Innovation policy

Katalin Erdős
Outline

What is innovation and why is it

important?

Market or state?

Features of a good innovation policy

Strategies, policies and instruments

What is innovation and why is is important?

What is innovation?

How does it spur economic development?

- Productivity improvements
- Fostering the creation of new firms and activities that create value

Why is innovation important? – Renewal is needed on firm and country level too
Global competition
Contribution to growth
Moving upward in the supply chain and process innovation (especially for developed countries)
Increased productivity, new skills, capabilities, functions in the economy
Market or state?

• What is innovation policy?

– More than science policy
– Integrated coordination of different policies in order to enhance innovation
based economic growth
– Explicitly linking science, technology and innovation with economic and
employment growth
– Game plan to compete and win in innovation-based economic activity
• Well articulated, generously funded and efficiently implemented
innovation strategies are needed in the race for global innovation
advantage
 Optimal focus Optimal focus
Poor economic Poor economic
for government for government
policy policy
economic policy economic policy

Support
Support key Pick specific
Leave it factor
broad firms/
principally to conditions
industries/ industries/
the market (e.g. science,
technologies technologies
skills)

Source: Atkinson – Ezell, 2012; p. 137

Is there a need for innovation policy?
10 reasons of suboptimal level of innovations by markets
1. Individual firms, entrepreneurs cannot capture all the benefits
of their innovative activity🡪 level of innovative activity is below
the social optimum
• Social return of company R&D is at least twice that of company return,
process R&D spills over in product R&D
• Even patents do not fully eliminate this problem – Apple iPad
2. High levels of risk and costs, respectively differing time horizons
impede the development of complex new technological
platforms
• New generation technologies – Internet
3. Failures of capital markets diverted privately funded R&D from
innovation based and entrepreneurial efforts
• Investment funds and venture capitalists both moved towards
investments with shorter time horizons and lower risk
• Shareholder value movement
4. Coordination failures undermine the innovation process
• Co-opetition
• Information deficiency, transaction costs/opportunity cost
• Differing interests (e.g. in university-industry cooperation)
5. Chicken-or-egg challenges inhibit the development of technology
platforms
• Coordination of tasks requiring synergic and parallel cooperation of
actors is cumbersome
6. Many industries and firms lag in adopting proven technologies
• Principal-agent problem
• Extreme fragmentation
7. The innovation-producing benefits of industry clusters are
under-realized
• Geographic clusters; free-rider problem, spill overs
8. There is more than one economic equilibrium 🡪 one
of them is worse from societal perspective
• Poverty trap – low level of skills and innovation
9. The interests of geographically mobile firms in
locating innovative activity may diverge from those
of a nation’s residents
10. Growth itself
• Growth 🡪 positive externalities
• Recession 🡪 negative externalities
 Scandinavia, Brazil, India,
Most of
USA Canada, Russia, East China
Europe
Australia Asia

Competing Playing to
Doesn’t fully Often subvert Anything to
based on win, but
recognize it’s rules when to win, including
innovation usually
in their lowering
policy; raising playing by the
competition advantage other’s games
their game rules

Source: Atkinson – Ezell, 2012; p. 160

Features of a good innovation policy

Inspiration

Information
Intention
technology

Investment Insight

Institutional
Incentives
innovation
• Inspiration: Ambitious targets
– Ambitious, but realistic (Singapore vs. EU)
– Different industry, technology and application domains: life
sciences, material sciences, digital media, clean (energy)
technologies, ICT, biotech, e-governance
• Intention: innovation-based competitiveness as a
national priority
– Finland (company tax cut)
– Switzerland (innovation voucher)
• Insight: better understanding of innovation activity
– Comparison with other countries
– New knowledge – on the process, methods, techniques,
measurement and spread of innovation
• Incentives: support of innovation, production and jobs
– Innovation incentives: tax cut, investment credits, interest-free loans
– Removing barriers: inefficient regulation, difficulties of company
establishment
• Institutional innovation
– Establishment of national development agencies
– Research funding organizations
– Reform of educational systems (Finnish Oivallus project)
– Reform of governmental institutions
• Investment
– R&D expenditures, direct support for applied research and
university-industry partnership
– Extension services, innovation voucher
• Information technology
Strategies, policies and instruments

Europe 2020
Smart specialization platform
Smart specialization objectives
RIO
National Research, Development and Innovation Office
Responsible Research and Innovation
Student presentations

• Foray, D. (2017): The Economic Fundamentals of Smart

Specialization Strategies. In: Radosevic et al. (eds.): Advances in
the Theory and Practice of Smart Specialization. Academic Press.
pp. 37-50. (Available at https://books.google.com)

• Krammer, S. M. S. (2017): Science, technology, and innovation

for economic competitiveness: The role of smart specialization
in less-developed countries. Technological Forecasting and
Social Change, Vol. 123. pp. 95–107.
Groupwork
Great job, thank you, have a nice day!
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