Regulation and Control of Economic Development

**39**

policy

**1. Introduction**

**Chapter 3**

Regulation

*Oleg Golichenko*

**Abstract**

Meso Trajectories in the National

The mesotrajectory is presented as a three-phase process of the development of mesopopulations: emergence (origination), diffusion (acceptance, assimilation and adaptation) and retention of a new rule (innovation). The central category of the NIS, i.e. knowledge, is considered from two positions: as a set of specific rules and as the most critical innovation resource. The proposed methodology also describes the three phases of mesostructure dividing each of them into two series–parallel sub-phases and incorporating them in the design of niches, technological and market ones. The methodology allows specifying the effect of the evolutionary selection and intermittent development of meso-units in the first two phases, as well as the mechanisms of changing the socio-technological regime in the third phase. The study set and analyse policy for creating motivation for innovative behaviour at different phases of the mesotrajectory. The actors' mesopopulation are represented as carriers of the properties of knowledge-rules-resources. The knowledge of the actor is taking into account not only as a rule but a factor breaking the mesotrajectory. Among other characteristics of mesotrajectory discontinuity, intermittent equilibrium is taken into consideration in the study. The problem of regulating trajectory

Innovation System and Their

continuity is analysed in the framework of public policy.

decision-making under bounded rationality.

**Keywords:** knowledge-rules, trajectory, mesopopulation, factoring populations, incentives and disincentives, technological niche, selection (market) niche, public

The possibilities for applying traditional approaches (including neoclassical theory and theory of growth) and their tools to the analysis of innovation systems are mostly limited [1, 2]. Frequently, the main conceptual statements of these approaches contradict the fundamental properties of the National innovation system (NIS) and its actors' characteristics. For example, it is not always possible to attribute NIS actors to the economic agents, especially in cases when gaining economic benefits is not their objective. Actors are not often represented as agents in the economic mainstream and not always benefit-oriented in short-term and sometimes medium-term perspectives. The actor of the NIS is often considered as

#### **Chapter 3**

## Meso Trajectories in the National Innovation System and Their Regulation

*Oleg Golichenko*

#### **Abstract**

The mesotrajectory is presented as a three-phase process of the development of mesopopulations: emergence (origination), diffusion (acceptance, assimilation and adaptation) and retention of a new rule (innovation). The central category of the NIS, i.e. knowledge, is considered from two positions: as a set of specific rules and as the most critical innovation resource. The proposed methodology also describes the three phases of mesostructure dividing each of them into two series–parallel sub-phases and incorporating them in the design of niches, technological and market ones. The methodology allows specifying the effect of the evolutionary selection and intermittent development of meso-units in the first two phases, as well as the mechanisms of changing the socio-technological regime in the third phase. The study set and analyse policy for creating motivation for innovative behaviour at different phases of the mesotrajectory. The actors' mesopopulation are represented as carriers of the properties of knowledge-rules-resources. The knowledge of the actor is taking into account not only as a rule but a factor breaking the mesotrajectory. Among other characteristics of mesotrajectory discontinuity, intermittent equilibrium is taken into consideration in the study. The problem of regulating trajectory continuity is analysed in the framework of public policy.

**Keywords:** knowledge-rules, trajectory, mesopopulation, factoring populations, incentives and disincentives, technological niche, selection (market) niche, public policy

#### **1. Introduction**

The possibilities for applying traditional approaches (including neoclassical theory and theory of growth) and their tools to the analysis of innovation systems are mostly limited [1, 2]. Frequently, the main conceptual statements of these approaches contradict the fundamental properties of the National innovation system (NIS) and its actors' characteristics. For example, it is not always possible to attribute NIS actors to the economic agents, especially in cases when gaining economic benefits is not their objective. Actors are not often represented as agents in the economic mainstream and not always benefit-oriented in short-term and sometimes medium-term perspectives. The actor of the NIS is often considered as decision-making under bounded rationality.

At present, the concept of a national innovation system covers all the major components of the innovation process, including organisational, social, political, and economic factors. Researchers and decision-makers widely use this concept at the regional, national and international levels [3]. At the same time, many authors indicated as one of the main disadvantages of the NIS approach that it lacks bridges between the macro and micro that are inherent in mainstream economic research. According to Edquist [3], when moving to a macro level, the innovation system is regarded as a single entity without breaking out into subprocesses and their actors [3, p. 186]. Here it may just be noted that in the current practice of NIS research, this approach often looks relatively static. Miettinen says that the NIS approach is poorly connected to … a dynamic way of thinking [4], p. 35.

The neo-evolutionary theory (NET), which has arisen relatively recently [5], is free from these shortcomings). Therefore, to eliminate the shortages and achieve a new quality analysis of innovation development, it seems reasonable to integrate the achievements of this theory and the NIS approach. The following facts indicate that these approaches are compatible.

Like the NIS approach [6–9], knowledge is the central category of the NET. According to [10], the bit of knowledge serves as the nuclear element of evolutionary economics. This bit is considered as a particular rule in the NET [11, 12]. In neo-evolutionary economics as well as in the national innovation system, the emphasis is on the consideration of new knowledge (rules). The NET and NIS actors are knowledge holders; their activity is associated with the generation and use of creative knowledge.

In the NET, the carriers of the same (rather complex) knowledge-rule are combined into a population. It is called a mesopopulation. Therefore, the couple of rule and mesopopulation is taken as a single object called the meso-unit in the NET. The dynamic process of the development of meso-units determines a mesotrajectory [11] or market trajectory [13]. As a result of passing through the trajectory, mesopopulation grows from one holder (entrepreneur or technology supplier) of a new technological knowledge/rule to a population. The mesotrajectory consists of the subsequent phases of the development of a complex rule. They are emergence (origination), diffusion (adaptation and assimilation) and retention of the rule.

It is worth noting that the introduction of the concept of mesotrajectory was an essential step in the development of evolutionary theory. However, neoevolutionists consider the technological changes that have relatively smooth dynamics. According to the authors, the technological shifts are the result of gradual changes in technologies and socio-technological regimes. Therefore, leap jumping changes in technologies (their mutation) are left out of the consideration of mesotrajectories. At the same time, there are some authors of the so-called quasievolutionary point of view [14–17], who insist that radical technological changes are often the result of drastic technological changes that break the previous trajectory of technological development.

These trajectory gaps often result in the discovery of new markets and new industries. The authors mentioned above are also convinced that the emerging technological and market niches, either inside or outside socio-technological regimes, are the drivers of technological changes. The processes of origin and selection of variations in technological changes that can meet the requirements of a changing selection environment take place just there. In the NET, the concept of niches is not actively used and therefore, it is not related to the implementation of mesotrajectories. However, it would be logical to do so. Below we will try to present the process of functioning of niches as a necessary part of the phases of trajectories. To this purpose, we will expand the typology and definition of niches below.

**41**

the factors.

new ones.

problems.

*Meso Trajectories in the National Innovation System and Their Regulation*

aspects of mesotrajectories usually not taken into account in the NET.

**2. External and internal factors hindering the implementation of** 

Certain factors influence the development of the phases of the mesotrajectories. They can be combined into two groups. The first of them are the factors that are shaped outside of the mesopopulations at the corresponding trajectory phase. The second is formed inside of the mesopopulations of the evolutionary trajectory. In the first, we include two following categories of risks and uncertainties: 1) inherent in innovation; 2) associated with threats of adverse externalities of technological spillover. They stem from an external environment and determine

The second group comprises the factors whose elements are formed by some actors of mesopopulations. The actors that fall into a factor forming population are holders of the attributes of a distinguishing factor. Actions of these populations

In light of the previous, one of the tasks of public policy is to mitigate the risks and uncertainties. In this study, we do not take into account such external factors of innovation activities as components of framework conditions. The regulation of influence of the factor-forming populations on the trajectory is the second problem of the NIS. The present study attempts to crystallise the mentioned groups of factors and some measures of public policy to regulate their actions. It means that actors cluster the group (populations) of factor characteristic carriers according to

In this context, it is worthwhile to note that public policy on the evolutionary trajectory differs significantly from the traditional economic, particularly, industrial policy in its goals and role-playing behaviour of the government. Under the general economic (industrial) policy, government actions usually aim at a structural transformation of the economy as a whole [18], economic development and growth of manufacturing and other types of production. Below, the term public or government policy is referred to government regulatory action to facilitate the drivers of a country's development and eliminate barriers [19] or performing core functions of NIS. Moreover, in contrast to the traditional theory, the government has bounded rationality and is only one of the possible participants in the processes of destroying trends of the trajectory and searching and implementing

And finally, one must take into account that these government's efforts cannot

be expected to succeed without solving the problem of encouraging actors to perform NIS functions as well as regulating the activities of factor-forming populations at different NIS levels. This section is devoted to the consideration of these

Furthermore, it makes sense to combine the NET and NIS approaches into one concept. The use of mesotrajectory notion in the NIS would make it possible to introduce the dynamics into the analysis of the system and determine the transitions from micro to macro through meso-level. At the same time. The application of the NIS toolkit in the field of public policy in the NET would allow linking the public actions with the need for rule carriers passing the mesophases of trajectories. The embedding NIS in NET allows speaking of knowledge not only as a rule but also as a specific innovative resource. And finally, as the rule-carries' motivation, the analysis of internal and external factors affecting leads to the consideration of new

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

**mesotrajectories and their regulation**

anti-stimuli for the actors' activities in mesopopulations.

may promote or inhibit the phases of mesotrajectories.

*Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

poorly connected to … a dynamic way of thinking [4], p. 35.

that these approaches are compatible.

use of creative knowledge.

of technological development.

At present, the concept of a national innovation system covers all the major components of the innovation process, including organisational, social, political, and economic factors. Researchers and decision-makers widely use this concept at the regional, national and international levels [3]. At the same time, many authors indicated as one of the main disadvantages of the NIS approach that it lacks bridges between the macro and micro that are inherent in mainstream economic research. According to Edquist [3], when moving to a macro level, the innovation system is regarded as a single entity without breaking out into subprocesses and their actors [3, p. 186]. Here it may just be noted that in the current practice of NIS research, this approach often looks relatively static. Miettinen says that the NIS approach is

The neo-evolutionary theory (NET), which has arisen relatively recently [5], is free from these shortcomings). Therefore, to eliminate the shortages and achieve a new quality analysis of innovation development, it seems reasonable to integrate the achievements of this theory and the NIS approach. The following facts indicate

Like the NIS approach [6–9], knowledge is the central category of the NET. According to [10], the bit of knowledge serves as the nuclear element of evolutionary economics. This bit is considered as a particular rule in the NET [11, 12]. In neo-evolutionary economics as well as in the national innovation system, the emphasis is on the consideration of new knowledge (rules). The NET and NIS actors are knowledge holders; their activity is associated with the generation and

In the NET, the carriers of the same (rather complex) knowledge-rule are combined into a population. It is called a mesopopulation. Therefore, the couple of rule and mesopopulation is taken as a single object called the meso-unit in the NET. The dynamic process of the development of meso-units determines a mesotrajectory [11] or market trajectory [13]. As a result of passing through the trajectory, mesopopulation grows from one holder (entrepreneur or technology supplier) of a new technological knowledge/rule to a population. The mesotrajectory consists of the subsequent phases of the development of a complex rule. They are emergence (origination), diffusion (adaptation and assimilation) and retention of the rule. It is worth noting that the introduction of the concept of mesotrajectory was an essential step in the development of evolutionary theory. However, neoevolutionists consider the technological changes that have relatively smooth dynamics. According to the authors, the technological shifts are the result of gradual changes in technologies and socio-technological regimes. Therefore, leap jumping changes in technologies (their mutation) are left out of the consideration of mesotrajectories. At the same time, there are some authors of the so-called quasievolutionary point of view [14–17], who insist that radical technological changes are often the result of drastic technological changes that break the previous trajectory

These trajectory gaps often result in the discovery of new markets and new industries. The authors mentioned above are also convinced that the emerging technological and market niches, either inside or outside socio-technological regimes, are the drivers of technological changes. The processes of origin and selection of variations in technological changes that can meet the requirements of a changing selection environment take place just there. In the NET, the concept of niches is not actively used and therefore, it is not related to the implementation of mesotrajectories. However, it would be logical to do so. Below we will try to present the process of functioning of niches as a necessary part of the phases of trajectories. To this

purpose, we will expand the typology and definition of niches below.

**40**

Furthermore, it makes sense to combine the NET and NIS approaches into one concept. The use of mesotrajectory notion in the NIS would make it possible to introduce the dynamics into the analysis of the system and determine the transitions from micro to macro through meso-level. At the same time. The application of the NIS toolkit in the field of public policy in the NET would allow linking the public actions with the need for rule carriers passing the mesophases of trajectories. The embedding NIS in NET allows speaking of knowledge not only as a rule but also as a specific innovative resource. And finally, as the rule-carries' motivation, the analysis of internal and external factors affecting leads to the consideration of new aspects of mesotrajectories usually not taken into account in the NET.

#### **2. External and internal factors hindering the implementation of mesotrajectories and their regulation**

Certain factors influence the development of the phases of the mesotrajectories. They can be combined into two groups. The first of them are the factors that are shaped outside of the mesopopulations at the corresponding trajectory phase. The second is formed inside of the mesopopulations of the evolutionary trajectory.

In the first, we include two following categories of risks and uncertainties: 1) inherent in innovation; 2) associated with threats of adverse externalities of technological spillover. They stem from an external environment and determine anti-stimuli for the actors' activities in mesopopulations.

The second group comprises the factors whose elements are formed by some actors of mesopopulations. The actors that fall into a factor forming population are holders of the attributes of a distinguishing factor. Actions of these populations may promote or inhibit the phases of mesotrajectories.

In light of the previous, one of the tasks of public policy is to mitigate the risks and uncertainties. In this study, we do not take into account such external factors of innovation activities as components of framework conditions. The regulation of influence of the factor-forming populations on the trajectory is the second problem of the NIS. The present study attempts to crystallise the mentioned groups of factors and some measures of public policy to regulate their actions. It means that actors cluster the group (populations) of factor characteristic carriers according to the factors.

In this context, it is worthwhile to note that public policy on the evolutionary trajectory differs significantly from the traditional economic, particularly, industrial policy in its goals and role-playing behaviour of the government. Under the general economic (industrial) policy, government actions usually aim at a structural transformation of the economy as a whole [18], economic development and growth of manufacturing and other types of production. Below, the term public or government policy is referred to government regulatory action to facilitate the drivers of a country's development and eliminate barriers [19] or performing core functions of NIS. Moreover, in contrast to the traditional theory, the government has bounded rationality and is only one of the possible participants in the processes of destroying trends of the trajectory and searching and implementing new ones.

And finally, one must take into account that these government's efforts cannot be expected to succeed without solving the problem of encouraging actors to perform NIS functions as well as regulating the activities of factor-forming populations at different NIS levels. This section is devoted to the consideration of these problems.

#### **2.1 External factors for mesotrajectories: risks and uncertainty emerging in the environment**

For actors, the activity on the phases of the mesotrajectory has two sides. The first is positive, and it is related to the possible economic benefits of innovation. These benefits generate incentives for the activity of NIS actors. The second is negative, and it is determined by the presence of strong disincentives to perform core NIS function to get these benefits. The high risk and uncertainty of actors' activity lay the groundwork of the disincentives. Consequently, the stimulus must outweigh the anti-stimulus in order this activity takes place.

The disincentives are unevenly distributed along the mesotrajectory. If the proposed innovation is radically new, then the most significant uncertainty of positive results in the innovation activity occurs in the Meso 1 phase. However, if the successful development of the innovation processes provides the transition of the mesotrajectory to the Meso 2, then calibrated risks of getting innovative results will replace the uncertainty.

Risks and uncertainties in the NIS on the trajectory can be conditionally clustered into two groups [20]. The first group includes uncertainties and risks that are natural, i.e. intrinsic and inherent, in actors' activity. Their presence, especially on the early stages of technology creation, does not make firms eager to invest in innovation and support them.

Government, as a partner of an entrepreneur, tries to diminish the natural risks and uncertainties at initial phases of the trajectory. On the other hand, the government's steps may induce NIS actors to act as free riders and encourage them to receive rental income from the corresponding financial help of the government. The government to avoid this phenomenon should strive for such conditions that make actors accept a significant part of the innovative risks and uncertainties. In other words, dualism has to be inherent in government policy.

The dualism means that the domains of public policy will not only compensate for the system of anti-stimulus but also force the participants of the NIS to take on significant shares of uncertainties and risks. One of the methods of actors' compulsion to this sharing is an international competition [21].

The existence of the second group of risks and uncertainties can be associated with threats of adverse externalities or spillover [22] on the mesotrajectory. For example, if an actor was successful at Meso1, he succeeded in such a NIS function of an economic application of new knowledge. Nevertheless, the actor would not receive the full benefit from his innovations without sharing it with competitors, if the spread of innovations, i.e. fulfilment of such a core function as diffusion, took place due to the effect of technological spillover (the unauthorised use of these innovations).

This effect often does not arouse the actors' desire for creating innovations. An actor-innovator to avoid this effect could use substantial isolationist barriers protecting his new innovative knowledge [23, 24]. The durable protection of intellectual property supported by the government can act as such a barrier. However, it must be borne in mind that powerful isolationist barriers may hinder the diffusion of innovations (see Section 3 below). Then such an essential function of the NIS as the dissemination of new technological knowledge can be disrupted. The phenomenon may also sometimes impede the development of the new rules laid down in radical innovations as well as introducing innovative changes in related fields of activity.

In summary, the public policy, the purpose of which is to shape the actors' inducement, should include the following objectives:

**43**

*Meso Trajectories in the National Innovation System and Their Regulation*

1.holding dual policy measures of policy measures, on the one hand, to compensate uncertainties (on Meso 1) and risks (on Meso 2 and Meso 3) and, on the other hand, to force NIS actors to deal with these uncertainties and risks taking

2.maintaining a balance of performing various NIS functions at different phases

In addition to the mentioned above factors, uncertainties and risks, the factors formed among the mesopopulations play a significant role in the evolutionary trajectory. They are constructed by some members of the populations in the course

• Resource capability of NIS actors, i.e. their provision of primary resources

As an example, consider a factor such as resource availability or resource provision of enterprises. Let us assume that this level can be low, medium and high. According to these gradations, the set of industrial enterprises is broken down into factor-forming populations of small-, medium- and large-sized enterprises. For

• Large enterprises with employees between 500 and 9999, and above 10,000

The ranges of employees that are available for these enterprises are attributes of such the factor. It worth noting that enterprises within these specified factorforming populations are not distinguishable; that is, at this level of consideration, the group of enterprises can be considered as homogeneous unless otherwise specified. In this context, for given attributes or gradations of the factor, the analysis

Now, let us look at another example of factor-forming populations along the evolutionary trajectory. They are related to such a factor as forms of ownership of NIS actors. The sample of actors (e.g. innovative industrial enterprises) can be

**2.2 Internal factors for mesotrajectories: populations as holders of factor** 

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

of the mesotrajectory.

Such factors can include:

• Firm forms of ownership.

**attributes**

on with them through the trajectory;

of their activities along the mesotrajectory.

(in particular, their shortage or redundancy).

• Technological paradigms in the economy.

• Small enterprises up to 299 employees.

personals.

• The technological complexity of innovative products.

• Spatial distribution of innovation processes and actors.

• Absorption capacity and its distribution among actors.

instance, these populations can include the following groups:

deals with homogeneous populations (groups of enterprises).

• Enterprises with the number of employees from 300 to 499.

*Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*


#### **2.2 Internal factors for mesotrajectories: populations as holders of factor attributes**

In addition to the mentioned above factors, uncertainties and risks, the factors formed among the mesopopulations play a significant role in the evolutionary trajectory. They are constructed by some members of the populations in the course of their activities along the mesotrajectory.

Such factors can include:

*Circular Economy - Recent Advances, New Perspectives and Applications*

the anti-stimulus in order this activity takes place.

**environment**

replace the uncertainty.

innovation and support them.

**2.1 External factors for mesotrajectories: risks and uncertainty emerging in the** 

For actors, the activity on the phases of the mesotrajectory has two sides. The first is positive, and it is related to the possible economic benefits of innovation. These benefits generate incentives for the activity of NIS actors. The second is negative, and it is determined by the presence of strong disincentives to perform core NIS function to get these benefits. The high risk and uncertainty of actors' activity lay the groundwork of the disincentives. Consequently, the stimulus must outweigh

The disincentives are unevenly distributed along the mesotrajectory. If the proposed innovation is radically new, then the most significant uncertainty of positive results in the innovation activity occurs in the Meso 1 phase. However, if the successful development of the innovation processes provides the transition of the mesotrajectory to the Meso 2, then calibrated risks of getting innovative results will

Risks and uncertainties in the NIS on the trajectory can be conditionally clustered into two groups [20]. The first group includes uncertainties and risks that are natural, i.e. intrinsic and inherent, in actors' activity. Their presence, especially on the early stages of technology creation, does not make firms eager to invest in

Government, as a partner of an entrepreneur, tries to diminish the natural risks and uncertainties at initial phases of the trajectory. On the other hand, the government's steps may induce NIS actors to act as free riders and encourage them to receive rental income from the corresponding financial help of the government. The government to avoid this phenomenon should strive for such conditions that make actors accept a significant part of the innovative risks and uncertainties. In

The dualism means that the domains of public policy will not only compensate for the system of anti-stimulus but also force the participants of the NIS to take on significant shares of uncertainties and risks. One of the methods of actors' compul-

The existence of the second group of risks and uncertainties can be associated with threats of adverse externalities or spillover [22] on the mesotrajectory. For example, if an actor was successful at Meso1, he succeeded in such a NIS function of an economic application of new knowledge. Nevertheless, the actor would not receive the full benefit from his innovations without sharing it with competitors, if the spread of innovations, i.e. fulfilment of such a core function as diffusion, took place due to the effect of technological spillover (the unauthorised use of these

This effect often does not arouse the actors' desire for creating innovations. An actor-innovator to avoid this effect could use substantial isolationist barriers protecting his new innovative knowledge [23, 24]. The durable protection of intellectual property supported by the government can act as such a barrier. However, it must be borne in mind that powerful isolationist barriers may hinder the diffusion of innovations (see Section 3 below). Then such an essential function of the NIS as the dissemination of new technological knowledge can be disrupted. The phenomenon may also sometimes impede the development of the new rules laid down in radical innovations as well as introducing innovative changes in related fields of

In summary, the public policy, the purpose of which is to shape the actors'

other words, dualism has to be inherent in government policy.

sion to this sharing is an international competition [21].

inducement, should include the following objectives:

**42**

activity.

innovations).


As an example, consider a factor such as resource availability or resource provision of enterprises. Let us assume that this level can be low, medium and high. According to these gradations, the set of industrial enterprises is broken down into factor-forming populations of small-, medium- and large-sized enterprises. For instance, these populations can include the following groups:


The ranges of employees that are available for these enterprises are attributes of such the factor. It worth noting that enterprises within these specified factorforming populations are not distinguishable; that is, at this level of consideration, the group of enterprises can be considered as homogeneous unless otherwise specified. In this context, for given attributes or gradations of the factor, the analysis deals with homogeneous populations (groups of enterprises).

Now, let us look at another example of factor-forming populations along the evolutionary trajectory. They are related to such a factor as forms of ownership of NIS actors. The sample of actors (e.g. innovative industrial enterprises) can be subdivided into factor-forming populations according to the gradations of ownership the actors are belonging. The structure of gradations can obey a hierarchy. In the case of Russia, it can be presented as follows. At the macro level of the hierarchy, ownership has two attributes, such as Russian and non-Russian property.

Further, Russian property should be split into public and non-public ones. The former has two gradations: federal property and ownership of Russian Federation subjects. The following features can classify the latter as follows: municipal property, the private one, the property of consumer cooperatives, ownership of public and religious organisations, mixed (private and state-owned) property. Finally, last but not the least, the non-Russian property includes foreign and joint possession. The private (52–53% of enterprises) and mixed (14–16% of enterprises) ownership concentrate the main resources (human and material) of innovation. The federal and joint property (19–23% of enterprises and resources) are next in importance.

This just mentioned set of features can be regarded as finite; that is, it is not subject to further division. It means that organisations grouped by the listed attributes are taken as homogeneous regarding the corresponding form of ownership. In this context, it is worthwhile to point out that in other cases, for instance, considering the technological complexity of innovative products, the hierarchy of attributes of the factor must be deeper and homogeneous factor-forming populations of higher hierarchy level have to be split into subpopulations on the next lower level.

Now let us turn our attention to the analysis of dynamics of populations forming attributes such as the resource capacities and forms of ownership in Russia (see also [25]).

#### *2.2.1 The resource capacity*

The characteristics of evolutionary trajectory depend substantially on the level of common resources available for enterprises, i.e. sizes of enterprises.

In particular, for innovation-active enterprises of Russia, representatives of populations of small dimension, that is, small and medium-sized enterprises have a significant share of innovative products in their sales. It is worth pointing out that although in 2010–2012 some populations of large enterprises showed growth of this indicator at times, many of them were apparent outsiders (hereinafter, Rosstat data are used). They had had shares of innovative products in sales well below the those of three out of four populations of small and medium-sized businesses. Only the population of enterprises with employment between 1000 and 4999 people managed to exceed the level for small and medium-sized businesses populations.

In 2012–2015, the situation repeated: three out of four resource-rich populations had the lower meaning of the indicator compared to three resource-poor populations. (see **Figures 1** and **2**). However, the shares of innovative products in sales for the enterprises of 500–9999 and 50 to 99 employed became close (16.1% versus 16.2%). It turned out to be significantly below for the class of small businesses employed up to 50 people and the class of medium-sized enterprises with employment in the range of 100–199 people. The values of the indicator for the classes were 17.1% and 18.4%, respectively.

By contrast, it is worth noting that, despite the steady outsider's positions of the large enterprises' populations, they managed to reduce the gap with the leadership positions of small and medium-sized enterprises on Meso 2.

Here, not the last role could be played by the circumstance that the state-owned enterprises belonging to the populations of large enterprises were forced to accept the special innovation development programs (IDP) in which the government drafted the share of innovative products in sales. According to the plans, the enterprises must be answerable to the government for achieving the target value of

**45**

trajectories.

**Figure 2.**

*2013–2015 (%).*

**Figure 1.**

*2004–2007 (%).*

tive environments in markets.

*Meso Trajectories in the National Innovation System and Their Regulation*

this indicator. This responsibility, posing significant risks of over-statement and falsification of this indicator value for large state-owned enterprises, may trigger

*Average share of innovation production in the sales of innovation-active enterprises by size classes in* 

*Average share of innovation production in the sales of innovation-active enterprises by size classes in* 

It is worthwhile to point out that in the country the level and dynamics of indicators of the innovation activity scale and economic efficiency along the mesotrajectories continue to be almost wholly established by the populations of large enterprises due to their dominance in the economy. However, as just mentioned, the indicators of large enterprises often point to a lack of their activity along evolution

It is essential to overcome the innovative passivity of large enterprises and increase the groups of small and medium innovative business to find a way out of the situation. Furthermore, policy measures are needed to constitute a framework of conditions in the field of entrepreneurship. It concerns, in the first place, reducing regulatory and administrative barriers and developing and providing competi-

The populations of small and medium enterprises had primary positive, innovative attributes. The populations need increasing and supporting by the state. The critical task of public innovation policy is to establish conditions for the rapid growth and prosperity of new firms based on one technology on the mesotrajectories. The urgency of the issue is determined by the fast development of outsourcing processes on the final stages of R&D as well as the traditional disability of large

the sharp increase of its meaning in these years.

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

#### **Figure 1.**

*Circular Economy - Recent Advances, New Perspectives and Applications*

subdivided into factor-forming populations according to the gradations of ownership the actors are belonging. The structure of gradations can obey a hierarchy. In the case of Russia, it can be presented as follows. At the macro level of the hierarchy,

Further, Russian property should be split into public and non-public ones. The former has two gradations: federal property and ownership of Russian Federation subjects. The following features can classify the latter as follows: municipal property, the private one, the property of consumer cooperatives, ownership of public and religious organisations, mixed (private and state-owned) property. Finally, last but not the least, the non-Russian property includes foreign and joint possession. The private (52–53% of enterprises) and mixed (14–16% of enterprises) ownership concentrate the main resources (human and material) of innovation. The federal and joint property (19–23% of enterprises and resources) are next in importance. This just mentioned set of features can be regarded as finite; that is, it is not subject to further division. It means that organisations grouped by the listed attributes are taken as homogeneous regarding the corresponding form of ownership. In this context, it is worthwhile to point out that in other cases, for instance, considering the technological complexity of innovative products, the hierarchy of attributes of the factor must be deeper and homogeneous factor-forming populations of higher

ownership has two attributes, such as Russian and non-Russian property.

hierarchy level have to be split into subpopulations on the next lower level.

of common resources available for enterprises, i.e. sizes of enterprises.

Now let us turn our attention to the analysis of dynamics of populations forming attributes such as the resource capacities and forms of ownership in Russia

The characteristics of evolutionary trajectory depend substantially on the level

In 2012–2015, the situation repeated: three out of four resource-rich populations had the lower meaning of the indicator compared to three resource-poor populations. (see **Figures 1** and **2**). However, the shares of innovative products in sales for the enterprises of 500–9999 and 50 to 99 employed became close (16.1% versus 16.2%). It turned out to be significantly below for the class of small businesses employed up to 50 people and the class of medium-sized enterprises with employment in the range of 100–199 people. The values of the indicator for the classes were

By contrast, it is worth noting that, despite the steady outsider's positions of the large enterprises' populations, they managed to reduce the gap with the leadership

Here, not the last role could be played by the circumstance that the state-owned enterprises belonging to the populations of large enterprises were forced to accept the special innovation development programs (IDP) in which the government drafted the share of innovative products in sales. According to the plans, the enterprises must be answerable to the government for achieving the target value of

positions of small and medium-sized enterprises on Meso 2.

In particular, for innovation-active enterprises of Russia, representatives of populations of small dimension, that is, small and medium-sized enterprises have a significant share of innovative products in their sales. It is worth pointing out that although in 2010–2012 some populations of large enterprises showed growth of this indicator at times, many of them were apparent outsiders (hereinafter, Rosstat data are used). They had had shares of innovative products in sales well below the those of three out of four populations of small and medium-sized businesses. Only the population of enterprises with employment between 1000 and 4999 people managed to exceed the level for small and medium-sized businesses populations.

**44**

(see also [25]).

*2.2.1 The resource capacity*

17.1% and 18.4%, respectively.

*Average share of innovation production in the sales of innovation-active enterprises by size classes in 2004–2007 (%).*

#### **Figure 2.**

*Average share of innovation production in the sales of innovation-active enterprises by size classes in 2013–2015 (%).*

this indicator. This responsibility, posing significant risks of over-statement and falsification of this indicator value for large state-owned enterprises, may trigger the sharp increase of its meaning in these years.

It is worthwhile to point out that in the country the level and dynamics of indicators of the innovation activity scale and economic efficiency along the mesotrajectories continue to be almost wholly established by the populations of large enterprises due to their dominance in the economy. However, as just mentioned, the indicators of large enterprises often point to a lack of their activity along evolution trajectories.

It is essential to overcome the innovative passivity of large enterprises and increase the groups of small and medium innovative business to find a way out of the situation. Furthermore, policy measures are needed to constitute a framework of conditions in the field of entrepreneurship. It concerns, in the first place, reducing regulatory and administrative barriers and developing and providing competitive environments in markets.

The populations of small and medium enterprises had primary positive, innovative attributes. The populations need increasing and supporting by the state. The critical task of public innovation policy is to establish conditions for the rapid growth and prosperity of new firms based on one technology on the mesotrajectories. The urgency of the issue is determined by the fast development of outsourcing processes on the final stages of R&D as well as the traditional disability of large

firms to implement quickly new methods of doing business and introducing quite drastic changes in production and delivery methods.

#### *2.2.2 Forms of ownership*

The form of property has a substantial impact on the behaviour of the firm and its development and affect the choice of organisational model, management and innovation activity of the firm. The enterprises of private and mixed ownership demonstrate the most significant influence on the overall situation in innovation. In 2015, the number of privately-owned enterprises was 47% (versus 52% in 2006) among innovation active industrial enterprises on Meso 2, along with that the mixed-owned ones consisted 11% (versus 17% in 2006). Consequently, both populations concentrate about 65–70% of the general (human and material) resources of innovation. The next in importance to the influence were the populations of the federal property (15–17% in the number of enterprises and quantities of resources) and joint ownership (7–10%).

For many years, private ownership has not been a leader in entrepreneurial activity in innovation. In particular, the organisations of this form of property has been significantly behind those of federal property. It concerns a share of innovative products in sales (see **Figure 3**). Moreover, according to this indicator, the gap between these forms of ownership has increased dramatically in recent years (see **Figure 4**). Two circumstances can explain that increase. First, as mentioned above, federally owned enterprises had adopted innovative development plans with a commitment to enhancing innovative products in sales dramatically. Secondly, the government had undertaken intensive financial interventions to support stateowned enterprises.

According to the Center for Strategic Research, within the framework of the IDP, there was a significant increase in funding for the state-owned corporations and companies with state participation leading in high-tech industries in 2011–2016. In 2016, the gross expenditures of the state budget on R&D in these companies reached 1.7% of GDP [26]. As a result, the spending on technological innovations of these companies increased more than 20 times (from 2.15 billion rubles in 2010 to 56 billion rubles in 2015). It would seem that this surge in subsidies should drastically enlarge the scale of innovation activity and its effectiveness of these companies. However, that did not happen. The increasing share of innovative products compared with it in the mid-00s was not proportional to the subsidies surge.

#### **Figure 3.**

*Average share of costs for technological innovations in the sales of innovation-active enterprises by ownership classes in 2004–2007 (%).*

**47**

*Meso Trajectories in the National Innovation System and Their Regulation*

What made the situation even more difficult was the level of innovation efficiency of these state-owned enterprises. It is worth noting that the supremacy of Federal ownership over private property had always been "broken" when one tried measuring the innovation efficiency on Meso 2 calculated as the value of the innovative product per employee. However, this "defect" turned out to be very significant in 2013–2014. If the meaning of this indicator for federal ownership enterprises had been 60–70% of the national average in 2004–2005, it dropped to

*Average share of costs for technological innovations in the sales of innovation-active enterprises by ownership* 

As it follows from the above, the policy measures should be aimed at the

• Forcing the enterprises of private and mixed ownership to innovate, for example, by developing competitive processes in relevant markets.

• Increasing the share of enterprises of foreign and joint ownership in the

**3. Knowledge as a rule or a resource generating gaps of mesotrajectories**

The NIS is often presented as storage of innovative resources and processes that transform these resources [27]. At the same time, the major category of the resources is knowledge, more precisely, innovative rules in the terminology of NET.

According to the economic tradition, primary resources or factors of the production process are understood as labour, business, capital, and natural resources. For creating long-term advantages, unique resources stand out among the firm's resources [28]. The resources have a value, and they are rare and poorly replaceable. They have limited mobility, and it is difficult to imitate them [28]. The property of uniqueness of the resources, as it is easy to see, is primarily associated with their scarcity in the economic system. Their supply shortage can be both external and internal. It can occur for ether some entrepreneur population as a whole or for internal subdivisions of a particular focal firm. In respect to a traditional (rivalrous) resource, the internal deficit does not allow the firm to expand outcome and turn

manufacturing industry, for instance, by creating a favourable investment and

• Reforming the management of state-owned enterprises.

They play a leading role in providing the functioning of the system.

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

12–15% of the average in 2013–2014.

following components.

**Figure 4.**

*classes in 2012–2015 (%).*

business climate.

*Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

#### **Figure 4.**

*Circular Economy - Recent Advances, New Perspectives and Applications*

drastic changes in production and delivery methods.

*2.2.2 Forms of ownership*

and joint ownership (7–10%).

owned enterprises.

firms to implement quickly new methods of doing business and introducing quite

The form of property has a substantial impact on the behaviour of the firm and its development and affect the choice of organisational model, management and innovation activity of the firm. The enterprises of private and mixed ownership demonstrate the most significant influence on the overall situation in innovation. In 2015, the number of privately-owned enterprises was 47% (versus 52% in 2006) among innovation active industrial enterprises on Meso 2, along with that the mixed-owned ones consisted 11% (versus 17% in 2006). Consequently, both populations concentrate about 65–70% of the general (human and material) resources of innovation. The next in importance to the influence were the populations of the federal property (15–17% in the number of enterprises and quantities of resources)

For many years, private ownership has not been a leader in entrepreneurial activity in innovation. In particular, the organisations of this form of property has been significantly behind those of federal property. It concerns a share of innovative products in sales (see **Figure 3**). Moreover, according to this indicator, the gap between these forms of ownership has increased dramatically in recent years (see **Figure 4**). Two circumstances can explain that increase. First, as mentioned above, federally owned enterprises had adopted innovative development plans with a commitment to enhancing innovative products in sales dramatically. Secondly, the government had undertaken intensive financial interventions to support state-

According to the Center for Strategic Research, within the framework of the IDP, there was a significant increase in funding for the state-owned corporations and companies with state participation leading in high-tech industries in 2011–2016. In 2016, the gross expenditures of the state budget on R&D in these companies reached 1.7% of GDP [26]. As a result, the spending on technological innovations of these companies increased more than 20 times (from 2.15 billion rubles in 2010 to 56 billion rubles in 2015). It would seem that this surge in subsidies should drastically enlarge the scale of innovation activity and its effectiveness of these companies. However, that did not happen. The increasing share of innovative products compared with it in the mid-00s was not proportional to the subsidies surge.

*Average share of costs for technological innovations in the sales of innovation-active enterprises by ownership* 

**46**

**Figure 3.**

*classes in 2004–2007 (%).*

*Average share of costs for technological innovations in the sales of innovation-active enterprises by ownership classes in 2012–2015 (%).*

What made the situation even more difficult was the level of innovation efficiency of these state-owned enterprises. It is worth noting that the supremacy of Federal ownership over private property had always been "broken" when one tried measuring the innovation efficiency on Meso 2 calculated as the value of the innovative product per employee. However, this "defect" turned out to be very significant in 2013–2014. If the meaning of this indicator for federal ownership enterprises had been 60–70% of the national average in 2004–2005, it dropped to 12–15% of the average in 2013–2014.

As it follows from the above, the policy measures should be aimed at the following components.


#### **3. Knowledge as a rule or a resource generating gaps of mesotrajectories**

The NIS is often presented as storage of innovative resources and processes that transform these resources [27]. At the same time, the major category of the resources is knowledge, more precisely, innovative rules in the terminology of NET. They play a leading role in providing the functioning of the system.

According to the economic tradition, primary resources or factors of the production process are understood as labour, business, capital, and natural resources. For creating long-term advantages, unique resources stand out among the firm's resources [28]. The resources have a value, and they are rare and poorly replaceable. They have limited mobility, and it is difficult to imitate them [28]. The property of uniqueness of the resources, as it is easy to see, is primarily associated with their scarcity in the economic system. Their supply shortage can be both external and internal. It can occur for ether some entrepreneur population as a whole or for internal subdivisions of a particular focal firm. In respect to a traditional (rivalrous) resource, the internal deficit does not allow the firm to expand outcome and turn

into a marginal producer or monopolist displacing less efficient competitors from the market. If the internal deficiency is stable, it leaves no chance for the focal firm to get monopoly rent. Then, the only recourse it has is to receive Riccardo's rent (see also [23, 28]).

However, the situation looks somewhat different when it comes to such an unconventional (non-rival) production resource as the knowledge that provides the birth of a firm's innovation, in particular, a new technological rule. In conjunction with other resources, knowledge has a significant impact on reducing the cost of a product and increasing consumer benefits. The lack of such knowledge among competitors gives the focal firm a competitive advantage in generating and appropriating economic rent. The firm can lose the rent appropriated if particular barriers do not protect the resource from imitation by its rivals. In other words, the firm requires isolationist barriers [22, 29, 30].

It brings up to the question of whether the firm protecting and apply its specific innovative knowledge is always limited to Ricardo's rent. More likely, no than yes. If a firm's specific knowledge is explicit and codified one, such as results of research and development, then there are hardly any natural barriers to its dissemination within the firm. The absence of barriers and internal scarcity suggests that Peteraf's assumption about the dominance of Riccardo's rent does not work in the case. At the same time, it is profitable for the firm to obtain monopoly rent in the market. It has the opportunity if there is an ability to create or use the existing isolationist barriers (in particular, the protection of intellectual property) to safeguard the innovation rule. The barriers make it difficult for competitors to imitating the innovation rule. Consequently, they support the external deficit of the specific knowledge in the external environment of the firm.

From what has just been said, it follows that the use of monopoly rents by NIS actors protected by isolationist barriers results in gaps in a mesotrajectory. The originators of neo-evolutionary theory usually do not focus on this aspect of innovation activity. However, these barriers can significantly limit the processes of diffusion of innovative rules among actors' populations in the second phase of mesotrajectory and even break them. The special public policy measures them reducing are needed to close the gaps and restore the growth of the rule carriers' population.

#### **4. Phases of a mesotrajectory and core functions of the NIS**

In the first phase (Meso 1) of the evolutionary trajectory, the emergence of ideas adopted by a mesopopulation and their first actualisation occur at the microlevel. Following Schumpeter's point of view on entrepreneurial activity [31], this phase is dealing with an active entrepreneur showing ingenuity under conditions of uncertainty and risks. Moreover, this entrepreneur is able not only to overcome scepticism proposing a new rule, but he also can take a fresh look at the well-known rule. Besides, he may even find sources of funding for his activities to build a mechanism for the implementation of the new or updated rule. If successful, the targeted actions of the economic agent may change the existing boundaries of entrepreneurial activity and perhaps alter the essence of this activity. At the same time, as current practice shows, a discoverer or carrier of a new rule can be not only the manufacturer of new goods and services but sometimes a consumer revealing demand for products and services not previously produced [32].

In the second phase (Meso 2) of the evolutionary trajectory, the adoption and adaptation of the novelty at the local level, i.e. diffusion of innovation and its support in the economic system, take place. The macro-effect of the phase is the beginning of the destruction of the prior coordination and re-coordination caused

**49**

*Meso Trajectories in the National Innovation System and Their Regulation*

by reformatting the behaviour of actors. It is a result of the spread of the new rule. This process of the institutionalisation is an essence of the Schumpeterian approach

Meso 3 is the boundary and final phase at which the retaining and replicating of the rule and at least the preservation of its carriers occur, and the establishment of a new macro-order takes place. The phase is a well-structured state in which innovation is already introduced into the system, and metastable structures provide the basis of the order. Profit is at a reasonable level; uncertainties have completely transformed into risks; actors' expectations are based on ongoing experiments and comparisons of their results. Technology is widely initialised and adopted by a significant number of users, and markets using the technology are transforming

As for the NIS approach, it is worthwhile to note that although here the emphasis

Let us also assume that there are two evolutionary mechanisms at work in mesotrajectories. The first of them is the mechanism of natural selection, and the second is the mechanism of spontaneous mutation, that is, the interruption of evolutionary equilibrium. The actions of these mechanisms rely heavily on existing tools for the selection and development of technological and market niches. The niches can both support the functioning of the dominant socio-technological regime and contribute

**5. Meso-units passing through the phases of a mesotrajectory in the NIS**

So, let us turn to the analysis of the mesophases of the innovative development trajectories and split every phase into two sub-phases. We represent Meso 1 as the sequential-parallel processes of creation and diffusion of open codified knowledge (subphase 1.1) and the methods of transforming open knowledge into pre-competitive one (subphase 1.2). Meso 2 contains the processes of shaping a new selecting (market) environment (subphase 2.1) and the development of the pull of

• formation of an exit from the previous development track (subphase 3.1);

• introduction of a new one, in particular, construction of new mass-consumption environment (for instance, the market for goods and services produced according to the new rule) and maintenance of its metastability (subphase 3.2).

this environment (subphase 2.2). Finally, Meso 3 combines two processes:

is not explicitly made on dynamics, the main (core) functions of NIS processes take after the abovementioned characteristics of the mesotrajectory phases. These functions of NIS can be established from the existing definitions of the national innovation system (see, for example, [6–9]). One can easily see the following ones: creation (generation), storage, distribution (diffusion or transfer) and effective economic use of knowledge. The similarity of the content of NIS functions and phases of mesotrajectories is obvious. However, it is worth point out the task of knowledge retaining is absent among the NIS core functions. Maybe this task needs combining with such a score NIS function as storage. The newly expanded role, on the one hand, ensures the corresponding institutionalisation of the technological regime. Thanks to the task, technological innovation is accepted by a significant number of users and the markets where it is realised become mass. On the other hand, the excessive conservation of the technological regime can generate a track effect slowing down the technological development of the country. Consequently, the mesotrajectory can be presented as a sequential process of performing core

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

to economic evolution.

into large-scale ones.

functions on the different phases.

to the formation of a new, more progressive one.

#### *Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

firm requires isolationist barriers [22, 29, 30].

external environment of the firm.

also [23, 28]).

into a marginal producer or monopolist displacing less efficient competitors from the market. If the internal deficiency is stable, it leaves no chance for the focal firm to get monopoly rent. Then, the only recourse it has is to receive Riccardo's rent (see

However, the situation looks somewhat different when it comes to such an unconventional (non-rival) production resource as the knowledge that provides the birth of a firm's innovation, in particular, a new technological rule. In conjunction with other resources, knowledge has a significant impact on reducing the cost of a product and increasing consumer benefits. The lack of such knowledge among competitors gives the focal firm a competitive advantage in generating and appropriating economic rent. The firm can lose the rent appropriated if particular barriers do not protect the resource from imitation by its rivals. In other words, the

It brings up to the question of whether the firm protecting and apply its specific innovative knowledge is always limited to Ricardo's rent. More likely, no than yes. If a firm's specific knowledge is explicit and codified one, such as results of research and development, then there are hardly any natural barriers to its dissemination within the firm. The absence of barriers and internal scarcity suggests that Peteraf's assumption about the dominance of Riccardo's rent does not work in the case. At the same time, it is profitable for the firm to obtain monopoly rent in the market. It has the opportunity if there is an ability to create or use the existing isolationist barriers (in particular, the protection of intellectual property) to safeguard the innovation rule. The barriers make it difficult for competitors to imitating the innovation rule. Consequently, they support the external deficit of the specific knowledge in the

From what has just been said, it follows that the use of monopoly rents by NIS actors protected by isolationist barriers results in gaps in a mesotrajectory. The originators of neo-evolutionary theory usually do not focus on this aspect of innovation activity. However, these barriers can significantly limit the processes of diffusion of innovative rules among actors' populations in the second phase of mesotrajectory and even break them. The special public policy measures them reducing are needed

In the first phase (Meso 1) of the evolutionary trajectory, the emergence of ideas adopted by a mesopopulation and their first actualisation occur at the microlevel. Following Schumpeter's point of view on entrepreneurial activity [31], this phase is dealing with an active entrepreneur showing ingenuity under conditions of uncertainty and risks. Moreover, this entrepreneur is able not only to overcome scepticism proposing a new rule, but he also can take a fresh look at the well-known rule. Besides, he may even find sources of funding for his activities to build a mechanism for the implementation of the new or updated rule. If successful, the targeted actions of the economic agent may change the existing boundaries of entrepreneurial activity and perhaps alter the essence of this activity. At the same time, as current practice shows, a discoverer or carrier of a new rule can be not only the manufacturer of new goods and services but sometimes a consumer revealing

In the second phase (Meso 2) of the evolutionary trajectory, the adoption and adaptation of the novelty at the local level, i.e. diffusion of innovation and its support in the economic system, take place. The macro-effect of the phase is the beginning of the destruction of the prior coordination and re-coordination caused

to close the gaps and restore the growth of the rule carriers' population.

**4. Phases of a mesotrajectory and core functions of the NIS**

demand for products and services not previously produced [32].

**48**

by reformatting the behaviour of actors. It is a result of the spread of the new rule. This process of the institutionalisation is an essence of the Schumpeterian approach to economic evolution.

Meso 3 is the boundary and final phase at which the retaining and replicating of the rule and at least the preservation of its carriers occur, and the establishment of a new macro-order takes place. The phase is a well-structured state in which innovation is already introduced into the system, and metastable structures provide the basis of the order. Profit is at a reasonable level; uncertainties have completely transformed into risks; actors' expectations are based on ongoing experiments and comparisons of their results. Technology is widely initialised and adopted by a significant number of users, and markets using the technology are transforming into large-scale ones.

As for the NIS approach, it is worthwhile to note that although here the emphasis is not explicitly made on dynamics, the main (core) functions of NIS processes take after the abovementioned characteristics of the mesotrajectory phases. These functions of NIS can be established from the existing definitions of the national innovation system (see, for example, [6–9]). One can easily see the following ones: creation (generation), storage, distribution (diffusion or transfer) and effective economic use of knowledge. The similarity of the content of NIS functions and phases of mesotrajectories is obvious. However, it is worth point out the task of knowledge retaining is absent among the NIS core functions. Maybe this task needs combining with such a score NIS function as storage. The newly expanded role, on the one hand, ensures the corresponding institutionalisation of the technological regime. Thanks to the task, technological innovation is accepted by a significant number of users and the markets where it is realised become mass. On the other hand, the excessive conservation of the technological regime can generate a track effect slowing down the technological development of the country. Consequently, the mesotrajectory can be presented as a sequential process of performing core functions on the different phases.

Let us also assume that there are two evolutionary mechanisms at work in mesotrajectories. The first of them is the mechanism of natural selection, and the second is the mechanism of spontaneous mutation, that is, the interruption of evolutionary equilibrium. The actions of these mechanisms rely heavily on existing tools for the selection and development of technological and market niches. The niches can both support the functioning of the dominant socio-technological regime and contribute to the formation of a new, more progressive one.

#### **5. Meso-units passing through the phases of a mesotrajectory in the NIS**

So, let us turn to the analysis of the mesophases of the innovative development trajectories and split every phase into two sub-phases. We represent Meso 1 as the sequential-parallel processes of creation and diffusion of open codified knowledge (subphase 1.1) and the methods of transforming open knowledge into pre-competitive one (subphase 1.2). Meso 2 contains the processes of shaping a new selecting (market) environment (subphase 2.1) and the development of the pull of this environment (subphase 2.2). Finally, Meso 3 combines two processes:


It is worth to note that the first attempt introduces such phase portioning belongs to [11]. However, the proposed partition is somewhat different from that of the just mentioned work. We will not specifically analyse the difference between the formulations. Let us only note that the partitioning does not contradict the meaning Doppfer' one. The terms defining it are closer to specialists whose activities are directly related to the analysis of innovation processes. Besides, we included in the third mesophase the process of destruction of the previous development track, which Dopfer did not single out at the beginning of the phase.

#### **5.1 Mesophase 1: origination of an idea/rule and meso-units shaping**

The first phase starts a process of de-coordinating the selective environment (particularly, market) and creating new complex knowledge. In the first subphase, public policy has the objectives: 1) direct support of basic research; 2) creation and support of open information channels, that is, mechanisms for decoding and transfer available codified knowledge [20].

The transmission or transfer of codified information through an open information channel is an essential element of knowledge diffusion. It allows ensuring the process of pre-competitive cognition and technology invention if the acquisition of knowledge that is not special but generic enables its application in a reasonably wide range of areas. It is all the more relevant as the actor is unable to realise an available technological stock without additional scientific knowledge of an academic nature. The absence or ineffective operation of the open information channel creates gaps between the first and second subphases and significantly reduce the efficacy of the latter.

In the second subphase, the government supports for the channel for converting and transforming open knowledge into pre-competitive one [20]. Its content is to keep:


It is worth noting that at this phase, the activity of population actors occurs under conditions of significant uncertainty of a result (see Section 2.1). The active innovators need information, organisational and financial assistance from the government.

**Technological niches.** Using a niche enables NIS actors to counter emerging threats in development trends (for example, environmental degradation and reducing market demand). In these cases, innovators work in niches in the hope that they will help smooth and diminish these threats, while also through a series of technical improvements will be able to take into account the nature and future dynamics of the pressure of the selection environment.

As mentioned earlier, forming technological niches, it is necessary to take into account that in the socio-economic environment, in contrast to the biological one, there should be a co-evolution of technology and the selective settings [33].

**51**

*Meso Trajectories in the National Innovation System and Their Regulation*

cannot be considered in isolation from producers and investors.

cessful, the technological niche turns into a rather broad market.

themselves, and thus resist the established rut of development.

innovative changes has appeared in the economy.

pre-competitive into competitive knowledge.

The phase can be represented as two subphases.

development, in particular, by forming quasi-evolutionary mutations.

It means that the selective environment is not steady and not exogenous to the evolution of the group of carriers of the technological rules. Therefore, consumers

Niches make a protected technological space in which inventions are tested and become a starting point for radically new technologies and products. The actors' population in the niche can include both actors of the previous technological regime and new players, carriers of new technologies. The process of growing technology and evolutionary learning help generate demand for technology and its products. They also include proto-markets, where the first interactions between producers and users of these technologies and products take place. If the proto-market is suc-

The protection of technological niches and their entry into the selective (market) space are organised by NIS actors investing in promising fledgeling technologies. Financial resources for the development of technological niches are private investments in strategic R&D and public grants or subsidies from the target users,

Business incubators, technology parks, advanced technology programs, and support for pre-competitive cooperation between business and public organisations in the development of radical technologies can serve as a form to arrange public support for technological niches. There is a need in policy aimed at actors seeking the status of innovators who are able to create specialised technological niches

The implementation of the concept of technological niches in many ways enables us to create prerequisites for solving the problem of advanced innovative

**5.2 Mesophase 2: rule adoption and diffusion in the selection environment**

At the beginning of the phase, the first adoption of the rule by the market (selection environment) occurs. The randomness of the environment and its bifurcations give rise to uncertainty of innovation rule perspectives. If it is possible to reduce this uncertainty, then the turnover of innovations becomes large-scale [12], the rule belongs to a group. At the end of the phase, the significant population of rule-carriers is emerging. Its shaping allows saying that a mesolevel bringing future

Selection (or market) niches created for the new technological rules are tools that give an opportunity reducing the chaos of the environment introduce order and, ultimately, achieving the spread of the new rules among consumers. If the market acts as a selective medium, then at this phase, there is a transformation of

At the first of them (subphase 2.1), a new selection (market) environment is shaped. It has a perceptual ability to adopt the proposed new technological ideas. Public policy supports the formation and development of selection niches for them (for example, within the technology parks and advanced technology programs, late stages of venture capital business supported by specialised tax breaks). Besides, to protect emerging niches, isolationist barriers that partially and sometimes completely block the diffusion of the innovation rule to competitors are raised.

At the second subphase (subphase 2.2), a new selection environment develops.

It means that there are growth and blurring of the most successful (selection) market niches, that is, a conquest for market space by niche actors. The government innovation policy in NIS is aimed at supporting and developing the demand for new products produced according to new technological rules, new technological

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

for example, defence agencies.

#### *Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

which Dopfer did not single out at the beginning of the phase.

transfer available codified knowledge [20].

incubators or initial stage venture business;

the pressure of the selection environment.

**5.1 Mesophase 1: origination of an idea/rule and meso-units shaping**

The first phase starts a process of de-coordinating the selective environment (particularly, market) and creating new complex knowledge. In the first subphase, public policy has the objectives: 1) direct support of basic research; 2) creation and support of open information channels, that is, mechanisms for decoding and

The transmission or transfer of codified information through an open information channel is an essential element of knowledge diffusion. It allows ensuring the process of pre-competitive cognition and technology invention if the acquisition of knowledge that is not special but generic enables its application in a reasonably wide range of areas. It is all the more relevant as the actor is unable to realise an available technological stock without additional scientific knowledge of an academic nature. The absence or ineffective operation of the open information channel creates gaps between the first and second subphases and significantly reduce the efficacy of

In the second subphase, the government supports for the channel for converting and transforming open knowledge into pre-competitive one [20]. Its content is

1.the functioning of technological niches implemented, for example, in business

2.intra-company R&D incorporated in setting up technologically new processes

3.NIS actors' cooperation in the generation of pre-competitive knowledge. At this phase, the activity of population actors occurs under conditions of significant uncertainty (see Section 2). The active innovators need information,

It is worth noting that at this phase, the activity of population actors occurs under conditions of significant uncertainty of a result (see Section 2.1). The active innovators need information, organisational and financial assistance from the

**Technological niches.** Using a niche enables NIS actors to counter emerging threats in development trends (for example, environmental degradation and reducing market demand). In these cases, innovators work in niches in the hope that they will help smooth and diminish these threats, while also through a series of technical improvements will be able to take into account the nature and future dynamics of

As mentioned earlier, forming technological niches, it is necessary to take into

account that in the socio-economic environment, in contrast to the biological one, there should be a co-evolution of technology and the selective settings [33].

organisational and financial assistance from the government.

It is worth to note that the first attempt introduces such phase portioning belongs to [11]. However, the proposed partition is somewhat different from that of the just mentioned work. We will not specifically analyse the difference between the formulations. Let us only note that the partitioning does not contradict the meaning Doppfer' one. The terms defining it are closer to specialists whose activities are directly related to the analysis of innovation processes. Besides, we included in the third mesophase the process of destruction of the previous development track,

**50**

the latter.

to keep:

and products;

government.

It means that the selective environment is not steady and not exogenous to the evolution of the group of carriers of the technological rules. Therefore, consumers cannot be considered in isolation from producers and investors.

Niches make a protected technological space in which inventions are tested and become a starting point for radically new technologies and products. The actors' population in the niche can include both actors of the previous technological regime and new players, carriers of new technologies. The process of growing technology and evolutionary learning help generate demand for technology and its products. They also include proto-markets, where the first interactions between producers and users of these technologies and products take place. If the proto-market is successful, the technological niche turns into a rather broad market.

The protection of technological niches and their entry into the selective (market) space are organised by NIS actors investing in promising fledgeling technologies. Financial resources for the development of technological niches are private investments in strategic R&D and public grants or subsidies from the target users, for example, defence agencies.

Business incubators, technology parks, advanced technology programs, and support for pre-competitive cooperation between business and public organisations in the development of radical technologies can serve as a form to arrange public support for technological niches. There is a need in policy aimed at actors seeking the status of innovators who are able to create specialised technological niches themselves, and thus resist the established rut of development.

The implementation of the concept of technological niches in many ways enables us to create prerequisites for solving the problem of advanced innovative development, in particular, by forming quasi-evolutionary mutations.

#### **5.2 Mesophase 2: rule adoption and diffusion in the selection environment**

At the beginning of the phase, the first adoption of the rule by the market (selection environment) occurs. The randomness of the environment and its bifurcations give rise to uncertainty of innovation rule perspectives. If it is possible to reduce this uncertainty, then the turnover of innovations becomes large-scale [12], the rule belongs to a group. At the end of the phase, the significant population of rule-carriers is emerging. Its shaping allows saying that a mesolevel bringing future innovative changes has appeared in the economy.

Selection (or market) niches created for the new technological rules are tools that give an opportunity reducing the chaos of the environment introduce order and, ultimately, achieving the spread of the new rules among consumers. If the market acts as a selective medium, then at this phase, there is a transformation of pre-competitive into competitive knowledge.

The phase can be represented as two subphases.

At the first of them (subphase 2.1), a new selection (market) environment is shaped. It has a perceptual ability to adopt the proposed new technological ideas. Public policy supports the formation and development of selection niches for them (for example, within the technology parks and advanced technology programs, late stages of venture capital business supported by specialised tax breaks). Besides, to protect emerging niches, isolationist barriers that partially and sometimes completely block the diffusion of the innovation rule to competitors are raised.

At the second subphase (subphase 2.2), a new selection environment develops. It means that there are growth and blurring of the most successful (selection) market niches, that is, a conquest for market space by niche actors. The government innovation policy in NIS is aimed at supporting and developing the demand for new products produced according to new technological rules, new technological

knowledge diffusion among producers and consumers. The policy facilitates the reduction of isolationist barriers and provides the operating of channels of commercial knowledge transfer [20] from the niches.

The sub-phases can be linked in the mesotrajectory. As a result, the second one turns out to be a continuation of the first. At the same time, it is worth recalling that the requirements for public policy at different sub-phases may come into an inevitable conflict with each other (see also Section 3). At the first one, the public policy should support isolationist barriers protecting the innovative rule owners. At the second subphase, it may turn out that the introduced protective barriers, being demotivators for actors to enter the population of rule carriers, prevent the expansion of mature niches into the market or other selection space. Therefore, there appears a need for mechanisms reducing the barriers.

This phase has to make certain the progress of the rules at the level of micro and macro inventions that appears in the previous phase, i.e. particularly, implement them to produce products useful to the consumer. A safe space for the adaptation of the rules can be organised in isolated niches (a separate environment). At the start of the phase, a niche product is scarce. However, if it successfully diffuses among consumers outside the niche, it can ensure the steady growth of its market. Consequently, the successful niche might put the corresponding meso-unit on the trajectory of increasing economies of scale.

**Types of selection (market) niches**. Within the niche, the direction of the evolutionary technological process is mainly determined not by variations of existing generations of technologies, but by changes in the selective environment. However, the changes in the selection environment of a niche can force niche actors not only to reject unsuitable technologies but also create a preferred technology option by organising a step-by-step process of improving existing options. This process of changing technological rules takes place in the interaction of producers and users.

The types of emerging niches should be distinguished both by the method of formation and by their content. According to the first item, we should distinguish two types of niches. One of them includes the niches that are the result of the transformation of the technological niches that arose in the previous phase of a mesotrajectory. The second one singles out the niches that are purposefully created for the organization of local adaptation and evolution of mainstream technologies that maybe are not widely spread in the country. In terms of content, it is necessary to take into account that some niches implement natural selection; that is, they prolong a continuous evolutionary process. In contrast, other niches provide a change in the direction of evolution, that is, intermittent development.

In other words, technological niches are often at the origin of selection (market) niches. As mentioned above, a successful technology niche generates some primary markets build by coalitions of actors-agents to test and develop new technologies. The proto-market can eventually transform into a niche market. The likelihood of such a transformation is high if the technologies presented on the proto-markets take into account a perspective for the co-evolution of producers and consumers in a certain market segment. These transformation mechanisms usually operate in developed countries at the stage of development based on innovations. In the initial stages of this transformation, small and medium-sized enterprises often act as original technology carriers [34].

Following the above, another option for the emergence of market niches is also available. In this variant, micro or macro inventions continuing the trends of the mainstream evolve in market niches. As a result of this isolation, the technology development can lead to the development of the technology for the local environment (including step-by-step improvement of known, in particular, imported technologies or the development and adaptation of inclusive options for advanced

**53**

*Meso Trajectories in the National Innovation System and Their Regulation*

technologies). The emerging technology can also diffuse into other market niches contributing to the origination of new socio-technological regime in the economic system. If a certain degree of local maturity of the regime is reached, it penetrates the mainstream markets and begins to compete with the other regime modes that are widespread there. Niches of this development model can be shaped within special economic zones to create a pool of new technologies for the country. The implementation of the pool could be necessary to reduce the gap with the mainstream of technological development. The formation of market niches of this kind is typical for actors in developing countries undergoing the investment stage of development [34]. Moreover, large national companies act as actors of mainstream technology carriers if government organises their protection and support in the niches. **Transformation of technological niches into selection (market) ones**. Considering the processes of formation of selection (market) niches for which technological ones serve as a prototype, it is worth to take into account the following circumstance. The radical technological changes are the result of a process of ether gradual changes, accumulated step-by-step cumulative innovation or rapid progressive changes accompanied by opening up new markets and creating new

Following what has just been said, one can distinguish niches of natural selec-

*Niches of natural selection (quasi-classical evolution).* In a selection (market) niche, the direction of the evolutionary process is determined not by the variations of emerging technology generations but by alterations in a selective environment. The alterations made actors not only reject unsuitable technologies but also forces them to organise a step-by-step process of improving the existing advantageous technologies. This process occurs in the interaction between a producer and user (see, for example, [32]) Besides, the carriers of the technology should take into consideration not only the market but also institutional factors of selection. As a result of the process, among the actors, the number of carriers of improved technology technologies increases. In contrast, the number of actors who have technologies

*Niches of intermittent equilibrium*. However, periods of gradual accumulation of new technological features characterised by the absence of visible changes or minor shifts can be disrupted if technologies that have an intermittent nature arise. Then there are technological changes that are considered analogous to the so-called

Within the framework of this equilibrium, long periods of relatively steady dynamics of mesotrajectories, which are characterised by the accumulation of smooth evolutionary variations of technological species, suddenly end and there are leapfrogs to new types of technologies. The leaps originate at the Meso-1 phase in technological niches of interrupted (or punctuated) equilibrium. Mutations destroy the selection environment. Therefore, the task of the mesopopulation is to transform the technological niche of intermittent equilibrium into a selection (market) one to begin shaping a full-fledged environment. In other words, the goal is to turn the niche, eventually, into the widespread domain (mass market) that can provide

At the Meso 3 phase, the main role is played by the dominant institutional or socio-technological regimes [35], which establish the prevailing system of mesounit coordination. The socio-technological regime is characterised by the rules that define the technological (technical) structure and market development (user's

with features unfavourable for the altered environment decreases.

the basis for changing the dominant socio-technological regime.

**5.3 Mesophase 3: changing the old rule and retaining the new rule**

intermittent equilibrium, studied in biology [33].

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

industries [33].

tion and discontinuous equilibrium.

#### *Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

mercial knowledge transfer [20] from the niches.

need for mechanisms reducing the barriers.

trajectory of increasing economies of scale.

original technology carriers [34].

in the direction of evolution, that is, intermittent development.

knowledge diffusion among producers and consumers. The policy facilitates the reduction of isolationist barriers and provides the operating of channels of com-

The sub-phases can be linked in the mesotrajectory. As a result, the second one turns out to be a continuation of the first. At the same time, it is worth recalling that the requirements for public policy at different sub-phases may come into an inevitable conflict with each other (see also Section 3). At the first one, the public policy should support isolationist barriers protecting the innovative rule owners. At the second subphase, it may turn out that the introduced protective barriers, being demotivators for actors to enter the population of rule carriers, prevent the expansion of mature niches into the market or other selection space. Therefore, there appears a

This phase has to make certain the progress of the rules at the level of micro and macro inventions that appears in the previous phase, i.e. particularly, implement them to produce products useful to the consumer. A safe space for the adaptation of the rules can be organised in isolated niches (a separate environment). At the start of the phase, a niche product is scarce. However, if it successfully diffuses among consumers outside the niche, it can ensure the steady growth of its market. Consequently, the successful niche might put the corresponding meso-unit on the

**Types of selection (market) niches**. Within the niche, the direction of the evolutionary technological process is mainly determined not by variations of existing generations of technologies, but by changes in the selective environment. However, the changes in the selection environment of a niche can force niche actors not only to reject unsuitable technologies but also create a preferred technology option by organising a step-by-step process of improving existing options. This process of changing technological rules takes place in the interaction of producers and users. The types of emerging niches should be distinguished both by the method of formation and by their content. According to the first item, we should distinguish two types of niches. One of them includes the niches that are the result of the transformation of the technological niches that arose in the previous phase of a mesotrajectory. The second one singles out the niches that are purposefully created for the organization of local adaptation and evolution of mainstream technologies that maybe are not widely spread in the country. In terms of content, it is necessary to take into account that some niches implement natural selection; that is, they prolong a continuous evolutionary process. In contrast, other niches provide a change

In other words, technological niches are often at the origin of selection (market) niches. As mentioned above, a successful technology niche generates some primary markets build by coalitions of actors-agents to test and develop new technologies. The proto-market can eventually transform into a niche market. The likelihood of such a transformation is high if the technologies presented on the proto-markets take into account a perspective for the co-evolution of producers and consumers in a certain market segment. These transformation mechanisms usually operate in developed countries at the stage of development based on innovations. In the initial stages of this transformation, small and medium-sized enterprises often act as

Following the above, another option for the emergence of market niches is also available. In this variant, micro or macro inventions continuing the trends of the mainstream evolve in market niches. As a result of this isolation, the technology development can lead to the development of the technology for the local environment (including step-by-step improvement of known, in particular, imported technologies or the development and adaptation of inclusive options for advanced

**52**

technologies). The emerging technology can also diffuse into other market niches contributing to the origination of new socio-technological regime in the economic system. If a certain degree of local maturity of the regime is reached, it penetrates the mainstream markets and begins to compete with the other regime modes that are widespread there. Niches of this development model can be shaped within special economic zones to create a pool of new technologies for the country. The implementation of the pool could be necessary to reduce the gap with the mainstream of technological development. The formation of market niches of this kind is typical for actors in developing countries undergoing the investment stage of development [34]. Moreover, large national companies act as actors of mainstream technology carriers if government organises their protection and support in the niches.

**Transformation of technological niches into selection (market) ones**. Considering the processes of formation of selection (market) niches for which technological ones serve as a prototype, it is worth to take into account the following circumstance. The radical technological changes are the result of a process of ether gradual changes, accumulated step-by-step cumulative innovation or rapid progressive changes accompanied by opening up new markets and creating new industries [33].

Following what has just been said, one can distinguish niches of natural selection and discontinuous equilibrium.

*Niches of natural selection (quasi-classical evolution).* In a selection (market) niche, the direction of the evolutionary process is determined not by the variations of emerging technology generations but by alterations in a selective environment. The alterations made actors not only reject unsuitable technologies but also forces them to organise a step-by-step process of improving the existing advantageous technologies. This process occurs in the interaction between a producer and user (see, for example, [32]) Besides, the carriers of the technology should take into consideration not only the market but also institutional factors of selection. As a result of the process, among the actors, the number of carriers of improved technology technologies increases. In contrast, the number of actors who have technologies with features unfavourable for the altered environment decreases.

*Niches of intermittent equilibrium*. However, periods of gradual accumulation of new technological features characterised by the absence of visible changes or minor shifts can be disrupted if technologies that have an intermittent nature arise. Then there are technological changes that are considered analogous to the so-called intermittent equilibrium, studied in biology [33].

Within the framework of this equilibrium, long periods of relatively steady dynamics of mesotrajectories, which are characterised by the accumulation of smooth evolutionary variations of technological species, suddenly end and there are leapfrogs to new types of technologies. The leaps originate at the Meso-1 phase in technological niches of interrupted (or punctuated) equilibrium. Mutations destroy the selection environment. Therefore, the task of the mesopopulation is to transform the technological niche of intermittent equilibrium into a selection (market) one to begin shaping a full-fledged environment. In other words, the goal is to turn the niche, eventually, into the widespread domain (mass market) that can provide the basis for changing the dominant socio-technological regime.

#### **5.3 Mesophase 3: changing the old rule and retaining the new rule**

At the Meso 3 phase, the main role is played by the dominant institutional or socio-technological regimes [35], which establish the prevailing system of mesounit coordination. The socio-technological regime is characterised by the rules that define the technological (technical) structure and market development (user's preferences), as well as the processes of their regulation. In this sense, a regime is a set of sequential rules that are carried by a certain range of actors including firms, users and government. Changing the system of rules leads to a transition to a new type of mesotrajectory.

A particular socio-technological regime supports the dominant technology genes (see [33], pp. 607). A genotype of technology refers to the rules for how to produce, use and regulate specific products. The technology is considered as the constructions (analogous to the biological genotype) whose implementation in products and processes (technology phenotypes) is promoted by various firms. The functions of the regime also include such actions as transferring and storing the rules (see [33], p. 608–609). The technology genes determine the generality and differences between technological species.

Such components of the knowledge system stipulate the metastability of Meso 3 as routines, competencies, and the ability to use them. Conserving and preserving knowledge (rules) and reproducing them allows actors to create a space for step-by-step technological mutations. In this space, there is a dynamic balance of developing technological types supported by their incremental improvement and improvement.

In theory, a regime exists as long as its rules remain essential for the economic system. The fundamental nature of the rules is to maintain an optimal balance between increasing returns to scale (short-term effect) and the desired degree of diversity, i.e. the possibility of considerable recombination of innovations (longterm benefit) for the existing genotype of technologies. However, this balance cannot remain optimal for a long time due to the internal conflict between the achieved level of economies of scale and the demand for expanding the diversity of technological genotypes. The conflict causes a change in technological genotype after a while. Finding and implementing a new optimal balance may not be easy. Therefore, at this stage, there is a danger to fall into the trap of a well-worn track. In result, a systemic failure of the national innovation system takes place. This trap gives rise to the severe dysfunction of the NIS, that is, the failure to perform such its primary function as gaining and implementing innovative knowledge.

Resistance to changes in ideas, institutions, technologies, and the behaviour of actors can be an additional factor in maintaining the existing track. In addition, one can also attribute some historical restrictions to the resistance factor. In biology, such circumstances are referred to as a development constraint [36] or phylogenetic inertia [37]. In economics, this phenomenon is interpreted in terms such as dependence on the path of development, blocking the future path [38].

However, if a rule carriers' population passed Meso 2 manages to overcome this resistance and shape promising market niches external to the existing socioeconomic regime, then the stability of the previous development track is violated. The search for a new technological balance starts, new technological genes that are not a continuation of the existing ones begin to dominate. New evolutionary shifts on meso-trajectories change the order at the macro level, and a new sociotechnological regime appears. This mode initiates a new ordered (metastable) state with its structure and order.

**Influence of niche development on the change of socio-technological regime**. A significant factor in extending a life span or changing the dominant socio-economic regime is the process of spreading market niches. The set of market niches that coexist with the mode facilitates the stability of its functionality. Elements of such niches can be associated with global socio-technological regimes. The existence of the set of niches compatible with the socio-technological regime points out a mosaic of technological evolution. A similar idea of mosaic evolution of branching species is also present in biology [39].

**55**

*Meso Trajectories in the National Innovation System and Their Regulation*

the actors of the innovation system to invest in these niches.

1.Getting out of the rut of previous development.

tions of existing technological genotypes in the world.

government policy is needed to implement such a manoeuvre [21].

technological regime is being adjusted.

2.Forming a new track of development.

To pass these subphases, it is necessary:

phase to mass markets.

If in the process of their development, all niches remain internal to the regime,

The increased variability of the niches leads to their transition to the category of external ones if the changes introduced in niches are fundamental. The active progress of external niches can ultimately lead to the transformation of the sociotechnological regime, that is, the formation of a new evolution direction. In this case, the situation changes radically. First of all, it may be associated with the emergence of market niches of punctuated equilibrium and powerful incentives for

There may also be another case when the rules changing so after some correction allow actors of mesopopulation to keep previous dimensions of development. As a result, the dominating regime improves and adapts to the new requirements of the selection environment. For example, the pressure of growing demand for electric cars forces traditional car manufacturers to focus their efforts on meeting environmental needs of the social environment within the framework of the previous model of a vehicle with an internal combustion engine. Thus, the existing socio-

As it follows from the above Meso 3 should be divided into two subphases:

1.To initiate the narrowing of the differences between the country's technology pool and the existing variety of technological genotypes in the world.

2.To determine the dimensions of necessary technological shifts from the posi-

3.To facilitate the penetration of technology genotypes created at the Meso 2

Public policy should encourage the diffusion and development of the wide range of technologies to expand the diversity of those that promote structural shifts towards more advanced technological genes. It can also foster the development of

The solution of the first and second tasks determines the conditions for getting out of the previous development track isolated from the technology mainstream. The country must participate in international value chains and use international competition as a driver of the necessary shifts. The result might be the design of socio-technological regime that, on the one hand, has common technological genotypes with regimes of advanced countries, and, on the other hand, satisfy the particular needs of the country's technological development. Carefully thought-out

then they support various elements of its functionality and realize its internal diversity. In the process of diffusion of innovative rules, thanks to the incremental changes in technologies and rivalry between them, the new socio-technological regime adjusting to the new requirements of the selective environment evolves. Its evolution gives rise to a new equilibrium of the system. In the process of diffusion of innovative rules, thanks to the incremental changes in technologies and rivalry between them, the new socio-technological regime adjusting to the new requirements of the selective environment evolves. Its evolution gives rise to a new equilib-

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

rium of the system.

#### *Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

type of mesotrajectory.

between technological species.

improvement.

preferences), as well as the processes of their regulation. In this sense, a regime is a set of sequential rules that are carried by a certain range of actors including firms, users and government. Changing the system of rules leads to a transition to a new

A particular socio-technological regime supports the dominant technology genes (see [33], pp. 607). A genotype of technology refers to the rules for how to produce, use and regulate specific products. The technology is considered as the constructions (analogous to the biological genotype) whose implementation in products and processes (technology phenotypes) is promoted by various firms. The functions of the regime also include such actions as transferring and storing the rules (see [33], p. 608–609). The technology genes determine the generality and differences

Such components of the knowledge system stipulate the metastability of Meso 3 as routines, competencies, and the ability to use them. Conserving and preserving knowledge (rules) and reproducing them allows actors to create a space for step-by-step technological mutations. In this space, there is a dynamic balance of developing technological types supported by their incremental improvement and

In theory, a regime exists as long as its rules remain essential for the economic system. The fundamental nature of the rules is to maintain an optimal balance between increasing returns to scale (short-term effect) and the desired degree of diversity, i.e. the possibility of considerable recombination of innovations (longterm benefit) for the existing genotype of technologies. However, this balance cannot remain optimal for a long time due to the internal conflict between the achieved level of economies of scale and the demand for expanding the diversity of technological genotypes. The conflict causes a change in technological genotype after a while. Finding and implementing a new optimal balance may not be easy. Therefore, at this stage, there is a danger to fall into the trap of a well-worn track. In result, a systemic failure of the national innovation system takes place. This trap gives rise to the severe dysfunction of the NIS, that is, the failure to perform such its

Resistance to changes in ideas, institutions, technologies, and the behaviour of actors can be an additional factor in maintaining the existing track. In addition, one can also attribute some historical restrictions to the resistance factor. In biology, such circumstances are referred to as a development constraint [36] or phylogenetic inertia [37]. In economics, this phenomenon is interpreted in terms such as depen-

However, if a rule carriers' population passed Meso 2 manages to overcome this resistance and shape promising market niches external to the existing socioeconomic regime, then the stability of the previous development track is violated. The search for a new technological balance starts, new technological genes that are not a continuation of the existing ones begin to dominate. New evolutionary shifts on meso-trajectories change the order at the macro level, and a new sociotechnological regime appears. This mode initiates a new ordered (metastable) state

**Influence of niche development on the change of socio-technological regime**. A significant factor in extending a life span or changing the dominant socio-economic regime is the process of spreading market niches. The set of market niches that coexist with the mode facilitates the stability of its functionality. Elements of such niches can be associated with global socio-technological regimes. The existence of the set of niches compatible with the socio-technological regime points out a mosaic of technological evolution. A similar idea of mosaic evolution of branching

primary function as gaining and implementing innovative knowledge.

dence on the path of development, blocking the future path [38].

**54**

with its structure and order.

species is also present in biology [39].

If in the process of their development, all niches remain internal to the regime, then they support various elements of its functionality and realize its internal diversity. In the process of diffusion of innovative rules, thanks to the incremental changes in technologies and rivalry between them, the new socio-technological regime adjusting to the new requirements of the selective environment evolves. Its evolution gives rise to a new equilibrium of the system. In the process of diffusion of innovative rules, thanks to the incremental changes in technologies and rivalry between them, the new socio-technological regime adjusting to the new requirements of the selective environment evolves. Its evolution gives rise to a new equilibrium of the system.

The increased variability of the niches leads to their transition to the category of external ones if the changes introduced in niches are fundamental. The active progress of external niches can ultimately lead to the transformation of the sociotechnological regime, that is, the formation of a new evolution direction. In this case, the situation changes radically. First of all, it may be associated with the emergence of market niches of punctuated equilibrium and powerful incentives for the actors of the innovation system to invest in these niches.

There may also be another case when the rules changing so after some correction allow actors of mesopopulation to keep previous dimensions of development. As a result, the dominating regime improves and adapts to the new requirements of the selection environment. For example, the pressure of growing demand for electric cars forces traditional car manufacturers to focus their efforts on meeting environmental needs of the social environment within the framework of the previous model of a vehicle with an internal combustion engine. Thus, the existing sociotechnological regime is being adjusted.

As it follows from the above Meso 3 should be divided into two subphases:


The solution of the first and second tasks determines the conditions for getting out of the previous development track isolated from the technology mainstream. The country must participate in international value chains and use international competition as a driver of the necessary shifts. The result might be the design of socio-technological regime that, on the one hand, has common technological genotypes with regimes of advanced countries, and, on the other hand, satisfy the particular needs of the country's technological development. Carefully thought-out government policy is needed to implement such a manoeuvre [21].

Public policy should encourage the diffusion and development of the wide range of technologies to expand the diversity of those that promote structural shifts towards more advanced technological genes. It can also foster the development of

modular technologies facilitating innovative combinations and exchanging information, so that cross-fertilisation or pollination in modular innovations become possible. The use of recombination of technological innovations can be a key element to get out of the rut trap, for example, through switching to environmentally friendly technologies.

#### **6. Conclusions**

Thus, one can present a mesotrajectory as a sequential process of performing core NIS functions on the different its phases.

The study of the problems of regulating the mesotrajectory should take into account that the focus must be on the impact of policies on two groups of factors. The first is external factors whose action is manifested in the existence of high risks and uncertainties distributed over different stages of the mesotrajectory. The high risks and uncertainties generate strong disincentives to perform core NIS function. The second group occurs within the mesopopulations, some of whose actors shape the factors of the group and can be teemed into factor-forming populations.

Regarding the first group of factors, two conclusions can be drawn. First, government policy that aims to mitigate inherent risks and uncertainties must be dual. It means that, on the one hand, the innovation system should facilitate compensation for a part of uncertainties and risks inherent in innovation activity, and, on the other hand, make the actors carry a significant portion of risks themselves. Secondly, if the NIS is intended for regulating the effects of externalities (e.g. technological spillover) on different phases of the trajectory, then its task is to reduce risks of their adverse influences on the evolutionary trajectories. In this case, the policy should maintain some balance of these influences on different NIS core functions on mesotrajectories. Notably, it could provide a choice between a strong or weak public support of intellectual property rights.

The actions of factor-forming populations also contribute to realising the core NIS functions on the different phases of trajectory. It is worthwhile to organise support and expansion of those factoring-forming populations that have a positive effect on the phases of mesotrajectories. If the factor-forming population harms the trajectory phases, then the targeted policy should neutralise it, in particular, weakening this actors' population. In the case, when a factor-forming population demonstrates both positive and negative influences on the trajectory, the policy should facilitate a transformation of the actors' behavioural models dominated in the population. It means that it may assist in strengthening the useful parameters of the models and eliminating or smoothing their harmful ones.

A significant limitation of the neo-evolutionary approach is not taking into account the fact that in addition to changing the size of the mesopopulation and transforming the innovation rule, it is necessary to consider also other its characteristics. Among them, innovative resources of the population, elements of the production processes embodying the rule into products and technologies. One of the most critical innovative resources is the knowledge that underlies the technological rule.

Therefore, it is necessary to consider populations of system actors not so much as a set of carriers of the knowledge-rule pair, but as a set of carriers of the knowledgerule-resource triple. At the same time, it should be taken into account that knowledge as a resource can be a source of innovative rent for actors. The contest for its possession can break the continuation of mesotrajectory. The isolationist barriers built by the firm and the state to preserve the innovative rent rights largely facilitate the emerging gap. This gap gives rise the problem of public regulation of innovation

**57**

**Author details**

Oleg Golichenko

Moscow, Russia

Central Economics and Mathematics Institute of Russian Academy of Sciences,

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

\*Address all correspondence to: golichenko@rambler.ru

provided the original work is properly cited.

*Meso Trajectories in the National Innovation System and Their Regulation*

diffusion in mesotrajectories. The problem is not simple. On the one hand, monopoly isolationist barriers protecting market niches promote the development of radical technologies. However, on the other hand, they make a hindrance to diffuse

However, the reasons for the discontinuity of the trajectory may not only the factors mentioned above. They can include both the origin and spread of disruptive technologies. The emergence and development of these technologies can disrupt the relative stability and continuity of the former mesotrajectory due to the appearance of significant mutations of technological species. The appearance of such gaps poses difficult tasks of regulating the mesotrajectory and managing technological and

Also, embedding the design of niches into the three-phase model of mesotrajectories of the new evolution theory is, in our opinion, an essential theoretical and practical aspect of its development. The introduction of a system of niches gives an opportunity to tie together better all three mesophases. Moreover, it allows considering more adequately control loop of the trajectory. In particular, it concerns the incorporation of evolutionary and intermittent development into the dynamics of meso-units at the first two mesophases and the mechanisms for changing or

prolonging the span of the socio-technological regime at the third phase.

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

innovations into the market space.

market niches.

#### *Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

*Circular Economy - Recent Advances, New Perspectives and Applications*

core NIS functions on the different its phases.

or weak public support of intellectual property rights.

the models and eliminating or smoothing their harmful ones.

friendly technologies.

**6. Conclusions**

modular technologies facilitating innovative combinations and exchanging information, so that cross-fertilisation or pollination in modular innovations become possible. The use of recombination of technological innovations can be a key element to get out of the rut trap, for example, through switching to environmentally

Thus, one can present a mesotrajectory as a sequential process of performing

The study of the problems of regulating the mesotrajectory should take into account that the focus must be on the impact of policies on two groups of factors. The first is external factors whose action is manifested in the existence of high risks and uncertainties distributed over different stages of the mesotrajectory. The high risks and uncertainties generate strong disincentives to perform core NIS function. The second group occurs within the mesopopulations, some of whose actors shape the factors of the group and can be teemed into factor-forming populations. Regarding the first group of factors, two conclusions can be drawn. First, government policy that aims to mitigate inherent risks and uncertainties must be dual. It means that, on the one hand, the innovation system should facilitate compensation for a part of uncertainties and risks inherent in innovation activity, and, on the other hand, make the actors carry a significant portion of risks themselves. Secondly, if the NIS is intended for regulating the effects of externalities (e.g. technological spillover) on different phases of the trajectory, then its task is to reduce risks of their adverse influences on the evolutionary trajectories. In this case, the policy should maintain some balance of these influences on different NIS core functions on mesotrajectories. Notably, it could provide a choice between a strong

The actions of factor-forming populations also contribute to realising the core NIS functions on the different phases of trajectory. It is worthwhile to organise support and expansion of those factoring-forming populations that have a positive effect on the phases of mesotrajectories. If the factor-forming population harms the trajectory phases, then the targeted policy should neutralise it, in particular, weakening this actors' population. In the case, when a factor-forming population demonstrates both positive and negative influences on the trajectory, the policy should facilitate a transformation of the actors' behavioural models dominated in the population. It means that it may assist in strengthening the useful parameters of

A significant limitation of the neo-evolutionary approach is not taking into account the fact that in addition to changing the size of the mesopopulation and transforming the innovation rule, it is necessary to consider also other its characteristics. Among them, innovative resources of the population, elements of the production processes embodying the rule into products and technologies. One of the most critical innovative resources is the knowledge that underlies the techno-

Therefore, it is necessary to consider populations of system actors not so much as a set of carriers of the knowledge-rule pair, but as a set of carriers of the knowledgerule-resource triple. At the same time, it should be taken into account that knowledge as a resource can be a source of innovative rent for actors. The contest for its possession can break the continuation of mesotrajectory. The isolationist barriers built by the firm and the state to preserve the innovative rent rights largely facilitate the emerging gap. This gap gives rise the problem of public regulation of innovation

**56**

logical rule.

diffusion in mesotrajectories. The problem is not simple. On the one hand, monopoly isolationist barriers protecting market niches promote the development of radical technologies. However, on the other hand, they make a hindrance to diffuse innovations into the market space.

However, the reasons for the discontinuity of the trajectory may not only the factors mentioned above. They can include both the origin and spread of disruptive technologies. The emergence and development of these technologies can disrupt the relative stability and continuity of the former mesotrajectory due to the appearance of significant mutations of technological species. The appearance of such gaps poses difficult tasks of regulating the mesotrajectory and managing technological and market niches.

Also, embedding the design of niches into the three-phase model of mesotrajectories of the new evolution theory is, in our opinion, an essential theoretical and practical aspect of its development. The introduction of a system of niches gives an opportunity to tie together better all three mesophases. Moreover, it allows considering more adequately control loop of the trajectory. In particular, it concerns the incorporation of evolutionary and intermittent development into the dynamics of meso-units at the first two mesophases and the mechanisms for changing or prolonging the span of the socio-technological regime at the third phase.

### **Author details**

Oleg Golichenko Central Economics and Mathematics Institute of Russian Academy of Sciences, Moscow, Russia

\*Address all correspondence to: golichenko@rambler.ru

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

[1] Lundvall B-A, Johnson B. The learning economy. Journal of Industry Studies. 1994; 2: pp. 23-42.

[2] Golichenko O. The national innovation system: From concept to research methodology. Problems of Economic Transition. 2016; 58: 463-481.

[3] Edquist C. Systems of Innovation: Perspectives and Challenges. In Nelson RR, Mowery DC, Fagerberg J editors. The Oxford Handbook of Innovation. Oxford: Oxford University Press; 2006. p. 181-208.

[4] Miettinen R. Innovation, Human Capabilities, and Democracy: Towards an Enabling Welfare State. Oxford: Oxford University Press; 2013.

[5] Dopfer K, Potts J (editors). The New Evolutionary Economics. Edward Elgar Publishing; 2014.

[6] Freeman. C. Technology Policy and Economic Performance: Lessons from Japan. London and New York: Pinter Publishers; 1987.

[7] Lundvall B Å (editor). National Systems of Innovation. Towards a Theory of Innovation and Interactive Learning. London: Pinter; 1992.

[8] Nelson RR. National Innovation Systems: A Comparative Analysis. New York: Oxford University Press; 1993.

[9] Metcalfe S. The economic foundations of technology policy: equilibrium and evolutionary perspectives. In: Stoneman P, editor. Handbook of the Economics of Innovation and Technological Change. Blackwell Publishers. Oxford (UK)/ Cambridge (US); 1995.

[10] Dopfer K, Potts J, Pyka A. Upward and Downward Complementarity: The Meso Core of Evolutionary

Growth Theory. Springer-Verlag Berlin Heidelberg; 2015.

[11] Dopfer K. Foster J, Potts J. Micromeso-macro. Journal of Evolutionary Economics. 2004; 14: 263-279

[12] Dopfer K. The origins of meso economics. Schumpeter's legacy and beyond. Journal of Evolutionary Economics. 2012; 22: 133-160.

[13] Bleda M, del Rio P. The market failure and the systemic failure rationales in technological innovation systems. Research Policy. 2013; 42: 1039-1052.

[14] Schot J W. The policy relevance of the quasi-evolutionary model: The case of stimulating clean technologies. In: Coombs R et al, editors. Technological Change and Company Strategies. London: Academic; 1992: 185-200.

[15] Kemp R, Schot J, Hoogma R. Regime shifts to sustainability through processes of niche formation: the approach of strategic niche management. Technology Analysis and Strategic Management. 1998; 10: 175-196

[16] Hoogma R, Kemp R, Schot J, Truffer B. Experimenting for Sustainable Transport: The Approach of Strategic Niche Management. London: Spon. Press; 2002.

[17] Raven RPJM. Strategic Niche Management for Biomass. The Netherlands: Eindhoven University; 2005.

[18] Bianchi P, Labory S. From 'old' industrial policy to 'new' industrial development policies. In: Bianchi B, Labory S, editors. International Handbook on Industrial Policy. Cheltenham: Edward Elgar; 2006: 3-27.

[19] OECD. Governance of Innovation System. Paris: OECD; 2005.

**59**

99-120.

*Meso Trajectories in the National Innovation System and Their Regulation*

Competitive Strategic Management. New York: Prentice Hall. Englewood

[30] Thomä J, Bizer K. To protect or not to protect? Modes of appropriability in the small enterprise sector. Research

[31] Schumpeter J, Capitalism. Socialism and Democracy. London:George Allen

[32] Earl P, Potts J. The market for preferences. Cambridge Journal of Economics. 2004; 28; p. 619-633.

[33] Schot J, Geels F W. Niches in evolutionary theories of technical change. A critical survey of the literature. Journal of Evolutionary Economics. 2007; 17: p. 605-622.

[34] Golichenko O. A path to leadership of innovation for a developing country. In: Proceedings of the 13th European Conference on Innovation and Entrepreneurship; 20-21 September 2018; Aveiro. Portugal. 2018. p. 273-283

[35] Dopfer K. The economic agent as rule maker and rule user: *Homo sapiens* oeconomicus. Journal of Evolutionary Economics. 2004; 14: p. 177-195.

[37] Wilson. C. Up-scaling. formative phases. and learning in the historical diffusion of energy technologies. Energy Policy. 2012; 50: p. 81-94.

[36] Gould S J. The Structure of Evolutionary Thought. Cambridge: Harvard University Press; 2002.

[38] Arthur W B. Competing technologies, increasing returns, and lock-in by historical events. The Economic Journal. 1989; 99: p. 116-131.

[39] Gould S J. Ever since Darwin: Reflections in Natural History.

1991.

Harmondsworth. Middlesex: Penguin;

Cliffs. 1984; p. 556-570.

Policy. 2013; 42: p. 35-49.

& Unwin; 1942.

*DOI: http://dx.doi.org/10.5772/intechopen.94945*

[20] Golichenko O. The Methodology of national innovation system analysis. In: Latif Al-Hakim, Chen Jin, editors. Quality Innovation: Knowledge, Theory, and Practice. USA: Hershey

[21] Golichenko O. Public policy and the failures of the national innovation

[22] Golichenko O, Samovoleva S. The balance of externalities and internal effects in national innovation systems. In: Proceedings of the 10th European Conference on Innovation and Entrepreneurship; 17-18 September 2015; Genoa, Italy; 2015. p. 223-230

[23] Peteraf M. The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal.

[24] Peteraf M, Barney J. Unraveling the resource-based tangle. Managerial and Decision Economics. 2003; 24; 309-323.

[25] Golichenko O. Regulation of meso trajectories in the national innovation system. In: Proceedings of the 14th European Conference on Innovation and Entrepreneurship; 19-20 September; 2019 Kalamata, Greece; 2019. p. 336-344

[26] Idrisov GI, Knyaginin VN, Kudrin AL, Rozhkova ES. New technological revolution: Challenges and opportunities for Russia. Voprosy

[27] Edler J, Fagerberg J. Innovation policy: What. why. and how. Oxford Review of Economic Policy. 1917; 33: 2-23.

[28] Barney J. Firm resources and sustained competitive advantage. Journal of Management. 1991; 17:

[29] Rumelt R P. Toward a strategic theory of the firm. In: Lamb R, editor.

Ekonomiki. 2018; 4: 5-25.

1993: 14: 179-191.

Pennsilvanya, 2013: 94-123.

system. (In Russian). Voprosi Economici. 2017; 2: 1-12.

*Meso Trajectories in the National Innovation System and Their Regulation DOI: http://dx.doi.org/10.5772/intechopen.94945*

[20] Golichenko O. The Methodology of national innovation system analysis. In: Latif Al-Hakim, Chen Jin, editors. Quality Innovation: Knowledge, Theory, and Practice. USA: Hershey Pennsilvanya, 2013: 94-123.

[21] Golichenko O. Public policy and the failures of the national innovation system. (In Russian). Voprosi Economici. 2017; 2: 1-12.

[22] Golichenko O, Samovoleva S. The balance of externalities and internal effects in national innovation systems. In: Proceedings of the 10th European Conference on Innovation and Entrepreneurship; 17-18 September 2015; Genoa, Italy; 2015. p. 223-230

[23] Peteraf M. The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal. 1993: 14: 179-191.

[24] Peteraf M, Barney J. Unraveling the resource-based tangle. Managerial and Decision Economics. 2003; 24; 309-323.

[25] Golichenko O. Regulation of meso trajectories in the national innovation system. In: Proceedings of the 14th European Conference on Innovation and Entrepreneurship; 19-20 September; 2019 Kalamata, Greece; 2019. p. 336-344

[26] Idrisov GI, Knyaginin VN, Kudrin AL, Rozhkova ES. New technological revolution: Challenges and opportunities for Russia. Voprosy Ekonomiki. 2018; 4: 5-25.

[27] Edler J, Fagerberg J. Innovation policy: What. why. and how. Oxford Review of Economic Policy. 1917; 33: 2-23.

[28] Barney J. Firm resources and sustained competitive advantage. Journal of Management. 1991; 17: 99-120.

[29] Rumelt R P. Toward a strategic theory of the firm. In: Lamb R, editor. Competitive Strategic Management. New York: Prentice Hall. Englewood Cliffs. 1984; p. 556-570.

[30] Thomä J, Bizer K. To protect or not to protect? Modes of appropriability in the small enterprise sector. Research Policy. 2013; 42: p. 35-49.

[31] Schumpeter J, Capitalism. Socialism and Democracy. London:George Allen & Unwin; 1942.

[32] Earl P, Potts J. The market for preferences. Cambridge Journal of Economics. 2004; 28; p. 619-633.

[33] Schot J, Geels F W. Niches in evolutionary theories of technical change. A critical survey of the literature. Journal of Evolutionary Economics. 2007; 17: p. 605-622.

[34] Golichenko O. A path to leadership of innovation for a developing country. In: Proceedings of the 13th European Conference on Innovation and Entrepreneurship; 20-21 September 2018; Aveiro. Portugal. 2018. p. 273-283

[35] Dopfer K. The economic agent as rule maker and rule user: *Homo sapiens* oeconomicus. Journal of Evolutionary Economics. 2004; 14: p. 177-195.

[36] Gould S J. The Structure of Evolutionary Thought. Cambridge: Harvard University Press; 2002.

[37] Wilson. C. Up-scaling. formative phases. and learning in the historical diffusion of energy technologies. Energy Policy. 2012; 50: p. 81-94.

[38] Arthur W B. Competing technologies, increasing returns, and lock-in by historical events. The Economic Journal. 1989; 99: p. 116-131.

[39] Gould S J. Ever since Darwin: Reflections in Natural History. Harmondsworth. Middlesex: Penguin; 1991.

**58**

*Circular Economy - Recent Advances, New Perspectives and Applications*

Growth Theory. Springer-Verlag Berlin

[11] Dopfer K. Foster J, Potts J. Micromeso-macro. Journal of Evolutionary

[12] Dopfer K. The origins of meso economics. Schumpeter's legacy and beyond. Journal of Evolutionary Economics. 2012; 22: 133-160.

[13] Bleda M, del Rio P. The market failure and the systemic failure rationales in technological innovation systems. Research Policy. 2013; 42: 1039-1052.

[14] Schot J W. The policy relevance of the quasi-evolutionary model: The case of stimulating clean technologies. In: Coombs R et al, editors. Technological Change and Company Strategies. London: Academic; 1992: 185-200.

[15] Kemp R, Schot J, Hoogma R. Regime shifts to sustainability through processes

[16] Hoogma R, Kemp R, Schot J, Truffer B. Experimenting for Sustainable Transport: The Approach of Strategic Niche Management. London: Spon.

Netherlands: Eindhoven University; 2005.

[19] OECD. Governance of Innovation

System. Paris: OECD; 2005.

of niche formation: the approach of strategic niche management. Technology Analysis and Strategic Management. 1998; 10: 175-196

[17] Raven RPJM. Strategic Niche Management for Biomass. The

[18] Bianchi P, Labory S. From 'old' industrial policy to 'new' industrial development policies. In: Bianchi B, Labory S, editors. International Handbook on Industrial Policy. Cheltenham: Edward Elgar;

Press; 2002.

2006: 3-27.

Economics. 2004; 14: 263-279

Heidelberg; 2015.

[1] Lundvall B-A, Johnson B. The learning economy. Journal of Industry

system: From concept to research methodology. Problems of Economic Transition. 2016; 58: 463-481.

[3] Edquist C. Systems of Innovation: Perspectives and Challenges. In Nelson RR, Mowery DC, Fagerberg J editors. The Oxford Handbook of Innovation. Oxford: Oxford University

[4] Miettinen R. Innovation, Human Capabilities, and Democracy: Towards an Enabling Welfare State. Oxford: Oxford University Press; 2013.

[5] Dopfer K, Potts J (editors). The New Evolutionary Economics. Edward Elgar

[6] Freeman. C. Technology Policy and Economic Performance: Lessons from Japan. London and New York: Pinter

[7] Lundvall B Å (editor). National Systems of Innovation. Towards a Theory of Innovation and Interactive Learning. London: Pinter; 1992.

[8] Nelson RR. National Innovation Systems: A Comparative Analysis. New York: Oxford University Press; 1993.

[10] Dopfer K, Potts J, Pyka A. Upward and Downward Complementarity: The Meso Core of Evolutionary

[9] Metcalfe S. The economic foundations of technology policy: equilibrium and evolutionary perspectives. In: Stoneman P, editor. Handbook of the Economics of Innovation and Technological Change. Blackwell Publishers. Oxford (UK)/

Cambridge (US); 1995.

[2] Golichenko O. The national innovation

Studies. 1994; 2: pp. 23-42.

**References**

Press; 2006. p. 181-208.

Publishing; 2014.

Publishers; 1987.

**61**

**Chapter 4**

**Abstract**

their framework.

**1. Introduction**

economy.

addressed in this paper:

"incentives":

central bank;

green bank, transformation

*Virginia Zhelyazkova*

The Role of Banks for the

Transition to Circular Economy

The financial system as a whole—in Europe the banks, in the USA mainly the stock exchanges—is oriented mainly towards financing the linear economy. It is the dominant economic model; the production cycles, hence the business cycles of the individual industries and products, are well known. This ensures relative predictability of the amount of expected profits they generate, and it gives the necessary degree of probability for the financial markets for the return on investment. In order for banks to provide the much-needed resource for the transformation of the linear economy into a circular one, they must undergo a major transformation. It is multi-layered and, of course, has many specific characteristics. As banks definitely play a dominant role in Europe's financing of the economy, the analysis in this paper will focus on them. Certain main trends will be presented, related to circular economy and directing to the future development of individual segments within

**Keywords:** circular economy, linear economy, environmental risk in lending,

Banks are among the main sources of capital for the activities of companies. Their role in the development of modern economic systems is leading—they redistribute funds between individual economic entities. To a large extent, they are in charge of granting credit resources and determining the conditions for financing. That is why the policies that banks adopt in this area are extremely important when it comes to the transition from a linear to a circular model of the

In general, the following problem areas can be outlined for the banks that will be

• Regulatory—like all for-profit organizations, banks will naturally continue to finance the linear economy in all possible forms when it is profitable for them. In order to start restricting access to finance for activities that run counter to the circular economy, banks must be subject to at least two types of

○ pressure from the regulatory authorities, i.e. by the state through the

#### **Chapter 4**

## The Role of Banks for the Transition to Circular Economy

*Virginia Zhelyazkova*

#### **Abstract**

The financial system as a whole—in Europe the banks, in the USA mainly the stock exchanges—is oriented mainly towards financing the linear economy. It is the dominant economic model; the production cycles, hence the business cycles of the individual industries and products, are well known. This ensures relative predictability of the amount of expected profits they generate, and it gives the necessary degree of probability for the financial markets for the return on investment. In order for banks to provide the much-needed resource for the transformation of the linear economy into a circular one, they must undergo a major transformation. It is multi-layered and, of course, has many specific characteristics. As banks definitely play a dominant role in Europe's financing of the economy, the analysis in this paper will focus on them. Certain main trends will be presented, related to circular economy and directing to the future development of individual segments within their framework.

**Keywords:** circular economy, linear economy, environmental risk in lending, green bank, transformation

#### **1. Introduction**

Banks are among the main sources of capital for the activities of companies. Their role in the development of modern economic systems is leading—they redistribute funds between individual economic entities. To a large extent, they are in charge of granting credit resources and determining the conditions for financing. That is why the policies that banks adopt in this area are extremely important when it comes to the transition from a linear to a circular model of the economy.

In general, the following problem areas can be outlined for the banks that will be addressed in this paper:

	- pressure from the regulatory authorities, i.e. by the state through the central bank;

#### **2. Emergence of the concept of circular economy**

Over the past hundred years, an interesting pattern has been observed. On the one hand, the consumption of resources worldwide has been increasing, but on the other hand, the way in which these resources are consumed is clearly proving its inefficiency. The inefficiency can be outlined in two spheres, which leads to two main defects of the linear model.

First, there is an uneven consumption of resources—most of them are consumed in highly developed countries at the expense of developing countries, and secondly, there is an accumulation of huge amounts of waste that are not used after being disposed of. The current economic model is linear and follows the pattern: extraction of natural resources, processing into finished products and the consumption of the products, which ends with their disposal. According to a number of studies, the

**63**

Mitchell Award.

*The Role of Banks for the Transition to Circular Economy*

current linear economic cannot ensure the achievement of economic development by all countries in the world, as the available natural resources are insufficient for

waste is disposed of, and all products are recycled or used in some way.

transition from a linear to a circular model reflect this trend.

popularity mainly due to several names.

In order to gradually come to this point, it is not enough just to find ways to recycle individual types of goods, but to reduce the total amount of waste disposed of. In support of efforts in this direction, ways should be sought to prolong the life of products, to encourage their longer use, as well as to share the use of certain categories of goods, which would lead to a smaller number of goods in circulation. It is difficult to determine exactly when and where the term "circular economy" itself has occurred. Today, "almost all international business operations are experiencing changes due to the pursuit of nature conservation" and efforts to make the

The term "circular economy" began to gain popularity in the 1970s, and gained

The idea of circular material flows was first introduced in 1966 by Kenneth Bo-ulding in his study, "The Economics of the Coming Spaceship Earth". Later, the idea of circular economy began to be seriously researched and developed by the Swiss architect Walter Stahel. In 1976, in a report to the European Commission entitled "The Potential for Substituting Manpower for Energy", Walter Stahel and Genevieve Redey presented the concept of circular economy. In the report, they outline the main impacts that the transformation of the linear economy into a circular one will have on the creation of labor, conservation and optimization of the use of natural resources, control of nature pollution and economic efficiency. In 1982, the report was published as a book entitled "Jobs for Tomorrow: The Potential

for Substituting Manpower for Energy" and its authors won the prestigious

wide popularity and gradually be adopted by governments around the world. Two years after its establishment, in 2012, the foundation published a report, which outlined the prospects for the development of the world as a result of the transition from a linear model of the economy to a circular one. In the following year, 2013, this foundation, together with the consulting firm McKinsey, prepared and published a detailed report on circular economy and the opportunities that it offers to the consumer goods sector [4]. These reports has had a strong impact on public opinion, especially in Europe, and since 2015 the European Commission has launched an all-embracive agenda for the transition of the economy of the union from linear to a circular one, which already shows the presence of serious awareness

Stahel's ideas have been further developed by Ellen MacArthur, a former world yacht record holder who founded an independent charity foundation of the same name in 2010 [3]. At the beginning of its activity, the foundation was supported by several powerful companies such as Renault, British Telecommunications, Cisco, etc., which provided funds for the implementation of the planned large-scale activities. One of the main goals of this foundation is to provoke a wide debate on the circular economy among the various economic schools, and thus the idea to gain

The circular model seeks to solve these two main defects of the linear model. The idea of this model draws inspiration from the way nature works, and in particular the individual biosystems. Just as each of them has its own cycle—birth, development, decline, death and rebirth, so do the individual systems within the economy. Therefore, the life of a product should not end with its disposal in the form of waste that can no longer be used, but on the contrary—each product should be seen as an eternally existing set of materials, each of which, after the conditional end of the life of the given product, must be included in the creation of a new product. Thus, at some point in the future, society should reach a state where virtually no

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

the purpose.

*Circular Economy - Recent Advances, New Perspectives and Applications*

○ pressure from the regulatory authorities on their customers (specific economic entities) to transform their activities. This pressure could take the form of various barriers to linear production, fines and other sanctions, which together increase the risk of losses for banks because they could not, for example, collect receivables from their customers whose products no longer have a market (due to a ban by the state on trading with the products they produce, for example, as they are the result of linear production);

• Management—the need for bank management to realize the necessity for change. This is a prerequisite for the implementation of any policy, especially when it leads to a sharp turn from the traditional way of functioning. Also, some studies emphasize that good corporate governance can lead to improved investment yield for the customers [1]. However, this awareness will emerge naturally under the pressure of change from regulators. In the context of such awareness, bank management will be able to play its key role in identifying the new products and services that institutions will start offering to individuals in the context of the transformation to circular economy. Banking activity is also associated with a number of risks inherent to the economies as a whole [2] and banks will have to start acknowledging and actively managing the whole new array of risks that are emerging, in particular the environmental and climate

• Building and maintaining internal administrative capacity. Not only the management, but also the employees of the banks will have to acquire knowledge about the new features of circular production. This will be necessary because circular production has a different cycle and features in terms of its economic dimensions—costs, revenues, profits, life expectancy of products, etc. All these dimensions both individually and collectively affect the various characteristics of bank products—collateral values, exposure at default, probability of default, loss given default, expected losses and many others. Hence the necessity for having knowledge about them and deeper understanding about the way they interact among themselves, and when impacting bank ratios. It must be acknowledged that building such internal capacity requires time and has proven to be a lengthy process. It is challenging for banks since they need to find experts who are capable of presenting in a catchy way to bank employees the interdisciplinary matters related to circular economy and its impact on banks. It is not impossible, though, such experts to be identified, since the interest in the subject of circular economy has been growing in recent years.

Over the past hundred years, an interesting pattern has been observed. On the one hand, the consumption of resources worldwide has been increasing, but on the other hand, the way in which these resources are consumed is clearly proving its inefficiency. The inefficiency can be outlined in two spheres, which leads to two

First, there is an uneven consumption of resources—most of them are consumed in highly developed countries at the expense of developing countries, and secondly, there is an accumulation of huge amounts of waste that are not used after being disposed of. The current economic model is linear and follows the pattern: extraction of natural resources, processing into finished products and the consumption of the products, which ends with their disposal. According to a number of studies, the

ones. This will take place again under regulatory pressure;

**2. Emergence of the concept of circular economy**

main defects of the linear model.

**62**

current linear economic cannot ensure the achievement of economic development by all countries in the world, as the available natural resources are insufficient for the purpose.

The circular model seeks to solve these two main defects of the linear model. The idea of this model draws inspiration from the way nature works, and in particular the individual biosystems. Just as each of them has its own cycle—birth, development, decline, death and rebirth, so do the individual systems within the economy.

Therefore, the life of a product should not end with its disposal in the form of waste that can no longer be used, but on the contrary—each product should be seen as an eternally existing set of materials, each of which, after the conditional end of the life of the given product, must be included in the creation of a new product. Thus, at some point in the future, society should reach a state where virtually no waste is disposed of, and all products are recycled or used in some way.

In order to gradually come to this point, it is not enough just to find ways to recycle individual types of goods, but to reduce the total amount of waste disposed of. In support of efforts in this direction, ways should be sought to prolong the life of products, to encourage their longer use, as well as to share the use of certain categories of goods, which would lead to a smaller number of goods in circulation.

It is difficult to determine exactly when and where the term "circular economy" itself has occurred. Today, "almost all international business operations are experiencing changes due to the pursuit of nature conservation" and efforts to make the transition from a linear to a circular model reflect this trend.

The term "circular economy" began to gain popularity in the 1970s, and gained popularity mainly due to several names.

The idea of circular material flows was first introduced in 1966 by Kenneth Bo-ulding in his study, "The Economics of the Coming Spaceship Earth". Later, the idea of circular economy began to be seriously researched and developed by the Swiss architect Walter Stahel. In 1976, in a report to the European Commission entitled "The Potential for Substituting Manpower for Energy", Walter Stahel and Genevieve Redey presented the concept of circular economy. In the report, they outline the main impacts that the transformation of the linear economy into a circular one will have on the creation of labor, conservation and optimization of the use of natural resources, control of nature pollution and economic efficiency. In 1982, the report was published as a book entitled "Jobs for Tomorrow: The Potential for Substituting Manpower for Energy" and its authors won the prestigious Mitchell Award.

Stahel's ideas have been further developed by Ellen MacArthur, a former world yacht record holder who founded an independent charity foundation of the same name in 2010 [3]. At the beginning of its activity, the foundation was supported by several powerful companies such as Renault, British Telecommunications, Cisco, etc., which provided funds for the implementation of the planned large-scale activities. One of the main goals of this foundation is to provoke a wide debate on the circular economy among the various economic schools, and thus the idea to gain wide popularity and gradually be adopted by governments around the world.

Two years after its establishment, in 2012, the foundation published a report, which outlined the prospects for the development of the world as a result of the transition from a linear model of the economy to a circular one. In the following year, 2013, this foundation, together with the consulting firm McKinsey, prepared and published a detailed report on circular economy and the opportunities that it offers to the consumer goods sector [4]. These reports has had a strong impact on public opinion, especially in Europe, and since 2015 the European Commission has launched an all-embracive agenda for the transition of the economy of the union from linear to a circular one, which already shows the presence of serious awareness among EU leaders on the issue. The concept of circular economy in EU has direct impact also on other financial institutions (insurers and pension funds) [5].

In practice, circular economy has functioned naturally from the very beginning of human activity. Technological progress made possible the extraction of huge quantities of raw materials, the creation of synthetic materials and the production of large number of goods at low prices. However, the quantity of goods has been enormously increasing, and subsequently it has turned out that some of these goods cannot be decomposed or reused in one way or another. In the process of production a number of environmentally harmful substances are released, it is necessary to build huge landfills, which in turn take over the disposed waste. As a result of these processes, the pressure on the environment increases enormously. Man is part of the biosphere and cannot be isolated from the processes that take place in it. Solving environmental problems is becoming a primary imperative of modern times.

From the middle of the twentieth century, when the shortcomings of the linear model became apparent, separate studies began to appear, as well as social movements that sought to define problems and propose solutions. This is how the concepts of eco-efficiency, systems thinking, the blue economy, industrial ecology, swing to swing and others emerged. What these separate theoretical concepts have in common is the idea of the need for transformation of the linear economic model, using examples from nature. Economy is a form of human activity, and man is an integral part of nature. It is therefore not possible for the systems he creates to function effectively under laws other than natural ones. Failure to take into account the effects of human activity on the environment, even if in the short term no serious consequences of financial nature are observed, in the medium term proves to be ineffective from an economic point of view. These theoretical concepts articulate precisely this basic feature of the linear economic model. Gradually, more and more countries around the world, led by the most developed ones, accept the need to change the model and begin to build strategies and policies in this direction.

#### **3. Banks and circular economy**

The transition from a linear to a circular model of the economy requires a number of changes in the way banks operate. This transition creates both opportunities and risks for them. A recent ING Bank study on this topic outlined the main opportunities and challenges for banks. In general, they can be linked to five main business models [6].

The first model aims at transforming production processes so that only raw materials from renewable sources or those that are subject to full recycling are used. In this way the waste will be eliminated and the depletion of natural resources will be stopped. Proponents of this model share the belief that this is the only way to move from a linear to a circular model of the economy.

The second business model concerns the re-use of the materials from which products are made to make new goods.

At the heart of the third model is the concept of extending the life cycle of products by repairing and improving them, as well as a result of additional efforts to advertise them on new markets. Extending the life of goods will not only delay their disposal in the form of waste, but will also generate profits from their sale, lease and use.

The fourth business model offers the replacement of the individual use of different goods with a collective one. For example, sharing cars, various devices, etc. This will eliminate the low efficiency inherent in the use of such goods, which when used by single individuals are often depreciated without being actually used long enough.

**65**

*The Role of Banks for the Transition to Circular Economy*

The fifth model offers a fundamental change in the way someone looks at goods: from an asset owned by its owner to a service that is used only when necessary. This will lead to a number of effects. On the one hand, the efficiency of the use of goods will increase. On the other hand, more people will have access to them. Third, as a result of more people using more goods, a number of ancillary markets will be

As there is significant public interest in introducing different variants of the five circular models, the market for products and services related to them is generally expected to reach a net growth of between 1% and 4% in the next ten years. This is an opportunity for banks to offer their products and services and expand their customer base and market share. In addition, such a policy resonates with the intentions announced by more and more banks to support sustainable development. Research shows that customers who work in the field of sustainable development in one way or another are more innovative, demonstrate better financial results and have better credit ratings, which means lower credit risk for banks and greater security of investments. This is another reason why organizations need to stimulate

At the same time, financing of the circular economy poses a number of challenges for banks. First of all, due to the extension of the life of products, it is necessary to rethink the way of assessing the collaterals. This is naturally reflected in the risk assessment, especially the credit risk of the respective transaction and the client, and hence on all indicators relevant to the monitoring of credit risk, such as loss given default (LGD), exposure at default (EAD), probability of default (PD),

Another important principle of circular economy related to the exploitation of goods for a longer than usual time, means not only that they need to have the functional characteristics for a longer life, but also that they need to actually circulate on the market. An example is Philips' policy to take medical equipment from its affluent customers after it has been exploited for some time and resell it on the secondary market, where there is demand from less solvent companies. Such actions are often undertaken after the equipment has been fully depreciated from an accounting point of view. This raises the question of depreciation rates for such equipment. If the company that buys it on the secondary market does so using loans where the equipment serves as collateral, the bank will have to evaluate it in

Second, the tendency to prefer leased instead of owned products affects banks at least in two ways. On the one hand, they no longer have the possibility to accept the leased product as collateral for the loans, it remains the property of the company from which the bank's customer takes it for use. Therefore, banks need to rethink the model in which they finance such customers. On the other hand, using a leased item instead of buying it, actually expands the market for it, as more people can

The expansion of the market for the product in question theoretically leads to an expansion of the market for banks, but they will have to change their risk assessment schemes for this new category of customers. The expectations are that the customers who use leased goods in their main part will not be highly solvent. So banks will take additional risks when financing such clients. In addition, ownership of the commodity is unlikely to be transferred to the banks as collateral, and this

Therefore, it can be said that the trend in the financing the circular model is characterized by a shift of focus from the importance of collateral to that of cash flows. Such a shift requires a complete change in the concept of banking and

will further increase the riskiness of such transactions.

fundamental changes in banks' credit policies.

created where other complementary goods and services will be offered.

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

innovative practices at workplace [7].

and expected losses (EL).

some way.

afford it.

#### *The Role of Banks for the Transition to Circular Economy DOI: http://dx.doi.org/10.5772/intechopen.94522*

*Circular Economy - Recent Advances, New Perspectives and Applications*

among EU leaders on the issue. The concept of circular economy in EU has direct impact also on other financial institutions (insurers and pension funds) [5].

environmental problems is becoming a primary imperative of modern times. From the middle of the twentieth century, when the shortcomings of the linear model became apparent, separate studies began to appear, as well as social movements that sought to define problems and propose solutions. This is how the concepts of eco-efficiency, systems thinking, the blue economy, industrial ecology, swing to swing and others emerged. What these separate theoretical concepts have in common is the idea of the need for transformation of the linear economic model, using examples from nature. Economy is a form of human activity, and man is an integral part of nature. It is therefore not possible for the systems he creates to function effectively under laws other than natural ones. Failure to take into account the effects of human activity on the environment, even if in the short term no serious consequences of financial nature are observed, in the medium term proves to be ineffective from an economic point of view. These theoretical concepts articulate precisely this basic feature of the linear economic model. Gradually, more and more countries around the world, led by the most developed ones, accept the need to change the model and begin to build strategies and policies in this direction.

The transition from a linear to a circular model of the economy requires a number of changes in the way banks operate. This transition creates both opportunities and risks for them. A recent ING Bank study on this topic outlined the main opportunities and challenges for banks. In general, they can be linked to five main

The first model aims at transforming production processes so that only raw materials from renewable sources or those that are subject to full recycling are used. In this way the waste will be eliminated and the depletion of natural resources will be stopped. Proponents of this model share the belief that this is the only way to

The second business model concerns the re-use of the materials from which

At the heart of the third model is the concept of extending the life cycle of products by repairing and improving them, as well as a result of additional efforts to advertise them on new markets. Extending the life of goods will not only delay their disposal in the form of waste, but will also generate profits from their sale,

The fourth business model offers the replacement of the individual use of different goods with a collective one. For example, sharing cars, various devices, etc. This will eliminate the low efficiency inherent in the use of such goods, which when used by single individuals are often depreciated without being actually used long enough.

In practice, circular economy has functioned naturally from the very beginning of human activity. Technological progress made possible the extraction of huge quantities of raw materials, the creation of synthetic materials and the production of large number of goods at low prices. However, the quantity of goods has been enormously increasing, and subsequently it has turned out that some of these goods cannot be decomposed or reused in one way or another. In the process of production a number of environmentally harmful substances are released, it is necessary to build huge landfills, which in turn take over the disposed waste. As a result of these processes, the pressure on the environment increases enormously. Man is part of the biosphere and cannot be isolated from the processes that take place in it. Solving

**64**

lease and use.

**3. Banks and circular economy**

products are made to make new goods.

move from a linear to a circular model of the economy.

business models [6].

The fifth model offers a fundamental change in the way someone looks at goods: from an asset owned by its owner to a service that is used only when necessary. This will lead to a number of effects. On the one hand, the efficiency of the use of goods will increase. On the other hand, more people will have access to them. Third, as a result of more people using more goods, a number of ancillary markets will be created where other complementary goods and services will be offered.

As there is significant public interest in introducing different variants of the five circular models, the market for products and services related to them is generally expected to reach a net growth of between 1% and 4% in the next ten years. This is an opportunity for banks to offer their products and services and expand their customer base and market share. In addition, such a policy resonates with the intentions announced by more and more banks to support sustainable development. Research shows that customers who work in the field of sustainable development in one way or another are more innovative, demonstrate better financial results and have better credit ratings, which means lower credit risk for banks and greater security of investments. This is another reason why organizations need to stimulate innovative practices at workplace [7].

At the same time, financing of the circular economy poses a number of challenges for banks. First of all, due to the extension of the life of products, it is necessary to rethink the way of assessing the collaterals. This is naturally reflected in the risk assessment, especially the credit risk of the respective transaction and the client, and hence on all indicators relevant to the monitoring of credit risk, such as loss given default (LGD), exposure at default (EAD), probability of default (PD), and expected losses (EL).

Another important principle of circular economy related to the exploitation of goods for a longer than usual time, means not only that they need to have the functional characteristics for a longer life, but also that they need to actually circulate on the market. An example is Philips' policy to take medical equipment from its affluent customers after it has been exploited for some time and resell it on the secondary market, where there is demand from less solvent companies. Such actions are often undertaken after the equipment has been fully depreciated from an accounting point of view. This raises the question of depreciation rates for such equipment. If the company that buys it on the secondary market does so using loans where the equipment serves as collateral, the bank will have to evaluate it in some way.

Second, the tendency to prefer leased instead of owned products affects banks at least in two ways. On the one hand, they no longer have the possibility to accept the leased product as collateral for the loans, it remains the property of the company from which the bank's customer takes it for use. Therefore, banks need to rethink the model in which they finance such customers. On the other hand, using a leased item instead of buying it, actually expands the market for it, as more people can afford it.

The expansion of the market for the product in question theoretically leads to an expansion of the market for banks, but they will have to change their risk assessment schemes for this new category of customers. The expectations are that the customers who use leased goods in their main part will not be highly solvent. So banks will take additional risks when financing such clients. In addition, ownership of the commodity is unlikely to be transferred to the banks as collateral, and this will further increase the riskiness of such transactions.

Therefore, it can be said that the trend in the financing the circular model is characterized by a shift of focus from the importance of collateral to that of cash flows. Such a shift requires a complete change in the concept of banking and fundamental changes in banks' credit policies.

Third, the importance of the leasing form of financing will increase. Banks can play the role of leasing goods on a much larger scale than at present. Demand for leased goods will increase, as already mentioned, and this is an additional opportunity for banks. The challenges arising from the expansion of leasing portfolios both in terms of the types of goods offered on lease and the types of customers are related to the need to know the specifics of these goods, as well as the characteristics of customer behavior. The extension of the useful life of the goods will have to be reflected in the calculation of the risk of the clients in the leasing portfolio. On the other hand, here, as well as in the loan portfolio, banks will have to redefine their leasing policies, taking into account the extended life of goods and the relatively lower solvency of customers.

Fourth, due to changing consumer preferences on the one hand, and on the other hand, due to the growing number of regulatory requirements for business regarding its implications on the environment, banks will have to develop and integrate into their existing models for credit risk assessment, environmental risk assessment.

Monitoring the environmental risk in loan portfolios, including the leasing part, will gradually become imperative. The difficulties in this area are due to the lack of a uniform methodology for the assessment of environmental risk, which raises uncertainty that it can be correctly evaluated and unwillingness on the part of banks to start work in this direction.

Environmental risk management in real banking activities is key to banks' contribution to the development of the circular economy. As long as lending to companies that maintain the linear model and lack strategy and vision for change continues, it will be very difficult to achieve transition to a circular economy. For their part, banks are profit-oriented and this is natural—the pursuit of financial success is part of the rational thinking of every economic entity. Therefore, if there are no incentives for banks to refuse financing to highly profitable but environmentally harmful companies, they will not do so. Nor will they fund many innovative, inherently excellent ideas that support the circular model, but which are characterized by questionable, at least in the short term, profitability. Banks should not be blamed for this course of action and no change can be expected on their part without good reason.

At this stage, the picture from the point of view of banks looks as follows and this complicates the process of environmental risk management:


**67**

*The Role of Banks for the Transition to Circular Economy*

assessment systems. This usually has to be the subject of a separate serious internal bank projects, which take a lot of resources and time, and which would be difficult to initiate, if there was no regulatory pressure to implement it.

Despite the declared desire of the countries (the European Union as a whole and each individual country as part of it, and this to a greater or lesser extent applies to all other countries in the world)—to change the model from linear to circular, at this point there are virtually no simplified and easy-to-apply tools to support

The development of the five models related to the transition to circular economy, mentioned above, requires serious funding. In many cases, funding must take place before it is clear exactly what the market for a given product or service will be, whether there will be demand for it, whether consumers will want to change their habits and, if so, with what time lag in relation to the introduction of new products

If we look, for example, at a model that describes the shift pf consumer preferences from buying a product and paying for it to leasing it needed—when could that happen? Can the transition be made for all goods at the same time, or will it take place for some goods as soon as there is the possibility of leasing, and for others it will take years of changing consumer habits? Undoubtedly, contrary to the theory of rational thinking of economic entities, it will turn out that for some groups of goods, especially those in the luxury segment, possession will continue to be a mat-

These are important issues that require very serious consideration in order appropriate form of financing to be found for ventures aimed at implementing new business models. It would not be realistic to expect banks to readily take the risk of experimenting with financing activities for which they themselves cannot determine, at least to some extent, the future return. Without being able to determine the expected future return on a loan, it is difficult to calculate the most important parameters for credit risk management such as PD, EAD, LGD, and EL. Therefore, the governments must intervene at least at the initial stage of the transition to

The government support can be realized in the form of state guarantees and participation in various activities. If the state creates a guarantee fund for initiatives aimed at implementing one of the five business models related to circular economy, banks would provide the necessary credit resources to entrepreneurs. Some years afterwards, when experience is gained in such projects, the answers to some of the above questions will have been established and the transition to circular economy

Therefore, it can be said that banks expect governments to take the initiative to be actively involved in financing the circular economy. However, governments have no reason to expect banks to take the first step based on purely market considerations. The uncertainty in the beginning of transitional periods is too great, and it is

Environmental risk management is not just a passive activity, consisting of the application of a procedure in which various documents of the clients are considered, or in the calculation of scoring for them on the basis of exposure parameters and other indicators. It has also a proactive part, which consists not only in assessing the customer in terms of whether he meets the existing conditions and matches the existing product range in the bank, but in developing such products and services

However, in order to create such products, serious work is needed inside the banks. The necessary level of expertise must be built, which includes knowledge of

ter of prestige and customers will keep on paying for owning them.

circular economy, standing behind the various new ventures.

will have gained momentum, governments will be able to withdraw.

necessary to remember that banks are conservative institutions.

which will meet his new needs reflect his profile.

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

this change.

and services will this happen.

*Circular Economy - Recent Advances, New Perspectives and Applications*

lower solvency of customers.

banks to start work in this direction.

portfolios of individual banks.

without good reason.

assessment.

Third, the importance of the leasing form of financing will increase. Banks can play the role of leasing goods on a much larger scale than at present. Demand for leased goods will increase, as already mentioned, and this is an additional opportunity for banks. The challenges arising from the expansion of leasing portfolios both in terms of the types of goods offered on lease and the types of customers are related to the need to know the specifics of these goods, as well as the characteristics of customer behavior. The extension of the useful life of the goods will have to be reflected in the calculation of the risk of the clients in the leasing portfolio. On the other hand, here, as well as in the loan portfolio, banks will have to redefine their leasing policies, taking into account the extended life of goods and the relatively

Fourth, due to changing consumer preferences on the one hand, and on the other hand, due to the growing number of regulatory requirements for business regarding its implications on the environment, banks will have to develop and integrate into their existing models for credit risk assessment, environmental risk

Monitoring the environmental risk in loan portfolios, including the leasing part, will gradually become imperative. The difficulties in this area are due to the lack of a uniform methodology for the assessment of environmental risk, which raises uncertainty that it can be correctly evaluated and unwillingness on the part of

Environmental risk management in real banking activities is key to banks' contribution to the development of the circular economy. As long as lending to companies that maintain the linear model and lack strategy and vision for change continues, it will be very difficult to achieve transition to a circular economy. For their part, banks are profit-oriented and this is natural—the pursuit of financial success is part of the rational thinking of every economic entity. Therefore, if there are no incentives for banks to refuse financing to highly profitable but environmentally harmful companies, they will not do so. Nor will they fund many innovative, inherently excellent ideas that support the circular model, but which are characterized by questionable, at least in the short term, profitability. Banks should not be blamed for this course of action and no change can be expected on their part

At this stage, the picture from the point of view of banks looks as follows and

1.There are no regulatory requirements (Basel III, regulations of national banks) to impose on banks the obligation to monitor in detail the environmental risks associated with lending to companies. This immediately means that this activity remains in the sphere of the good will of the management of banks.

2.Banks wishing to implement an environmental risk management system face a lack of a unified methodology for doing so. At present, perhaps the most applied methodology is that of the European Bank for Reconstruction and Development (EBRD). It is clear and well developed. However, even when applied, many additional methodological issues naturally arise, stemming from the need to adapt it on the one hand to the specificities of national laws and industry classifications, and on the other hand to the specific characteristics of

3.A third problem, which, however, can hardly be avoided, even if there was a standardized and globally accepted methodology, is the purely technological, software integration of environmental risk assessment into the credit risk

this complicates the process of environmental risk management:

**66**

assessment systems. This usually has to be the subject of a separate serious internal bank projects, which take a lot of resources and time, and which would be difficult to initiate, if there was no regulatory pressure to implement it.

Despite the declared desire of the countries (the European Union as a whole and each individual country as part of it, and this to a greater or lesser extent applies to all other countries in the world)—to change the model from linear to circular, at this point there are virtually no simplified and easy-to-apply tools to support this change.

The development of the five models related to the transition to circular economy, mentioned above, requires serious funding. In many cases, funding must take place before it is clear exactly what the market for a given product or service will be, whether there will be demand for it, whether consumers will want to change their habits and, if so, with what time lag in relation to the introduction of new products and services will this happen.

If we look, for example, at a model that describes the shift pf consumer preferences from buying a product and paying for it to leasing it needed—when could that happen? Can the transition be made for all goods at the same time, or will it take place for some goods as soon as there is the possibility of leasing, and for others it will take years of changing consumer habits? Undoubtedly, contrary to the theory of rational thinking of economic entities, it will turn out that for some groups of goods, especially those in the luxury segment, possession will continue to be a matter of prestige and customers will keep on paying for owning them.

These are important issues that require very serious consideration in order appropriate form of financing to be found for ventures aimed at implementing new business models. It would not be realistic to expect banks to readily take the risk of experimenting with financing activities for which they themselves cannot determine, at least to some extent, the future return. Without being able to determine the expected future return on a loan, it is difficult to calculate the most important parameters for credit risk management such as PD, EAD, LGD, and EL. Therefore, the governments must intervene at least at the initial stage of the transition to circular economy, standing behind the various new ventures.

The government support can be realized in the form of state guarantees and participation in various activities. If the state creates a guarantee fund for initiatives aimed at implementing one of the five business models related to circular economy, banks would provide the necessary credit resources to entrepreneurs. Some years afterwards, when experience is gained in such projects, the answers to some of the above questions will have been established and the transition to circular economy will have gained momentum, governments will be able to withdraw.

Therefore, it can be said that banks expect governments to take the initiative to be actively involved in financing the circular economy. However, governments have no reason to expect banks to take the first step based on purely market considerations. The uncertainty in the beginning of transitional periods is too great, and it is necessary to remember that banks are conservative institutions.

Environmental risk management is not just a passive activity, consisting of the application of a procedure in which various documents of the clients are considered, or in the calculation of scoring for them on the basis of exposure parameters and other indicators. It has also a proactive part, which consists not only in assessing the customer in terms of whether he meets the existing conditions and matches the existing product range in the bank, but in developing such products and services which will meet his new needs reflect his profile.

However, in order to create such products, serious work is needed inside the banks. The necessary level of expertise must be built, which includes knowledge of the latest market trends, customers' purchasing power, demand trends, and last but not least, the demographic characteristics of society. It should not be forgotten that young people are more likely to change their consumer habits. Middle-aged people, as well as retirees, are in most cases not among those ready to change their behavior. In order to create products that are aimed at protecting the environment in one way or another, and to find a market for these products, banks need to explore this whole range of problems, and perhaps many more, which at this stage cannot be foreseen.

#### **4. Comprehensive environmental risk management and the green bank concept**

In order for banks to contribute to the transition to circular economy, they themselves must be oriented towards it. When we talk about the environmental aspects of circular economy, at the micro level, this should mean for banks that they should be "green", in the sense that they should regard environmental protection as their philosophy and strategy. This coincides with the introduction of a comprehensive environmental risk management system in the banks—and this system not only covers internal resource consumption and monitoring of the level of environmental risk of loans after disbursement, but is proactive in the field of development of banking products and services aimed at preservation of the environment.

There are four levels (levels) of environmental risk management in banks [8].

The first level is related to the management of this part of environmental risk, which arises from the so-called direct effects of banking activity. These effects are the consequences of the day-to-day operations of the bank, for the needs of which it uses energy from various sources, paper, and water, generates waste, etc.

The second level builds on the first and also involves the development of environmental risk management policy in the core business of the bank, in the case of European banks, mainly in the field of corporate lending (in this level we include leasing, factoring and other forms of trade finance).

The third level covers the first two and extends environmental risk management through the development of appropriate products aimed at preservation of the environment, or, this is, as mentioned above, proactive risk management.

The fourth, highest level builds on the third and presupposes the orientation of the deposit policy to sources of resources that have a proven positive attitude towards the environment.

While many banks have already reached the first and second levels, the third (especially in the area of creation of a comprehensive product policy aimed at preservation of the environment, and not just the sporadic appearance of some "exotic" banking products) and the fourth belong entirely to the future.

The International Banking Community, represented by the United Nations Environmental Program Finance Initiative (UNEP FI), recognizes the need for a fundamental change in banks' approach to the economy. In the context of this way of thinking is the Positive Impact Manifesto adopted by this organization in May 2016. It declares that banks must use their unique position as intermediaries between the real economy and capital markets and begin to reorient their business models to financing sustainable development, an integral part of which is environmental protection. The aim of this change must be the realization of an overall positive impact of their activities, which in turn is defined as "leading to a positive impact on the economy, society and the environment, after proper consideration and minimization of all negative impacts."

**69**

Brazil and Peru.

*The Role of Banks for the Transition to Circular Economy*

model through environmental risk management at all levels [9].

which banks operate and the success of their business models.

ingly complex way. This is due to several reasons:

themselves, their frequency and intensity;

losses for farmers' creditor banks.

such as those of the Basel III framework.

not consider its impact in a broader, macroprudential plan.

A recent study, initiated by UNEP FI by the Institute for Sustainable Leadership at the University of Cambridge, outlines the main reasons why banks urgently need to take action to refocus from conventional e financing to supporting the circular

First of all, it is pointed out that environmental risks are increasing both in number and intensity. As a result, there is an increasing interaction between them and other socio-economic trends, which already in their entirety affect the financial

Secondly, a number of indirect effects of increasing environmental risks also appear. Indirect effects are related to the public response to these risks, which is often transferred to certain regulatory initiatives. All this affects the environment in

Third, environmental risks are beginning to manifest themselves in an increas-

• the growing connection between the different types of environmental risks;

• development of the manifestation of some of the environmental risks and the

A good example that illustrates these three features is the consequences observed

The importance of these risks increasingly necessitates serious regulatory action.

In this direction is the study of the University of Cambridge in conjunction with UNEP FI, led by Prof. K. Alexander of the University of Zurich. The thesis defended in this study is that in all financial crises banks suffer serious losses from the underestimation of the various risks they face in their activities and urgently need to take measures to include the assessment of environmental risk in banking regulations

At this stage, Basel III requires Pillar I banks to include an assessment of environmental risks in assessing the extent to which they are exposed to credit and operational risk. In particular, paragraph № 510 of Basel II and Basel III requires banks to monitor the risk of environmental liability for collateral. It is assumed that in order to be able to carry out such monitoring, banks must undertake to carry out (including hired consultants) thorough collateral checks of individual cases of transactions with a high environmental risk. However, the requirements for monitoring the environmental risk defined in this way remain desirable and no specific requirements and rules have been set in this regard. They mainly concern the environmental risk that would arise in individual transactions (lending), but do

The review of the state of regulations in relation to environmental risk management in the banking system, presented in the study of the University of Cambridge, shows that in some countries around the world national regulations in this direction are quite advanced. Of particular interest are the examples of China,

• uncertainty about the time horizons in which these risks will manifest

creation of various interdependencies between them over time.

in the United States in the 1930s as a result of the application of a number of unsuccessful agricultural practices over large areas over the previous 100 years. Dust storms, which are formed due to the disturbance of the ecological balance and the deterioration of the quality of the soils, practically ruin the economy of entire agricultural regions. Subsequently, an economic crisis ensued, leading to massive

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

stability in various places.

*The Role of Banks for the Transition to Circular Economy DOI: http://dx.doi.org/10.5772/intechopen.94522*

*Circular Economy - Recent Advances, New Perspectives and Applications*

the latest market trends, customers' purchasing power, demand trends, and last but not least, the demographic characteristics of society. It should not be forgotten that young people are more likely to change their consumer habits. Middle-aged people, as well as retirees, are in most cases not among those ready to change their behavior. In order to create products that are aimed at protecting the environment in one way or another, and to find a market for these products, banks need to explore this whole range of problems, and perhaps many more, which at this stage cannot be

**4. Comprehensive environmental risk management and the green bank** 

In order for banks to contribute to the transition to circular economy, they themselves must be oriented towards it. When we talk about the environmental aspects of circular economy, at the micro level, this should mean for banks that they should be "green", in the sense that they should regard environmental protection as their philosophy and strategy. This coincides with the introduction of a comprehensive environmental risk management system in the banks—and this system not only covers internal resource consumption and monitoring of the level of environmental risk of loans after disbursement, but is proactive in the field of development of banking products and services aimed at preservation of the

There are four levels (levels) of environmental risk management in banks [8]. The first level is related to the management of this part of environmental risk, which arises from the so-called direct effects of banking activity. These effects are the consequences of the day-to-day operations of the bank, for the needs of which it

The second level builds on the first and also involves the development of environmental risk management policy in the core business of the bank, in the case of European banks, mainly in the field of corporate lending (in this level we include

The third level covers the first two and extends environmental risk management

through the development of appropriate products aimed at preservation of the environment, or, this is, as mentioned above, proactive risk management.

The fourth, highest level builds on the third and presupposes the orientation of the deposit policy to sources of resources that have a proven positive attitude

While many banks have already reached the first and second levels, the third (especially in the area of creation of a comprehensive product policy aimed at preservation of the environment, and not just the sporadic appearance of some "exotic"

The International Banking Community, represented by the United Nations Environmental Program Finance Initiative (UNEP FI), recognizes the need for a fundamental change in banks' approach to the economy. In the context of this way of thinking is the Positive Impact Manifesto adopted by this organization in May 2016. It declares that banks must use their unique position as intermediaries between the real economy and capital markets and begin to reorient their business models to financing sustainable development, an integral part of which is environmental protection. The aim of this change must be the realization of an overall positive impact of their activities, which in turn is defined as "leading to a positive impact on the economy, society and the environment, after proper consideration

uses energy from various sources, paper, and water, generates waste, etc.

leasing, factoring and other forms of trade finance).

banking products) and the fourth belong entirely to the future.

and minimization of all negative impacts."

**68**

foreseen.

**concept**

environment.

towards the environment.

A recent study, initiated by UNEP FI by the Institute for Sustainable Leadership at the University of Cambridge, outlines the main reasons why banks urgently need to take action to refocus from conventional e financing to supporting the circular model through environmental risk management at all levels [9].

First of all, it is pointed out that environmental risks are increasing both in number and intensity. As a result, there is an increasing interaction between them and other socio-economic trends, which already in their entirety affect the financial stability in various places.

Secondly, a number of indirect effects of increasing environmental risks also appear. Indirect effects are related to the public response to these risks, which is often transferred to certain regulatory initiatives. All this affects the environment in which banks operate and the success of their business models.

Third, environmental risks are beginning to manifest themselves in an increasingly complex way. This is due to several reasons:


A good example that illustrates these three features is the consequences observed in the United States in the 1930s as a result of the application of a number of unsuccessful agricultural practices over large areas over the previous 100 years. Dust storms, which are formed due to the disturbance of the ecological balance and the deterioration of the quality of the soils, practically ruin the economy of entire agricultural regions. Subsequently, an economic crisis ensued, leading to massive losses for farmers' creditor banks.

The importance of these risks increasingly necessitates serious regulatory action. In this direction is the study of the University of Cambridge in conjunction with UNEP FI, led by Prof. K. Alexander of the University of Zurich. The thesis defended in this study is that in all financial crises banks suffer serious losses from the underestimation of the various risks they face in their activities and urgently need to take measures to include the assessment of environmental risk in banking regulations such as those of the Basel III framework.

At this stage, Basel III requires Pillar I banks to include an assessment of environmental risks in assessing the extent to which they are exposed to credit and operational risk. In particular, paragraph № 510 of Basel II and Basel III requires banks to monitor the risk of environmental liability for collateral. It is assumed that in order to be able to carry out such monitoring, banks must undertake to carry out (including hired consultants) thorough collateral checks of individual cases of transactions with a high environmental risk. However, the requirements for monitoring the environmental risk defined in this way remain desirable and no specific requirements and rules have been set in this regard. They mainly concern the environmental risk that would arise in individual transactions (lending), but do not consider its impact in a broader, macroprudential plan.

The review of the state of regulations in relation to environmental risk management in the banking system, presented in the study of the University of Cambridge, shows that in some countries around the world national regulations in this direction are quite advanced. Of particular interest are the examples of China, Brazil and Peru.

It can be said that the Chinese Banking Regulatory Commission acts to support the development of the third level of environmental risk management—proactive by financing environmentally sustainable projects and requiring banks in their contracts with customers to set compliance clauses of certain environmental standards. This policy was launched in 2007 by the Banking Commission and the Ministry of the Environment in the form of a document entitled "Green Credit Policies". In 2012, the publication of "Guidelines for Green Lending", consisting of instructions to banks on how to implement the policy and compliance with credit requirements followed.

The Commission oblige banks to collect and pass on statistics on the financing they provide to companies in the construction and transport sectors. Through these statistics, the Commission, together with the Ministry of Environment, monitors the country's progress in achieving national environmental goals. Another interesting feature of the requirements introduced in 2012 to banks is the obligation to monitor whether their customers comply with environmental standards and laws and to sanction them in case of violations by making changes to loan agreements. The main sanction that is applied is a requirement for early repayment of loans, in the event that after establishing the violation and subsequent warning, the client does not take corrective action within the period specified by the bank. In case of proven non-compliance with the environmental legislation, a client may be denied a loan at all. Another measure aimed at orienting companies to environmental projects is the granting of loans for non-environmentally friendly projects at higher interest rates, as well as generally difficult access to financing from banks.

The Commission obliges banks to incorporate the assessment and monitoring of environmental risk in their overall activity, which includes auditing the data.

Brazil is the next example of proactive environmental risk management by banks as a result of regulatory requirements, but China is ahead in this regard. In 2014, the Central Bank of Brazil issued a guidance document on the application of the Basel III Pillar II requirements for asset reviews and process assessments in banks, requiring them to take into account the extent to which they are exposed to environmental and social risk. This document also requires banks to prepare and disclose environmental and social risk reporting in their portfolios, dressing it in the form of following the Basel III Pillar III regulations. Penalties are envisaged for non-compliance with this requirement.

The approach of the Financial Regulator in Peru differs from that of the Chinese and Brazilian central banks. It definitely deserves to be defined as innovative and aimed at creating a lasting culture of assessment and management of environmental and social risk both among banks and the corporate world in the country. The Peruvian regulator requires from banks to prepare a report on the environmental and social risks associated with the project before funding is granted. Only after the report is considered together, of course, with the other documents of the company applying for a loan, and after the bank is convinced that the risks are acceptable, can the process of financing start. According to a 2014 report by the director of the Peruvian regulator, Dr. Daniel Szydlowski, this requirement has led to a significant improvement in the overall financial risk in Peru and the number of bad loans has decreased significantly [Ibidem].

#### **5. Conclusion**

Unlike China, Brazil and Peru, the most developed countries in the world have not created regulations to encourage proactive management of environmental risk and hence—lending to projects aimed at protecting the environment and thus encouraging the transition to circular economy.

**71**

tive easing.

transactions.

mental protection.

*The Role of Banks for the Transition to Circular Economy*

formation of the linear model into circular one.

It is necessary to think not only about the manifestation of environmental risks at the transaction level or at individual client level, but also at macro level in order to be able to make a comprehensive assessment of how and in what way the banking system is exposed to them and therefore to what extent it contributes to the trans-

In addition to regulations such as the Basel III rules, Prof. K. Alexander and his team propose to consider ways for the state to support projects aimed at protecting the environment with monetary policy instruments. Since the protection of the environment should be state priority, then it is natural for it to purposefully allocate

This idea provoked mixed reactions from representatives of individual countries during its discussion in the framework of the study that UNEP FI issued. For some countries, such policy is appropriate, while for others it seems to have the potential for destabilization. For example, China has taken a similar approach, while Brazil and Peru fear that declaring some kind of quantitative easing to help the environment could be interpreted by capital market investors as a sign of volatile monetary policy. The world is already witnessing an experiment by the Lebanese Central Bank, which by Decree № 7835 decided to grant special liquidity to the country's banks to be used for disbursing lending to various green investment activities. The monetary policy approach to stimulate green lending is generally more complex and unlikely to be easily adopted by most central banks around the world, mainly because of the divergent market reactions that follow each market quantita-

In a nutshell, it can be said that in the field of assessment, monitoring and disclosure of information on environmental risk at this stage there is no standardization internationally, as well as mandatory requirements for banks to monitor this risk. The existing requirements in Basel III are vague and general. The way they are formulated allows banks to circumvent the monitoring of environmental risk, giving priority to clear financial benefits for themselves in financing various

Therefore, the current state of regulations in most of the world encourages the overlooking of environmental risks. This is due to the lack of sufficient understanding of the problem at macro level. Proof of this are the examples of China, Brazil and Peru. These countries have specific requirements for banks in terms of environmental risk management and the results of this policy, as shown by the practice in Peru, are encouraging. The Chinese authorities, on the other hand, have come to a profound understanding that the economy of this huge developing country would not have a sustainable future if the imperatives of the environment were ignored. This has pushed them from now on to set strict requirements for both banks and companies from all sectors of the economy to comply with environmental legislation. Serious sanctions, which are provided in cases of violations, are a good enough incentive for market participants to follow the laws. In this way, as in Peru and Brazil, China is working to build a holistic culture in a society centered on environ-

money in this direction, with banks playing the role of intermediaries.

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

*Circular Economy - Recent Advances, New Perspectives and Applications*

It can be said that the Chinese Banking Regulatory Commission acts to support the development of the third level of environmental risk management—proactive by financing environmentally sustainable projects and requiring banks in their contracts with customers to set compliance clauses of certain environmental standards. This policy was launched in 2007 by the Banking Commission and the Ministry of the Environment in the form of a document entitled "Green Credit Policies". In 2012, the publication of "Guidelines for Green Lending", consisting of instructions to banks on how to implement the policy and compliance with credit requirements followed. The Commission oblige banks to collect and pass on statistics on the financing they provide to companies in the construction and transport sectors. Through these statistics, the Commission, together with the Ministry of Environment, monitors the country's progress in achieving national environmental goals. Another interesting feature of the requirements introduced in 2012 to banks is the obligation to monitor whether their customers comply with environmental standards and laws and to sanction them in case of violations by making changes to loan agreements. The main sanction that is applied is a requirement for early repayment of loans, in the event that after establishing the violation and subsequent warning, the client does not take corrective action within the period specified by the bank. In case of proven non-compliance with the environmental legislation, a client may be denied a loan at all. Another measure aimed at orienting companies to environmental projects is the granting of loans for non-environmentally friendly projects at higher

interest rates, as well as generally difficult access to financing from banks.

non-compliance with this requirement.

decreased significantly [Ibidem].

encouraging the transition to circular economy.

**5. Conclusion**

environmental risk in their overall activity, which includes auditing the data. Brazil is the next example of proactive environmental risk management by banks as a result of regulatory requirements, but China is ahead in this regard. In 2014, the Central Bank of Brazil issued a guidance document on the application of the Basel III Pillar II requirements for asset reviews and process assessments in banks, requiring them to take into account the extent to which they are exposed to environmental and social risk. This document also requires banks to prepare and disclose environmental and social risk reporting in their portfolios, dressing it in the form of following the Basel III Pillar III regulations. Penalties are envisaged for

The Commission obliges banks to incorporate the assessment and monitoring of

The approach of the Financial Regulator in Peru differs from that of the Chinese and Brazilian central banks. It definitely deserves to be defined as innovative and aimed at creating a lasting culture of assessment and management of environmental and social risk both among banks and the corporate world in the country. The Peruvian regulator requires from banks to prepare a report on the environmental and social risks associated with the project before funding is granted. Only after the report is considered together, of course, with the other documents of the company applying for a loan, and after the bank is convinced that the risks are acceptable, can the process of financing start. According to a 2014 report by the director of the Peruvian regulator, Dr. Daniel Szydlowski, this requirement has led to a significant improvement in the overall financial risk in Peru and the number of bad loans has

Unlike China, Brazil and Peru, the most developed countries in the world have not created regulations to encourage proactive management of environmental risk and hence—lending to projects aimed at protecting the environment and thus

**70**

It is necessary to think not only about the manifestation of environmental risks at the transaction level or at individual client level, but also at macro level in order to be able to make a comprehensive assessment of how and in what way the banking system is exposed to them and therefore to what extent it contributes to the transformation of the linear model into circular one.

In addition to regulations such as the Basel III rules, Prof. K. Alexander and his team propose to consider ways for the state to support projects aimed at protecting the environment with monetary policy instruments. Since the protection of the environment should be state priority, then it is natural for it to purposefully allocate money in this direction, with banks playing the role of intermediaries.

This idea provoked mixed reactions from representatives of individual countries during its discussion in the framework of the study that UNEP FI issued. For some countries, such policy is appropriate, while for others it seems to have the potential for destabilization. For example, China has taken a similar approach, while Brazil and Peru fear that declaring some kind of quantitative easing to help the environment could be interpreted by capital market investors as a sign of volatile monetary policy. The world is already witnessing an experiment by the Lebanese Central Bank, which by Decree № 7835 decided to grant special liquidity to the country's banks to be used for disbursing lending to various green investment activities.

The monetary policy approach to stimulate green lending is generally more complex and unlikely to be easily adopted by most central banks around the world, mainly because of the divergent market reactions that follow each market quantitative easing.

In a nutshell, it can be said that in the field of assessment, monitoring and disclosure of information on environmental risk at this stage there is no standardization internationally, as well as mandatory requirements for banks to monitor this risk. The existing requirements in Basel III are vague and general. The way they are formulated allows banks to circumvent the monitoring of environmental risk, giving priority to clear financial benefits for themselves in financing various transactions.

Therefore, the current state of regulations in most of the world encourages the overlooking of environmental risks. This is due to the lack of sufficient understanding of the problem at macro level. Proof of this are the examples of China, Brazil and Peru. These countries have specific requirements for banks in terms of environmental risk management and the results of this policy, as shown by the practice in Peru, are encouraging. The Chinese authorities, on the other hand, have come to a profound understanding that the economy of this huge developing country would not have a sustainable future if the imperatives of the environment were ignored. This has pushed them from now on to set strict requirements for both banks and companies from all sectors of the economy to comply with environmental legislation. Serious sanctions, which are provided in cases of violations, are a good enough incentive for market participants to follow the laws. In this way, as in Peru and Brazil, China is working to build a holistic culture in a society centered on environmental protection.

*Circular Economy - Recent Advances, New Perspectives and Applications*

#### **Author details**

Virginia Zhelyazkova VUZF University, Sofia, Bulgaria

\*Address all correspondence to: vzhelyazkova@vuzf.bg; virginia.zhelyazkova@gmail.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**73**

*The Role of Banks for the Transition to Circular Economy*

*DOI: http://dx.doi.org/10.5772/intechopen.94522*

[1] Dimitrov St., The PEPP Regulation and its influence on the Bulgarian market of insurance, p.4, 13th Young researchers scientific conference, ISBN: 978-954-8590-45-7, VUZF Publishing House St. Grigorii Bogoslov, Sofia, 2017

[2] Angelov. R. Mergers and Acquisition in the Banking Sector. Theory and Practice of Control. VUZF University, 2020, ISBN978-954-8590-77-8, p. 12

[3] Interview: Ellen MacArthur - Voyage of self-discovery, The Scotsman, http://www.scotsman.com/lifestyle/ interview-ellen-macarthur-voyage-of-

[4] Towards the Circular Economy. Opportunities for the Consumer Goods

[5] Dimitrov, St. (2020). "Integration of Environmental, Social and Governance Principles in Pension Funds and Insurance Companies' Activities", p.18, Money and Culture Magazine, vol. 1, 2020, ISSN 2683-0965, pp. 13 - 25, https://sites.google.com/vuzf.bg/

[6] Rethinking Finance in a Circular Economy. Financial implications of circular business models. ING. 2015

[7] Lazarova, T. Innovative Human Recourse Management. VUZF University, ISBN 978-954-8590-50-1,

[8] Zhelyazkova, V. Circular Economy. Financial Aspects. VUZF University, 2017, ISBN 978-954-8590-42-6 9,

[9] Stability and Sustainability in Banking Reform. Are Environmental Risks Missing in Basel III? 2014 University of Cambridge Institute for

Sustainability Leadership

**References**

(in Bulgarian)

self-discovery-1-808060

Sector, McKinsey, 2013

money-and-culture/202

p. 13, (in Bulgarian)

(in Bulgarian)

*The Role of Banks for the Transition to Circular Economy DOI: http://dx.doi.org/10.5772/intechopen.94522*

#### **References**

*Circular Economy - Recent Advances, New Perspectives and Applications*

**72**

**Author details**

Virginia Zhelyazkova

VUZF University, Sofia, Bulgaria

virginia.zhelyazkova@gmail.com

provided the original work is properly cited.

\*Address all correspondence to: vzhelyazkova@vuzf.bg;

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

[1] Dimitrov St., The PEPP Regulation and its influence on the Bulgarian market of insurance, p.4, 13th Young researchers scientific conference, ISBN: 978-954-8590-45-7, VUZF Publishing House St. Grigorii Bogoslov, Sofia, 2017

[2] Angelov. R. Mergers and Acquisition in the Banking Sector. Theory and Practice of Control. VUZF University, 2020, ISBN978-954-8590-77-8, p. 12 (in Bulgarian)

[3] Interview: Ellen MacArthur - Voyage of self-discovery, The Scotsman, http://www.scotsman.com/lifestyle/ interview-ellen-macarthur-voyage-ofself-discovery-1-808060

[4] Towards the Circular Economy. Opportunities for the Consumer Goods Sector, McKinsey, 2013

[5] Dimitrov, St. (2020). "Integration of Environmental, Social and Governance Principles in Pension Funds and Insurance Companies' Activities", p.18, Money and Culture Magazine, vol. 1, 2020, ISSN 2683-0965, pp. 13 - 25, https://sites.google.com/vuzf.bg/ money-and-culture/202

[6] Rethinking Finance in a Circular Economy. Financial implications of circular business models. ING. 2015

[7] Lazarova, T. Innovative Human Recourse Management. VUZF University, ISBN 978-954-8590-50-1, p. 13, (in Bulgarian)

[8] Zhelyazkova, V. Circular Economy. Financial Aspects. VUZF University, 2017, ISBN 978-954-8590-42-6 9, (in Bulgarian)

[9] Stability and Sustainability in Banking Reform. Are Environmental Risks Missing in Basel III? 2014 University of Cambridge Institute for Sustainability Leadership

**75**

**Chapter 5**

**Abstract**

tion reforms in Malaysia.

**1. Introduction**

Meeting the Needs of Fourth

Industrial Revolution (4IR) in

Entrepreneurial Education in

*Wan Mimi Diyana Wan Zaki and Sarmila Md Sum*

**Keywords:** Malaysia, entrepreneur, education, government, 4IR

Recognizing the importance of entrepreneurship education in inspiring entrepreneurship development and the economy, Malaysia Ministry of Higher Education (MOHE) has taken the initiative by making entrepreneurship subjects compulsory to all students at all universities [1]. The students are encouraged to take part in the entrepreneurship activities at their respective universities in order to develop the entrepreneurial attitudes and mind-set. The advancement in technology revolution is transforming method of educating through the usage of digital application that will eventually discard the traditional of concept time-honored classroom teaching.

Malaysia: The Government's Role

*Hanim Kamaruddin, Rosilah Hassan, Norasmah Othman,* 

Entrepreneurship education holds great value for all students of science, technology, mission work, social work, healthcare, and education. It also serves as a great incubator for the types of creative, innovative ideas of our students and the global needs in the 21st century where combining entrepreneurship syllabus and exposure of the fourth industrial revolution is essential. This study explores the Fourth Industrial Revolution (4IR) as an opportunity to change models of innovation-driven entrepreneurship for the better, and create an environment that makes entrepreneurship more inclusive, while maximizing the Fourth Industrial Revolution's benefits to the society and minimizing the risks that come with it. The role of Malaysian government in enhancing entrepreneurial education must therefore recognize the fourth industrial evolution and its impacts that must be compatible with Malaysia's industry policy. Promotion of entrepreneurial experimentation within an appropriate entrepreneurial education ecosystem will provide entrepreneurs with smart government support that invests in entrepreneurial skills in Malaysia. This article assesses (i) fourth industrial revolution impact on entrepreneurial education; (ii) new expectations arising from impacts of fourth industrial evolution in Malaysia: method in teaching and learning; (iii) government's role in supporting entrepreneurship education and finally (iv) entrepreneurial educa-

#### **Chapter 5**

## Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education in Malaysia: The Government's Role

*Hanim Kamaruddin, Rosilah Hassan, Norasmah Othman, Wan Mimi Diyana Wan Zaki and Sarmila Md Sum*

#### **Abstract**

Entrepreneurship education holds great value for all students of science, technology, mission work, social work, healthcare, and education. It also serves as a great incubator for the types of creative, innovative ideas of our students and the global needs in the 21st century where combining entrepreneurship syllabus and exposure of the fourth industrial revolution is essential. This study explores the Fourth Industrial Revolution (4IR) as an opportunity to change models of innovation-driven entrepreneurship for the better, and create an environment that makes entrepreneurship more inclusive, while maximizing the Fourth Industrial Revolution's benefits to the society and minimizing the risks that come with it. The role of Malaysian government in enhancing entrepreneurial education must therefore recognize the fourth industrial evolution and its impacts that must be compatible with Malaysia's industry policy. Promotion of entrepreneurial experimentation within an appropriate entrepreneurial education ecosystem will provide entrepreneurs with smart government support that invests in entrepreneurial skills in Malaysia. This article assesses (i) fourth industrial revolution impact on entrepreneurial education; (ii) new expectations arising from impacts of fourth industrial evolution in Malaysia: method in teaching and learning; (iii) government's role in supporting entrepreneurship education and finally (iv) entrepreneurial education reforms in Malaysia.

**Keywords:** Malaysia, entrepreneur, education, government, 4IR

#### **1. Introduction**

Recognizing the importance of entrepreneurship education in inspiring entrepreneurship development and the economy, Malaysia Ministry of Higher Education (MOHE) has taken the initiative by making entrepreneurship subjects compulsory to all students at all universities [1]. The students are encouraged to take part in the entrepreneurship activities at their respective universities in order to develop the entrepreneurial attitudes and mind-set. The advancement in technology revolution is transforming method of educating through the usage of digital application that will eventually discard the traditional of concept time-honored classroom teaching.

The 4IR will experience a combination of technologies that distort the lines between the physical, digital and biological spheres. It is, indeed, built upon the Third Industrial Revolution known as the digital revolution since the 1950's as revealed by Smelser [2]. The Fourth Industrial Revolution can be referred as the current proliferation of technological advancements driven by connectivity, speed, breadth and depth of transformation. It is reinforced by the digital economy that emphasize some rapid advances in emergent innovation areas like artificial intelligence (AI), internet of things (IoT), robots, block chain, 3D printing and cloud computing that are transforming industries and societies across the world. AI is best described as a wide field of study with applications to many disciplines and various subfields.

With the emergence and availability of computers or machines, their capability to perform various tasks have grown and developed at a quick pace. Specialists and professionals have developed the power of computer systems to be applied in diverse working domains that focused on increasing speed and reducing its size with respect to time. Applications of AI has shown a growing and advanced applications in various fields such as gaming, natural language processing (NLP), expert system, vision system, speech recognition, handwriting recognition and intelligent robot.

The ten (10) major Fourth Industrial Revolution (4IR) technologies revealed at World Economic Forum in 2017 with potential to be the most influential over the next decade whereby their impacts are not limited to shaping industry and businesses worldwide but also in helping to secure and enhance the planet's sustainability. This suggests the importance of environmental sustainability technologies that will attribute to the broader social challenges of the 21st century. The fast emergence of 4IR and its impacts must therefore translate to new implementation in Education 4.0 that focuses on empowering education to adapt to new challenges in teaching and content that creates and motivates innovation in technology.

#### **2. New expectations arising from impacts of 4IR in Malaysia**

Nowadays, all graduates face a world transform by technology, in which the internet and social media create different opportunities and challenges for formal education systems. As students consider life after graduation, the universities are facing questions about their own destiny especially in ensuring graduates are fully employed. In the era of fourth industrial age, students require to acquire certain skills that are not exactly the same as the skills that were required in the previous era (third industrial revolution) where information technology was the key driver. The skills emphasis needs to be shifted towards imparting of complex, problem solving skills: creative skills and social skills including management, leadership, change management, collaboration, critical thinking, curiosity and risk taking, communication, marketing and sales [3]. Further, emotional intelligence, judgment, negotiation, decision making, cognitive flexibility, as well as knowledge production are also skills that are required for the new era entrepreneurship.

With this development, many changes need to occur in the education system. For example, changes need to be made in the curriculum of courses offered in universities and teaching methods used by the lecturers. However, the goal of higher education institution such as to ensure quality of learning via teaching, to enable the students to get the latest knowledge through exploratory research, and to sustain the development of societies by means of service will remain.

One of the main objectives of every higher institution is to educate the youth. Therefore, it is necessary to implement appropriate teaching strategies or method

**77**

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education…*

and to organize work in a way that foster learning. This has implication on better learning experience and lifelong learning attitude. The changes that is expected to occur in the Malaysian Higher Education System are changes in teaching and learning methods. For instance, the implementation of massive open online courses (MOOCs) has been introduced in 2014. According to Mohamed Amin [4], teaching in the classroom can no longer remain conventional if universities want to produce competitive, innovative and creative graduates. He added, those born in the era of mobile computing, which he called Generation Z, are skilled in sharing information through social media and are interested in learning new things online. Therefore, educators need to create teaching and learning contents which can stimulate their

The use of MOOCs in teaching and learning has also been identified as beneficial

i.Will allow higher institutions to decrease the cost of creating and delivering

ii. can reach a much broader audience student – of all ages anywhere in the country via an internet connection will now be able to access high quality

iii.Will allow higher learning institutions to quickly augment their programs with international courses content and/or add new courses which they could

Massive open online courses, or MOOCs, have been regarded as a dominant force in the transformation of pedagogy. Universiti Kebangsaan Malaysia (UKM) has launched its own version of MOOCs and actively used as one of the methods in teaching and learning. In 2016, a total of 122,021 students have registered for the UKM courses and as for 2018, UKM plans to add more courses uses MOOCs

The role of Malaysian government in preparing the future generation with entrepreneurial skills and mindsets has made some headway throughout the last decade with the establishment of the Higher Education Entrepreneurship Development Policy in 2010. This significant policy addressing six (6) core areas creates entrepreneurial values and cultures amongst students or graduates in the Higher Learning Institutions (HEI's) by alleviating the development of entrepreneurial programs into a more defined, holistic and well organized curriculum to produce graduates with heightened entrepreneurial attributes and thinking skills. The government envisages an increase in the number of entrepreneurs amongst the graduates to stimulate economic transformation towards a high-income nation.

1.Nineteen (19) Higher Education Institutions (HEIs) in Malaysia have introduced entrepreneurial education as a compulsory subject [5] that are Universiti Kebangsaan Malaysia, Universiti Teknologi MARA, Universiti Putra Malaysia, Universiti Malaya, Universiti Islam Antarabangsa, Universiti Sains Islam Malaysia, Universiti Malaysia Sabah, Universiti Malaysia Sarawak, Universiti

Hence, several marked achievements can be traced including:

courses even if there are not currently enrolled at higher learning

in the education system. Amongst the benefits that have been identified are:

programs without compromising quality.

*DOI: http://dx.doi.org/10.5772/intechopen.94919*

learning experience.

institutions.

platform.

not previously provide.

**3. Malaysian government's role**

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education… DOI: http://dx.doi.org/10.5772/intechopen.94919*

and to organize work in a way that foster learning. This has implication on better learning experience and lifelong learning attitude. The changes that is expected to occur in the Malaysian Higher Education System are changes in teaching and learning methods. For instance, the implementation of massive open online courses (MOOCs) has been introduced in 2014. According to Mohamed Amin [4], teaching in the classroom can no longer remain conventional if universities want to produce competitive, innovative and creative graduates. He added, those born in the era of mobile computing, which he called Generation Z, are skilled in sharing information through social media and are interested in learning new things online. Therefore, educators need to create teaching and learning contents which can stimulate their learning experience.

The use of MOOCs in teaching and learning has also been identified as beneficial in the education system. Amongst the benefits that have been identified are:


Massive open online courses, or MOOCs, have been regarded as a dominant force in the transformation of pedagogy. Universiti Kebangsaan Malaysia (UKM) has launched its own version of MOOCs and actively used as one of the methods in teaching and learning. In 2016, a total of 122,021 students have registered for the UKM courses and as for 2018, UKM plans to add more courses uses MOOCs platform.

#### **3. Malaysian government's role**

The role of Malaysian government in preparing the future generation with entrepreneurial skills and mindsets has made some headway throughout the last decade with the establishment of the Higher Education Entrepreneurship Development Policy in 2010. This significant policy addressing six (6) core areas creates entrepreneurial values and cultures amongst students or graduates in the Higher Learning Institutions (HEI's) by alleviating the development of entrepreneurial programs into a more defined, holistic and well organized curriculum to produce graduates with heightened entrepreneurial attributes and thinking skills. The government envisages an increase in the number of entrepreneurs amongst the graduates to stimulate economic transformation towards a high-income nation. Hence, several marked achievements can be traced including:

1.Nineteen (19) Higher Education Institutions (HEIs) in Malaysia have introduced entrepreneurial education as a compulsory subject [5] that are Universiti Kebangsaan Malaysia, Universiti Teknologi MARA, Universiti Putra Malaysia, Universiti Malaya, Universiti Islam Antarabangsa, Universiti Sains Islam Malaysia, Universiti Malaysia Sabah, Universiti Malaysia Sarawak, Universiti

*Circular Economy - Recent Advances, New Perspectives and Applications*

The 4IR will experience a combination of technologies that distort the lines between the physical, digital and biological spheres. It is, indeed, built upon the Third Industrial Revolution known as the digital revolution since the 1950's as revealed by Smelser [2]. The Fourth Industrial Revolution can be referred as the current proliferation of technological advancements driven by connectivity, speed, breadth and depth of transformation. It is reinforced by the digital economy that emphasize some rapid advances in emergent innovation areas like artificial intelligence (AI), internet of things (IoT), robots, block chain, 3D printing and cloud computing that are transforming industries and societies across the world. AI is best described as a wide field of study with applications to many disciplines and various

With the emergence and availability of computers or machines, their capability to perform various tasks have grown and developed at a quick pace. Specialists and professionals have developed the power of computer systems to be applied in diverse working domains that focused on increasing speed and reducing its size with respect to time. Applications of AI has shown a growing and advanced applications in various fields such as gaming, natural language processing (NLP), expert system, vision system, speech recognition, handwriting recognition and intel-

The ten (10) major Fourth Industrial Revolution (4IR) technologies revealed at World Economic Forum in 2017 with potential to be the most influential over the next decade whereby their impacts are not limited to shaping industry and businesses worldwide but also in helping to secure and enhance the planet's sustainability. This suggests the importance of environmental sustainability technologies that will attribute to the broader social challenges of the 21st century. The fast emergence of 4IR and its impacts must therefore translate to new implementation in Education 4.0 that focuses on empowering education to adapt to new challenges in

teaching and content that creates and motivates innovation in technology.

Nowadays, all graduates face a world transform by technology, in which the internet and social media create different opportunities and challenges for formal education systems. As students consider life after graduation, the universities are facing questions about their own destiny especially in ensuring graduates are fully employed. In the era of fourth industrial age, students require to acquire certain skills that are not exactly the same as the skills that were required in the previous era (third industrial revolution) where information technology was the key driver. The skills emphasis needs to be shifted towards imparting of complex, problem solving skills: creative skills and social skills including management, leadership, change management, collaboration, critical thinking, curiosity and risk taking, communication, marketing and sales [3]. Further, emotional intelligence, judgment, negotiation, decision making, cognitive flexibility, as well as knowledge production are also

With this development, many changes need to occur in the education system. For example, changes need to be made in the curriculum of courses offered in universities and teaching methods used by the lecturers. However, the goal of higher education institution such as to ensure quality of learning via teaching, to enable the students to get the latest knowledge through exploratory research, and to sustain

One of the main objectives of every higher institution is to educate the youth. Therefore, it is necessary to implement appropriate teaching strategies or method

**2. New expectations arising from impacts of 4IR in Malaysia**

skills that are required for the new era entrepreneurship.

the development of societies by means of service will remain.

**76**

subfields.

ligent robot.

Malaysia Kelantan, Universiti Teknologi Malaysia, Universiti Teknologi Hussein Onn, Universiti Sains Malaysia, Universiti Malaysia Perlis, Universiti Malaysia Pahang, Universiti Utara Malaysia, Universiti Sultan Zainal Abidin, Universiti Perguruan Sultan Idris, Universiti Teknikal Melaka and Universiti Malaysia Terengganu.


Malaysia appears to be on the right track to ensure that transformation to a highincome nation by 2020 and beyond is attained. In that regard, the *Vision 2020* plan for the future of Malaysia between 2020 and 2050 needs to be put in place adapting to changes brought forth by 4IR. Hence, the universities having a serious role shall need to produce real future talents equipped with technological digital know how that must be supported with government's initiatives. It is invoked that future jobs require a new institutional approach that encourages universal skillset that complements significant changes that are coming quickly with a mix of both social skills and technical skills. A few examples of direction higher tertiary education employed in the US and UK universities towards that objective include:

**79**

education.

future graduates.

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education…*

i.Tulane University where targeted curriculum focuses around mission based and cross disciplinary learning that blends science and technology studies with entrepreneurship studies. The Bioinnovation PhD Programme trains students across the university's science, engineering, medicine, law and business faculties and supplements that academic breadth with 'real-world'

support of the US FDA and New Orleans Bioinnovation Center [8].

ii.Cambridge University's Institute for Manufacturing offers a cross disciplinary collection of expertise in management, engineering, technology and

iii.Stanford 2025 and Georgia Tech have taken steps to ensure life-long learning through online education is readily available where increasingly, the 3–4 year undergraduate degrees is deemed outdated. Thus, continuous learning is necessary to suit changing jobs and technologies to rapidly meet with the

In Malaysia, a number of initiatives have developed across the higher learning institutions including the usage of Massive Open Online Courses (MOOC) that is seen as a progress from campus-based university education towards an online

After analyzing the future needs of the job market taking into consideration the fusion of digital and biological impact of 4IR, the Malaysia's Higher Education Ministry has prepared a framework, known as Education 4.0 Framework, to ensure that the higher education institutions are equipped for the challenges and demands of the 4IR. This move is a critical step in allowing for promising and future directions to create initiatives in local academic world to best safeguard against the certainty of unprecedented future 4IR will create for students and

Hence, the role of Malaysian government is intensified as it has to ensure that the demands of 4IR can be fulfilled by an education system that is able to produce graduates with efficiency in technological expertise and humanistic issues.

The [9] (MEB) (Higher Education) has integrated factors to tackle the uncertainty of the 4IR to produce holistic, balanced entrepreneurial graduates who can adapt and cater to newly created jobs that are yet to exist. Thus, the Ministry recognizes that the education system needs to keep abreast with global trends such as disruptive technologies, the Internet of Things and the automation of work knowledge. Hence, the MEB is constructed on five aspirations which are access, quality, equity, unity and efficiency that is further strengthened by its foundation for a balanced student emphasizing on six primary attributes. These attributes include ethics and spirituality, leadership skills, national identity, language proficiency, thinking skills and knowledge that can be instilled entrepreneurial mindset of graduates that places equal value on technical training. In order to achieve these aspirations, the MEB lays out 10 SHIFTS (see **Figure 1**) that will stimulate performance towards achieving excellence in the higher education system through three (3) phases beginning from 2015, 2016–2020 and finally in 2021–2025. The first four Shifts aim for outcomes from main stakeholders in our HE education system while another six Shifts focus on enablers in the HE ecosystem namely financial stability, empowered government, innovation ecosystem, global prominence, globalized

*DOI: http://dx.doi.org/10.5772/intechopen.94919*

policy relating to manufacturing.

**4. Entrepreneurial education reforms**

needs of a new technological revolution.

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education… DOI: http://dx.doi.org/10.5772/intechopen.94919*


In Malaysia, a number of initiatives have developed across the higher learning institutions including the usage of Massive Open Online Courses (MOOC) that is seen as a progress from campus-based university education towards an online education.

After analyzing the future needs of the job market taking into consideration the fusion of digital and biological impact of 4IR, the Malaysia's Higher Education Ministry has prepared a framework, known as Education 4.0 Framework, to ensure that the higher education institutions are equipped for the challenges and demands of the 4IR. This move is a critical step in allowing for promising and future directions to create initiatives in local academic world to best safeguard against the certainty of unprecedented future 4IR will create for students and future graduates.

Hence, the role of Malaysian government is intensified as it has to ensure that the demands of 4IR can be fulfilled by an education system that is able to produce graduates with efficiency in technological expertise and humanistic issues.

#### **4. Entrepreneurial education reforms**

The [9] (MEB) (Higher Education) has integrated factors to tackle the uncertainty of the 4IR to produce holistic, balanced entrepreneurial graduates who can adapt and cater to newly created jobs that are yet to exist. Thus, the Ministry recognizes that the education system needs to keep abreast with global trends such as disruptive technologies, the Internet of Things and the automation of work knowledge. Hence, the MEB is constructed on five aspirations which are access, quality, equity, unity and efficiency that is further strengthened by its foundation for a balanced student emphasizing on six primary attributes. These attributes include ethics and spirituality, leadership skills, national identity, language proficiency, thinking skills and knowledge that can be instilled entrepreneurial mindset of graduates that places equal value on technical training. In order to achieve these aspirations, the MEB lays out 10 SHIFTS (see **Figure 1**) that will stimulate performance towards achieving excellence in the higher education system through three (3) phases beginning from 2015, 2016–2020 and finally in 2021–2025. The first four Shifts aim for outcomes from main stakeholders in our HE education system while another six Shifts focus on enablers in the HE ecosystem namely financial stability, empowered government, innovation ecosystem, global prominence, globalized

*Circular Economy - Recent Advances, New Perspectives and Applications*

Malaysia Terengganu.

Modernization or ATOM.

for single mothers [7].

Malaysia Kelantan, Universiti Teknologi Malaysia, Universiti Teknologi Hussein Onn, Universiti Sains Malaysia, Universiti Malaysia Perlis, Universiti Malaysia Pahang, Universiti Utara Malaysia, Universiti Sultan Zainal Abidin, Universiti Perguruan Sultan Idris, Universiti Teknikal Melaka and Universiti

2. Several thrusts in the Strategic Plan on Entrepreneurship Development in Higher Education (2013–2105) have been successful [6] which include establishing the Entrepreneurship Centre in every HEI, providing holistic and well-planned entrepreneurial education and programmes, enhancing the competency of HEI's entrepreneurship trainers and facilitators, and to increase the effect of the

3.Various programs to stimulate entrepreneurial spirits and increase knowledge and skills such as 1Malaysia Entrepreneur (1MET), Program Usahawan Bimbing Usahawan, Business Design Workshop and Business Facilitator, Graduate Entrepreneur Scheme (SIS), Program Galakan Perniagaan and Program Pembudayaan Keusahawanan (INSKEN 2015), MSC Malaysia, Meet Your Experts (ER360), Majlis Amanah Rakyat, Small Medium Enterprise (SME) Corp Malaysia, Ministry of Domestic Trade, Cooperatives and Consumerism (KDNKK) and Perbadanan Nasional Berhad (PNS), Satu Daerah Satu Industri program (SDSI), Youth and Entrepreneurship Program (Business and Agriculture Business), Economic Transformation Program and Automotive Workshop

4.The establishment of Malaysian Global Innovation and Creativity Center (MAGIC), an entrepreneurial entity, formed by the Malaysian government in 2014 to develop dynamic entrepreneurs with high endurance equipped to take

5.The government provides micro-credit facilities through TEKUN Nasional and Amanah Ikhtiar Malaysia (AIM) to manage the micro-credit funds in tandem with entrepreneurship training to build women and youths' ability in finance,

6.Women Entrepreneurship Incubator (I-KeuNITA) was introduced to harness women's skills training in micro enterprises providing intensive skills training and entrepreneurship assistance for low-income women in the field of sewing, beauty therapy, commercial cooking, crafts, childcare, and tour services. In addition, the Ministry of Women, Family and Community Development holds a Skills Training for Single Mothers (I-KIT) to encourage generation of income

Malaysia appears to be on the right track to ensure that transformation to a highincome nation by 2020 and beyond is attained. In that regard, the *Vision 2020* plan for the future of Malaysia between 2020 and 2050 needs to be put in place adapting to changes brought forth by 4IR. Hence, the universities having a serious role shall need to produce real future talents equipped with technological digital know how that must be supported with government's initiatives. It is invoked that future jobs require a new institutional approach that encourages universal skillset that complements significant changes that are coming quickly with a mix of both social skills and technical skills. A few examples of direction higher tertiary education

employed in the US and UK universities towards that objective include:

up challenges and make impact at regional and global stage.

business plan preparation, marketing and promotion.

implementation of HEI's entrepreneurial education and development.

**78**

online learning and transformed HE delivery. The Higher Education Ministry expects the transformation to be gained in the long term, but impact and changes will be visible in the short term building on future excellence.

With the emergence of 4IR, Malaysia has taken a much-needed educational strategy to introduce new methods to produce students to meet the demands of the new Revolution that must be powered by character building, higher order of thinking, multiple intelligences and soft skills. Various initiatives were undertaken that include the application of iCGPA which assesses students on their participation in co-curricular, social and voluntary activities, 2u2i Programme and the CEO @ Faculty Programme. In a more micro level initiative, universities in Malaysia are encouraged to give emphasis on data analytic skills for students across disciplines on top of the entrepreneurial skills. This effort is to adhere to the rapid development of processing power and availability of big data that are seen becoming one of the distortions to the entrepreneurial strategy. Hence, besides entrepreneurial skills, students need to have the ability to manage and take advantage of the data to come out with the best information for business decision particularly on the trend of the market and the availability of the supplier. In UKM, apart from offering the subject of Fundamentals of Entrepreneurship and Innovation [10, 11], the university is also offering Management and Data Analytic as compulsory subject to all the students to address method for managing, mining and analyzing big dataset.

It is further envisaged that in order to meet the challenges of the 4IR, several factors are required to enhance the education system including entrepreneurial curriculum content that are:

i.Application of Heutagogy which is "*the study of self-determined learning that attempts to challenge some ideas about teaching and learning that still prevail in teacher centered learning and the need for, as Bill Ford (1997) eloquently puts it 'knowledge sharing' rather than 'knowledge hoarding'. In this respect heutagogy looks to the future in which knowing how to learn will be a fundamental skill given the pace of innovation and the changing structure of communities and workplaces".*

**81**

eco-system.

**Figure 2.**

**5. Conclusion**

ii.Delivery of Higher Education that asserts gamification, and on demand learning methods such as inverted classroom and blended learning.

iii.Curriculum Content which amplifies the need for balanced values of ethics

iv.Translational research which encompasses transdisciplinary collaborations, crowd sourcing, web of co-laboratories, quadruple helix innovation, a symbiosis of learning, research and collaborations and guided by human

The MOHE has realized 4IR is opening vast opportunities to on-line or e-commerce businesses which includes the Business to business (B2B), Business to Customer (B2C) and even Customer to Customer (C2C) business activities. In order to equip the current entrepreneurship education content, collaboration with the world e-commerce giant Ali-Baba Group Ltd., for example, was initiated with MOHE to participate in the Global E-Commerce Talent (GET) training program that provides lecturers and students of higher education with competitive skills required in the global e-commerce industry. It is the intent of the MOHE that with the e-commerce skills provided, the higher education in Malaysia would be able to develop more entrepreneur talent with new business model that benefits from 4IR that creates a platform to heighten connectivity in the existing entrepreneurial

Hence, it is suffice to state that presently educational system in Malaysia is bracing for new paradigm shift or at a lesser extent enhancing the existing methods to ensure that entrepreneurial learning content is aligned with impacts of 4IR. Although the Education 4.0 Framework that address the issues and challenges of 4IR is yet to be realized, it is an evidence that the Malaysian government has quickly taken up the role to explore the impacts of 4IR to redesign the curriculum content at

The business of higher education institutions remains unchanged in Malaysia since the establishment of the University of Malaya in 1949, however, students still assemble at a scheduled time and venue to listen to the wisdom and teachings by scholars. Given the fourth industrial revolution, a new form of university is emerging that implements teaching, research and service in an unconventional approach.

and morality and knowledge and skills (**Figure 2**).

*The 21st century curriculum for MyHE 4.0. Source: Datin Paduka and Tapsir [12].*

based research ethics.

the higher learning institutions.

#### **Figure 2.**

*Circular Economy - Recent Advances, New Perspectives and Applications*

online learning and transformed HE delivery. The Higher Education Ministry expects the transformation to be gained in the long term, but impact and changes

With the emergence of 4IR, Malaysia has taken a much-needed educational strategy to introduce new methods to produce students to meet the demands of the new Revolution that must be powered by character building, higher order of thinking, multiple intelligences and soft skills. Various initiatives were undertaken that include the application of iCGPA which assesses students on their participation in co-curricular, social and voluntary activities, 2u2i Programme and the CEO @ Faculty Programme. In a more micro level initiative, universities in Malaysia are encouraged to give emphasis on data analytic skills for students across disciplines on top of the entrepreneurial skills. This effort is to adhere to the rapid development of processing power and availability of big data that are seen becoming one of the distortions to the entrepreneurial strategy. Hence, besides entrepreneurial skills, students need to have the ability to manage and take advantage of the data to come out with the best information for business decision particularly on the trend of the market and the availability of the supplier. In UKM, apart from offering the subject of Fundamentals of Entrepreneurship and Innovation [10, 11], the university is also offering Management and Data Analytic as compulsory subject to all the students to

will be visible in the short term building on future excellence.

address method for managing, mining and analyzing big dataset.

It is further envisaged that in order to meet the challenges of the 4IR, several factors are required to enhance the education system including entrepreneurial

i.Application of Heutagogy which is "*the study of self-determined learning that attempts to challenge some ideas about teaching and learning that still prevail in teacher centered learning and the need for, as Bill Ford (1997) eloquently puts it 'knowledge sharing' rather than 'knowledge hoarding'. In this respect heutagogy looks to the future in which knowing how to learn will be a fundamental skill given the pace of innovation and the changing structure of communities and* 

**80**

**Figure 1.**

*The 10 SHIFTS. Source: [9].*

curriculum content that are:

*workplaces".*

*The 21st century curriculum for MyHE 4.0. Source: Datin Paduka and Tapsir [12].*


The MOHE has realized 4IR is opening vast opportunities to on-line or e-commerce businesses which includes the Business to business (B2B), Business to Customer (B2C) and even Customer to Customer (C2C) business activities. In order to equip the current entrepreneurship education content, collaboration with the world e-commerce giant Ali-Baba Group Ltd., for example, was initiated with MOHE to participate in the Global E-Commerce Talent (GET) training program that provides lecturers and students of higher education with competitive skills required in the global e-commerce industry. It is the intent of the MOHE that with the e-commerce skills provided, the higher education in Malaysia would be able to develop more entrepreneur talent with new business model that benefits from 4IR that creates a platform to heighten connectivity in the existing entrepreneurial eco-system.

Hence, it is suffice to state that presently educational system in Malaysia is bracing for new paradigm shift or at a lesser extent enhancing the existing methods to ensure that entrepreneurial learning content is aligned with impacts of 4IR. Although the Education 4.0 Framework that address the issues and challenges of 4IR is yet to be realized, it is an evidence that the Malaysian government has quickly taken up the role to explore the impacts of 4IR to redesign the curriculum content at the higher learning institutions.

#### **5. Conclusion**

The business of higher education institutions remains unchanged in Malaysia since the establishment of the University of Malaya in 1949, however, students still assemble at a scheduled time and venue to listen to the wisdom and teachings by scholars. Given the fourth industrial revolution, a new form of university is emerging that implements teaching, research and service in an unconventional approach. This version of university education is interdisciplinary and multi-disciplinary where methods of learning and teaching is conducted in virtual classrooms. Hence, the experience of learning is highly enhanced with the usage of technology and data management. Hence, all stakeholders especially the government needs to ensure that all tools and initiatives are well placed in all educational institutions to meet all the impacts of 4IR and benefits a potential entrepreneur graduate may gain from the new revolution.

### **Acknowledgements**

This research is funded by National Higher Education Research Institute (IPPTN) under CLMV Research Grant – Executing UKM Entrepreneurship Education syllabus on Cambodian University (Code GG-2016-004) and FRGS/1/2018/TK04/UKM/02/07.

### **Author details**

Hanim Kamaruddin\*, Rosilah Hassan, Norasmah Othman, Wan Mimi Diyana Wan Zaki and Sarmila Md Sum Universiti Kebangsaan Malaysia, UKM, 43600 Bangi, Selangor Darul Ehsan, Malaysia

\*Address all correspondence to: hanim@ukm.edu.my

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**83**

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education…*

[8] R. May Lee, Kendall, M. and Simmons, T, 2017, https://www. weforum.org/agenda/2017/10/to-traintomorrow-s-leaders-universities-needagain-to-teach-universal-skillsets/. Accessed 23 December 2017.

[9] Malaysia Education Blueprint 2015- 2025 (Higher Education), Ministry of

Kamaruddin H, Othman N, Sarmila MS. Fostering entrepreneurship foundation. Nurturing Innovation and Creativity in UKM Students, 7th International Conference on Global Social Entrepreneurship. 2016:43-50

[11] Rosilah Hassan, Wan Mimi Diyana Wan Zaki, Hanim Kamaruddin, Norasmah Othman, Sarmila Md Sum, Zulkifli Mohamad, 2017, Entrepreneurship Education in UKM: Essential Skills for first - Years Students, Leadership, innovation and entrepreneurship as driving forces of the global economy: Proceedings of the 2016 international conference on leadership, innovation and entrepreneurship (ICLIE), p 675-685.

[12] Datin Paduka IR, Siti Hamisah Tapsir, 2017, Keynote Speaker in University Presidential forum 2017, http://www.utm.my/upf/utmuniversity-presidents-forum-2017/.

Accessed 30 January 2019.

Education, Malaysia

[10] Hassan R, Zaki WMDW,

*DOI: http://dx.doi.org/10.5772/intechopen.94919*

[1] Hardy Loh Rahim, Mohd Ali Bahari Abdul Kadir, Zanariah Zainal Abidin, Junainah Junid, Laila Mohd Kamaruddin, Noor Faizah Mohd Lajin, Siti Zahrah Buyong, and Adlan Ahmad Bakri, 2015. Entrepreneurship Education In Malaysia: A Critical Review, Journal of Technology Management and Business (ISSN: 2289-7224) Vol 02, No 02, 2015.

[2] Smelser NJ. Social Change in the Industrial Revolution: An Application of Theory to the British Cotton Industry.

[3] Naude W. Entreprenuership, Education and the Fourth Industrial Revolution in Africa. IZA Insitute of Labor Economic, Germany: Discussion

[4] Mohamed Amin Embi, 2016. 35 Kursus Massive Open Online Courses (MOOC) baharu untuk pembelajaran sesi akademik 2016/2017.http://www. ukm.my/news/Latest\_News/newteaching-and-learning-method-forgeneration-z/. Accessed 24 Jan 2019.

[5] Yussof B, Zainol FA & Ibrahim B 2015. Entrepreneurship Education in Malaysia's Public Institutions of Higher Learning—A Review of the Current Practices, International Education

[6] Shamsudin SFFAAM, Nawi NBC, Nasir NABM, Zakaria MNB. Policies and practices for entrepreneurial education: The Malaysian experience. The Journal of Developing Areas.

Studies. Volume 8, No. 1.

2016;**50**(5):307-316

[7] Mutalib RA, Arshad R,

Ismail NSA, Ahmad Z. Women and entrepreneurship: An overview of women entrepreneurship programs in Malaysia, JGD vol. 11. Special Issue on Social Entrepreneurship. 2015:15-28

Routledge; 2013

**References**

paper series; 2017

*Meeting the Needs of Fourth Industrial Revolution (4IR) in Entrepreneurial Education… DOI: http://dx.doi.org/10.5772/intechopen.94919*

#### **References**

*Circular Economy - Recent Advances, New Perspectives and Applications*

This version of university education is interdisciplinary and multi-disciplinary where methods of learning and teaching is conducted in virtual classrooms. Hence, the experience of learning is highly enhanced with the usage of technology and data management. Hence, all stakeholders especially the government needs to ensure that all tools and initiatives are well placed in all educational institutions to meet all the impacts of 4IR and benefits a potential entrepreneur graduate may gain from

This research is funded by National Higher Education Research Institute (IPPTN) under CLMV Research Grant – Executing UKM Entrepreneurship Education syllabus on Cambodian University (Code GG-2016-004) and

**82**

**Author details**

the new revolution.

**Acknowledgements**

FRGS/1/2018/TK04/UKM/02/07.

Malaysia

Hanim Kamaruddin\*, Rosilah Hassan, Norasmah Othman,

Universiti Kebangsaan Malaysia, UKM, 43600 Bangi, Selangor Darul Ehsan,

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

Wan Mimi Diyana Wan Zaki and Sarmila Md Sum

\*Address all correspondence to: hanim@ukm.edu.my

provided the original work is properly cited.

[1] Hardy Loh Rahim, Mohd Ali Bahari Abdul Kadir, Zanariah Zainal Abidin, Junainah Junid, Laila Mohd Kamaruddin, Noor Faizah Mohd Lajin, Siti Zahrah Buyong, and Adlan Ahmad Bakri, 2015. Entrepreneurship Education In Malaysia: A Critical Review, Journal of Technology Management and Business (ISSN: 2289-7224) Vol 02, No 02, 2015.

[2] Smelser NJ. Social Change in the Industrial Revolution: An Application of Theory to the British Cotton Industry. Routledge; 2013

[3] Naude W. Entreprenuership, Education and the Fourth Industrial Revolution in Africa. IZA Insitute of Labor Economic, Germany: Discussion paper series; 2017

[4] Mohamed Amin Embi, 2016. 35 Kursus Massive Open Online Courses (MOOC) baharu untuk pembelajaran sesi akademik 2016/2017.http://www. ukm.my/news/Latest\_News/newteaching-and-learning-method-forgeneration-z/. Accessed 24 Jan 2019.

[5] Yussof B, Zainol FA & Ibrahim B 2015. Entrepreneurship Education in Malaysia's Public Institutions of Higher Learning—A Review of the Current Practices, International Education Studies. Volume 8, No. 1.

[6] Shamsudin SFFAAM, Nawi NBC, Nasir NABM, Zakaria MNB. Policies and practices for entrepreneurial education: The Malaysian experience. The Journal of Developing Areas. 2016;**50**(5):307-316

[7] Mutalib RA, Arshad R, Ismail NSA, Ahmad Z. Women and entrepreneurship: An overview of women entrepreneurship programs in Malaysia, JGD vol. 11. Special Issue on Social Entrepreneurship. 2015:15-28

[8] R. May Lee, Kendall, M. and Simmons, T, 2017, https://www. weforum.org/agenda/2017/10/to-traintomorrow-s-leaders-universities-needagain-to-teach-universal-skillsets/. Accessed 23 December 2017.

[9] Malaysia Education Blueprint 2015- 2025 (Higher Education), Ministry of Education, Malaysia

[10] Hassan R, Zaki WMDW, Kamaruddin H, Othman N, Sarmila MS. Fostering entrepreneurship foundation. Nurturing Innovation and Creativity in UKM Students, 7th International Conference on Global Social Entrepreneurship. 2016:43-50

[11] Rosilah Hassan, Wan Mimi Diyana Wan Zaki, Hanim Kamaruddin, Norasmah Othman, Sarmila Md Sum, Zulkifli Mohamad, 2017, Entrepreneurship Education in UKM: Essential Skills for first - Years Students, Leadership, innovation and entrepreneurship as driving forces of the global economy: Proceedings of the 2016 international conference on leadership, innovation and entrepreneurship (ICLIE), p 675-685.

[12] Datin Paduka IR, Siti Hamisah Tapsir, 2017, Keynote Speaker in University Presidential forum 2017, http://www.utm.my/upf/utmuniversity-presidents-forum-2017/. Accessed 30 January 2019.

**85**

Section 3

Opportunity and Future

of Circular Economy

Development

### Section 3
