerial. The first of these classes is comprised of examples of "bad creativity" (e.g. spam, cyber-crime, restrictions on basic human rights and freedoms, and other Internet abuses) that form part of the Confidence theme. The second class includes regulatory issues such as network neutrality that are part of the Convergence theme.

^iv This has been identified as a particularly important issue for Canada through the work of the Canadian e-Business Initiative (CeBI), by the Telecommunications Policy Review Panel, and in numerous government reports and policy statements

^v Other key applications running on the public Internet include e-mail, instant messaging, file transfer, audio and video streaming, and Voice Over Internet Protocol (VoIP)

^vi See "Reinventing the Internet", The Economist, 9 March 2006, for an overview of some of the initiatives currently underway to develop the second generation Internet. See also the Proceedings of the 8 March 2006 OECD Workshop on "The Future of the Internet" for an overview of technical, economic and policy issues related to the future of the Internet, available at http://www.oecd.org/document/5/0,2340,en_2649_34223_36169989_1_1_1_1,00.html

^vii As defined by Kenneth Carlaw, Richard Lipsey and Ryan Webb, a General Purpose Technology (GPT) is "a major transforming technology that is widely used for multiple purposes and that has many spillovers, particularly in enabling the development of new products, new processes and new forms of organization in places well beyond the industry that produces the GPT itself". In their view, programmable computing networks (PCNs), a concept that includes the Internet and other ICTs, are the latest in a relatively small number of GPTs that have driven economic growth throughout history. See Carlaw, K., Lipsey, R., & Webb, R., "The Past Present and Future of the ICT Revolution", an Industry Canada sponsored research report.

^viii The development and deployment of these networks raises a number of significant policy and regulatory issues that will be discussed in the accompanying Canada Roundtable paper on "Benefiting from Convergence: Access, Mobility and Ubiquity".