Demand for innovation. What policy can and cannot do for it. Jakob Edler, MIoIR

1Manchester Institute of Innovation Research

Demand for innovation.What policy can and cannot do for it.

Jakob Edler, MIoIR

Seminar on The New Agenda of Innovation Studies: Policies

Madrid, March 31 2014

2

Structure and Basic Idea

Policy trend Demand and Innovation Role of Policy

– Rationales– “Instruments”

Examples– Private Demand Instruments– Public Procurement as policy tool

Challenges Conclusion

Manchester Institute of Innovation Research

3

Policy Trend (innovation policy!)

Demand measures for decades (e.g. market transformation…) EU level driving:

– Kok and Aho Reports– PCP (ICT area), LMI, Horizon 2020 (New regulation proposal)

Many countries: studies, intentions, new schemes (OECD 2011, Izsak/Edler 2011), small countries (Georghiou et al 2011)

Regions have started as well (Wintjes 2012) Demand conditions recognised as important (UK 2009,

2010) Demand based innovation policy: „ most important“

area to learn (Trendchart Users, July 2011) Manchester Institute of Innovation Research

Long standing theoretical debate (Marshall, Schmookler, Rosenberg, Metcalf…)

Successful innovations: most often reaction to perceived changes in demand rather than to technological advances

Innovation failures often due to a misperception of what the market is ready and willing to accept (Rothwell 2007)

Eco innovation: demand more important than public subsidies, growing demand is most importance incentive for innovation (Horbach et al 2012, Newell 2010)

Firm survey (Commission 2009) Policies to improve demand for innovation highly relevant Uncertain demand most important obstacle

☼ Demand for demand policies..

The meaning of demand for innovation


Demand and innovation (eco-innovation)

Source: INNOBAROMETER, EUCom (Gallup) 2011

Barriers to accelerated eco-innovation uptake and development for companiesUncertain demand from the market (Gallup 2011, p. 31)

Source: INNOBAROMETER, EU Com (Gallup) 2011

Demand and Innovation (eco-innovation): SPAIN: 80% say demand is very serious or serious obstacle

Demand triggering innovation: asking for new products / services (new functions, more efficient…)

Demand being responsive to existing innovation: absorbing, adopting, using, accepting innovations

Innovation role of users Co-production (co-adaptation): user –

producer User produced innovation

Different ways in which demand influences innovation


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Demand based Innovation PolicyDefintion

all public action to induce innovation and/or speed up the diffusion of innovation through

increasing the demand for innovation – i.e. influencing the willingness and ability to buy and

use an innovation) and/or– defining new functional requirements for products

and services and/or– improving user involvement in innovation production

(user-driven)

Innovation defined form demand perspective (including “diffusion”)


Rationale - Three sets of justifications

Logic: Intelligent

public action to overcome

various kinds of

“weaknesses” and link to

societal needs,

efficiency gains and economic

development

system weaknesses* hamper market entry and diffusion

Information asymmetries (producers do not know preferences, users do not know innovations)

Poor articulation by consumers/policy Adoption externalities Lack of interaction between users and producers High switching and entry costs: lack of

capabilities and willingness to use new technologies

Technological path dependenciesSocietal goals, Public sector needs

Contributing to sectoral / societal policy needs and goals (e.g. the eco-agenda)

Making public service more effective and efficient (value for money, long term)

Support (local) producers, service providers Indirect: Triggering something bigger, market

creation Dominant designs, Demonstration effects Scale/scope advantages Learning / upgrading for buyer and provider Keep up innovation pressure in system Attractive investment location (demand

conditions)

Support industry, growth and location

* term borrowed from BergekManchester Institute of Innovation Research

Instruments - TypologyPublic Procurement (policies): direct/catalytical; strategic/generalPrivate Demand:

Demand Subsidies, Demand tax incentives Awareness measures, labels.. Training Demonstration projects Articulation of needs, joint need definition (e.g. foresight)

Support user – producer interactionSupport user driven innovationRegulation / Standardisation (creating markets, security, health etc.)Mix of Measures

Various demand measures Demand and supply link

Pre-commercial procurement (direct support to supply, but based on need, potential purchase afterwards)


11

Examples


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Demand Subsidies – Tax Incentives

Applied and analysed mainly in energy Very mixed messages – no clear „best“ approach Example: Subsidies for eco-innovation purchase

– Diffusion and size of markets push innovation– Positive impact of subsidies on uptake, but often not

„significant“ E.g. 15% price reduction (insulation): „limited“ effect (8% to

11% of respondents) Other factors often more important (cost savings over time,

other input factors) Considerable windfall

Cross country differences in context and design


13

Comparison supply vs. demand instruments: – Limited evidence, often wrong indicator (patents only)– R&D subsidies more important for R&D leading to patents; product

innovation, – Demand subsidies: process innovation (diffusion effect)– Older studies: (public) demand more important than R&D subsidies– Demand measures also have innovations effects abroad

Dependent on need for user – producer proximity Command & control: radical innovation Price based: incremental



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Subsidy effect: Immediate monetary effect more important than savings over time

Right level of incentive: – too high: inefficient, too low: no sustained diffusion

Timing– Leverage effect on diffusion higher in early phase (but risk:

too early)– Reduction over time reasonable

Demand measures risk of creating lock in (developing niche, but no incentive for next generation)



15

Policy measures to support public procurement Note: public procurement NOT an instrument for innovation

per se Policies to support PPI tackle a set of well-known

weaknesses– adverse incentive structures (leading to risk aversion and lack of

innovation orientation),– dysfunctional internal division of responsibilities (disconnecting

users, budget holders and procurers),– lack of internal capabilities and skills (market knowledge, need

definition, business case, using wrong procedures),– lack of interaction between public bodies and,– lack of political commitment and organisational leadership.

Poor roll out of those policies, multiple challenges


I N N O V A T I O N P R A C T I S E

STRATEGIC INTELLIGENCEP O L I C Y

Domain policy (social need)Innovation/economicGeneral procurement

Framew

ork

B. Discursive: CTA, supplier-user discourse

C. Operational: Market&Technology Intelligence

D. Evaluative: ex ante / ex post – impact

A. Conceptual: Policy and innovation system, Rationale, Appropriateness

DEMAND: Innovation Users or co-preoducers

private

consumers firms

Public(users,

procurers, policy

makers)

SUPPLY:Innovation Producers

Sate of the artBusiness infrastructure

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Challenges for Policy Design and Implementation


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Conclusion

What policy can do– Using demand to pull innovation in specific directions (societal

benefit)– Improving how markets work: Reducing market uncertainty and

tackling system weaknesses, awareness, skills

What policy cannot (should not) do– Prepare long term supply-demand roadmaps– See demand based innovation policy as economic policy only

(tension societal welfare and economic benefit)– Limiting variety and failure


18

Thanks - and see you soon again !!

http://www.euspri-manchester2014.com/Manchester Institute of Innovation Research

http://www.euspri-forum.eu/

Theory Demand for innovation: signal to market to acquire

new product / service on the basis of a need for a certain price

Demand crucial for innovation (back Alfred Marshall)

Strong theoretical demand debate in 1960s and 1980s

Importance of the market pulling (incremental) innovations from suppliers (Schmookler 1966) and “steering” firms to work on certain problems (Rosenberg 1969)

Interplay of demand and supply (Metcalf 1995)

Users as sources for innovation (co-production, inputs, von Hippel 1986…)

The meaning of demand for innovation


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Price based instruments

Instrument Type ExamplesDirect Demand Subsidies

De facto reduced purchase price: Cash grants, cash back, cash equivalent credits, points and vouchers, fixed price

Less financing burden over time (plus risk reduction): loan guarantees, preferential loans

Guaranteed benefit from purchase (plus risk reduction): feed-in-tariffs

Demand tax incentives

Reduced tax burden over time: Tax relief/rebate, tax credits, tax deduction, tax deferrals, accelerated depreciation allowance

Reduced purchasing price: Tax waivers of various sorts


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Demand for innovation. What policy can and cannot do for it. Jakob Edler, MIoIR

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