DEMAND SIDE INNOVATION POLICY: A SYSTEMS PERSPECTIVE

Mario Cervantes Senior Economist (TIP) Country Studies and Outlook Division OECD

Outline

• Background – OECD and Innovation

• Changing context for innovation

• Demand-side Innovation

• Measurement issues

• Looking ahead

OECD work on innovation

• 1962- Frascati Manual on R&D

• 1982 Freeman and Lundvall (at OECD) coined the term National System of Innovation

• 1992- Technology and Economy Programme

• 1992 Oslo Manual on Innovation

• 1993 – Working party on Innovation and Technology

• 2005 - III Revision of the Oslo Manual on Innovation recognising non-tech innovation

• 2013 New Revision of the Frascati Manual on R&D

OECD work on innovation

• 2010 OECD Innovation Strategy – a “whole of government” strategy around 5 Policy Principles to “guide” national/regional strategies – 1. Empowering people to innovate

– 2. Unleashing innovation in firms

– 3. Creating and applying knowledge

– 4. Applying innovation to address global and social challenges

– 5. Improving the governance and measurement of policies for innovation

OECD work on innovation

• OECD “Green Growth Strategy” released in 2011; two main arguments:

1. “’Getting prices right“’ to internalise externalities and incentive entrepreneurs

2. Promoting green technology and innovation

• Support for basic R&D, esp. radical breakthroughs

• Linking supply and demand

Along the way a shift in policy....

• From tech to R&D-based innovation; to non-tech innovation and social innovations

• From closed innovation to open innovation

• From supply-side to demand-side innovation policies

• From a focus on the rate of innovation to the direction of innovation, especially with regard to social and global challenges

Along the way, a shift in policy...

• From government action to correct market failures and systems failures

• To government action to promote opportunities;

• To shift innovation towards growth areas.

• From single policy actions towards a policy mix

• A wider range of policy tools focused on co-operation, co-ordination, dialogue and networks in partnership with industry .

National Innovation systems

System Innovation (transition)

Supply side actors and framework conditions

Supply, demand, regulation, standards, culture

Focus on knowledge flows (R&D, patents) and links in the system

Technology and behaviourial change

Improve the functioning of innovation systems (speed and output)

Shift to make systems more sustainable (direction of innovation)

Government as co-ordinator Government as network facilitator and a full partner

OECD adapted from Frank Geels, 2012

Shift in policy reflected in new concepts

• Socio-technological systems are needs based

• Involve R&D and non-technological innovation

• Multiple producers and users of innovation

• Require alliances and partnerships

Fostering innovation in complex socio-

technological systems

• Putting pressure on existing firms to change behaviour – Taxation, regulation

• Radical or disruptive innovation – support new emerging technological fields; niche-

strategies

– R&D dependent on relative market or factor prices

• Incremental innovation – User-driven innovation, pricing policies, tax incentives

….But choice of levers also depend on country size

Policy levers for transitioning systems

• Increased role of Public-Private Partnerships in STI , in particular more strategic P/PPs that

– focus on direction of innovation

– foster structural change

– adopt a value chain approach

– address global challenges at local/regional level

Demand-side innovation policies are

key element

• Some socio-economic transitions are more dependent on technology while other a more dependent on social change

• Importance of service redesign and addressing fragmentation in the market (market formation policies)

Demand-side policy can play a

role in this new context

Recent policy initiatives that illustrate new

and system based approach

• Bio-based economy

• Hydrogen economy

• Electric vehicles

• Sustainable manufacturing

• Education systems

Graphic source: Johannisse presentation at OECD -TIP

UK’s Technology Strategy Board Innovation Platforms

• Brings together a range of support mechanisms in a holistic way, focused on a specific challenge.

Collaborative R&D

Collaborative R&DSmartSmart

LaunchpadLaunchpad

Innovation

Vouchers

Innovation

Vouchers

Innovation and

Knowledge

Centres

Innovation and

Knowledge

Centres

Entrepreneur

Missions

Entrepreneur

Missions

• “An innovation platform brings industry,

academia and government together to focus on a

societal challenge that will create future markets

for future innovative solutions”

Traditionally government intervention

on the demand-side has been limited

– Classical economic notions of growth highlight increases in supply factors (land, capital, labour, etc)

– Market failures on the demand-side tend often resolved by macro-economic or framework conditions

• Macroeconomic policies to sustain demand/income growth

• Competition policy and removal of barriers to firm entry and exit

• Getting prices “right” (IPRs, tax, subsidies)

• Use of mission-oriented public procurement of R&D limited to societal demands (e.g. public procurement in defence, health, transport sector)

16

Why is demand side innovation

policy important now?

1. New understanding of the sources of economic growth and rise of knowledge capital

2. Social and global challenges

3. New industrial policy and push for competitiveness

4. Fiscal consolidation a motivator = demand-side policies to pull innovation without new programme spending

5. Evidence of successful demand-side policies such as environmental regulations, standards and to a some extent public procurement

17

Types of Targeted Demand-side

policies and instruments

1. Innovation-friendly regulation (e.g. Orphan Drug

regulation; US, 2010 HITECH Act for EHRs)

2. Public procurement of innovation

3. Innovation-spurring standards (e.g. GSM,

ADSL)

4. Lead market initiatives

5. Pricing schemes /taxes and subsidies

6. User-driven and consumer-oriented innovation schemes

18

Public procurement of

innovation

Considerable policy interest (esp. to support innovative SMEs). Some challenges:

– Diverse nature of public goods services

– Fragmentation of demand and co-ordination costs

– Poor data on public procurement (est. 16% of GDP in EU)

– Risk aversion and weak capacity/skills of public sector

– Risk of protectionism and capture by big players (usual

suspects)

Good practice:

– Networks of public procurers (learning platforms/expertise)

– Prevent discrimination against SMEs (e.g. Korea, France, USA)

– Funding instruments to provide incentives (e.g. Finland)

19

Experiments in public procurement of

Innovation

• Finland – TEKES funding instrument

• Germany – High Tech Strategy and Interministerial agreement

• EU - new instrument to co-finance procurement for innovation

• Korea – sectoral approach in ICT procurement and recently green growth

• UK: Guidelines for Procurement(DIUS/OGC)

Innovation Procurement Plan (for each Department)

• United States (pre-commercial procurement):

– the Small Business Act, Small Business Innovation Research Program.(SBIR) and its smaller sister Small Business Technology Transfer Program (STTR) earmarked towards promotion of business–university interface; CRADAs

Innovative product or service

Procurer

Supplier

Risk due to failure, public accountability

Risk due to uncertain nature of new product/service

Tekes funding instrument for innovative public procurement to cut down the risk

TEKES pilot on Public Procurement for

innovation: solving the information problem

Innovation-friendly regulation

– Relationship between regulation and innovation varies

– But some evidence that regulation, especially social regulations, can be a very powerful tool to foster demand for innovation

– But use of regulation is challenging (effects and timing are difficult to determine ex ante) and economic consequences are far-reaching

– Industry-specific intelligence is needed

– Co-ordination between regulators and different stakeholders

Good practice:

– Excellent market/sector knowledge (through stakeholder involvement)

– Regulatory system using foresight to anticipate technological developments

22

Environmental regulations or taxes on

pollution are the main driver of

environmental innovations

23

Source: OECD (2011), Science, Technology and Industry Scoreboard

Promoting innovation through

industry standards setting

– Standards provide significant economic benefit (annual contribution of GBP 2.5 billion in UK); they promote interoperability and diffusion of information

– Developing international standards helps expand markets, esp. for emerging technologies

– Standardization is voluntary process

– Many successful platforms are based on Open standards

– In fast changing areas, Dynamic standards may be more appropriate

– But government role in standards setting also comes at a cost (budget and govt. co-ordination costs)

Good practice: Although mainly industry-led, but government has role in:

– Coordinating the process

– Setting standards for government demand (e.g. health, security)

– Making a case for standardisation in government

24

Lead Markets for Innovation

– Lead markets: ““Innovation taken up one market eventually spread and adopted in other market” (EC)

– Bridge the gap between innovation generation and market success

– Increases rate of return; attracts further R&D – virtuous cycle of growth and jobs

But

– Identifying the “right” market for the technology/innovation is tricky

– Timing and scale of public intervention (long lead time is a risk)

– Choosing and co-ordinating the policy mix for LM

– Picking winners or losers (Risk of technology lock-in)

Good practice: – Focus on removing barriers in sector (e.g. construction sector, screening

national building regulations)

– Broad-based approach – don’t target specific technologies (techno neutrality) or products

25

General OECD findings (1)

1. Sector specificity of innovation processes and market dynamics require a tailored approach (e.g. pharmaceutical, chemicals = technology push; ICT, automotive more platform based)

2. Scale: is needed for reaching critical mass, reducing costs and increasing market uptake (e.g. teaming with other regions/countries for procurement)

3. Need to choose appropriate policy mix meeting policy goals (e.g. prices, pre-commercial public procurement and regulation could favour more radical innovation; regular public procurement perhaps more incremental innovation)

26

General OECD findings (2)

4. Systemic nature of these policies implies co-ordination between industry and (across) government and other stakeholders (e.g. UK biometrics standardisation, wide-ranging

consultation, but, it takes time and has cost)

5. Key role played by the public sector; need to provide incentives for buy-in by public administrations and to foster “cultural change”. Networks can help: e.g. networks of public

procurers EU

6. Need for evidence on the area targeted (metrics) need for evaluation of public interventions

27

Conclusions

• Demand and supply side innovation policies need to become better integrated = system approach

• Timing of policy interventions is important

• Industrial sector, market conditions and maturity of technology matter

• Importance of technology neutrality through performance, standards etc.

• Evaluation of policy measures needed

• Potential new role for public-private partnerships

• Importance of engaging consumers/users

• Critical infrastructure is needed for demand policies

• Regional innovation policies matter greatly

• Importance of funding institutions (e.g. ARPA-style bodies) which have the freedom to take risks and pursue visions, rather than mere incremental changes.

Thank you for your attention, for more information:

or contact: mario.cervantes@oecd.org

http://www.innovationpolicyplatform.org/