1. Lecture 10: The policy relevance
of innovation studies

2. Comments on the 11/10 debate

3. The search process…

4. Our “current state of the art”

5. Our elusive target - or how the world
will look like in May 2007…

6. Innovation policy: a definition
Innovation policy refers to elements of science, technology and industrial
policy that explicitly aim at promoting the development, spread and efficient
use of new products, services and processes in markets or inside private and
public organisations.
The main focus is on the impact on economic performance and social
cohesion. Innovation policy has wider objectives than those of science
policy and technology policy. It includes policies which aim at
organisational change and the marketing of new products.
Many other policy areas affect innovation. This is true of competition policy
and macroeconomic policy, but it is also true of sectoral policies like
environment, energy, transport and communications and most importantly it is
true of human resource development policy.

7. Innovation Policy Instruments
Policy Tools Examples
Public enterprises: Innovation by publicly owned industries, setting up of
new industries, pioneering use of new technologies
Financial: Grants, loans, subsidies, financial sharing arrangements,
export credits, loan guarantees
Procurement: Government purchases, prototype purchases, R&D contracts
Commercial: Trade agreements, tariffs, currency regulations
Public services: Purchases, maintenance, construction, innovation in health
services, public buildings, transport, telecommunications
Taxation: Tax allowances, company taxation
Scientific research: Research laboratories, support for research associations,
professional associations, research grants
Education: General and technical educations, universities, apprenticeship
schemes, retraining
Information: Information networks and centres, consulting services,
databases
Regulation: Patents, environmental and health regulation, monopoly
regulation

8. Innovation Policy Trends
1960s: Basic research and human capital
1970s: Emphasis on macroeconomic adjustment and
competitiveness (neglecting the micro-level)
1980s: Technological change challenges
Technological leadership (Japan vs. US)
The <peace dividend>: declining military R&D
Diffusion-oriented policies
Environmental issues
Regulatory frameworks
1990s: The learning economy and innovation driven
growth
Exogenous shocks and complex learning processes
Emphasis of the efficiency of policy portfolios

9. Economic rationales for innovation policy
• Market failures
• Co-ordination failures [a special case of market
failures involving failures in the innovation
process]
• Path-dependence in the evolution of institutions
and industries
• Complementarities with other policies

17. Invention, co-invention and co-
ordination failures.
Back to our 11/10 Debate…

32. Innovation Policy and Phases of Economic Development
PHASE I: INFRASTRUCTURE DEVELOPMENT FOR FDI
• Solicitation of FDI
• Creation of attractive investment and regulation regimes
• Public investment on IT, energy and transportation infrastructures
PHASE II: LOCAL CAPABILITIES AND TECHNOLOGY ACQUISITION
• Offset policies for market access
• Technology transfer and technology acquisition strategies
• Expanded incentives to local producers
• Incentives for increasing local value added
PHASE III: INDIGENOUS R&D AND COMMERCIALISATION PROCESSES
• Government funding of R&D
• Investment in technology commercialization
• Investment in higher education and human resources
• Targeted promotion of innovation at the sectoral level

34. Innovation Policy and Industrialization
Objectives/Targets Obstacles Market failures & Policy Policy Approach & Policy Components
Constraints
Widespread Lack of good R&D projects Learning Approach: Government Agency becoming
Endogeneization of the an N3 network entrepreneur; generating relevant
R&D process Pervasive market failure project taxonomies; codification of policy
experience
Assemble networks
-
User-producer
-
Exchange if ideas
-
Collective, Absence of R&D (and search) Massive and flexible support
Multidisciplinary & routine at firms
Cumulative Learning
Process
Achieving ‘critical mass’ Underdeveloped R&D Mix between finance/monetary incentives and
of projects Consultancy/advisory services and institutional/market building policies
financial services markets
Developing Policy Partially inadequate institutional Predominance of Neutrality in incentives/finance
Capabilities framework
Defining the specifics of Inadequate policy approach and Proactive policies (project generation)
firm based incentives policy capabilities at Government
Investment in new policy capabilities (training, staff
work etc.)

35. Challenges for Developing Countries
• New areas of co-ordination failures
– Skills
– Infrastructure and logistics
– Capital markets
– Ability to adjust
• The lack of space for macroeconomic adjustment, i.e. the
absorption of exogenous shocks
– Interest rates fluctuations in the global economy
– De-regulation facilitating innovation driven growth in advanced
countries

36. Different Views on Innovation Dynamics and
Innovation Policy
• SYSTEMS APPROACH
• NEO-CLASSICAL – Co-ordination failures
APPROACH – Knowledge externalities
– Diffusion of technology
– Market failures
– Institutional competences
• POLICY AGENDA
• POLICY AGENDA
– Adjustment to institutional
– Innovation=R&D change
– Human Capital – Proactive diffusion policies
– Institutional learning
– Property rights
– Networking policies

37. Policies affecting the pressure for change, the ability to
change and the consequences of change
Transformation pressure
Macro-economic policies
Competition policies
Trade policies
↓
Ability to innovate [broadening vs. deepening] and adapt to change
Human resource development policies
Labour market policies
Innovation policies
↓
Redistribution of costs and benefits of change
Tax and other income transfer policies
Social policy
Regional policy

39. Is that enough?
Six Myths about Technology
and their influence on Industrial Policy
(i) Technology is (just) Applied Science Set up R&D Institutes
(ii) Technological Self-reliance is Key, period Indigenization as end in
itself
(iii) More Technology is always Good Focus on R&D Spending, not
Content or Value Added
(iv) High tech is the Best technology Expensive, high-tech Champions,
State or Private
(v) Technology is well understood and easily transferred Focus on
Regulation
(vi) R&D is Key, and led by Research Focus on Research, not
Development

40. Technology Policy Implementation
BEST PRACTISE ENDOGENOUS NEEDS
• Well defined targets • Links local needs and
complementary policies
• Already available
expertise • Consensus building
• Limited requirements for • Adjustment to exogenous
new institutional shocks
arrangements • Limited local resources
• Lack of priorities for policy analysis
• Difficulty to adjust to • Lack of policy
exogenous changes implementation
institutions

41. Readings…
• Westphal
– Additional readings Martin, Metcalfe, Aghion,
et al. (2006)