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
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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
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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)
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The meaning of demand for innovation

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..

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Demand and innovation (eco-innovation)

Source: INNOBAROMETER, EUCom (Gallup) 2011

Demand and Innovation (eco-innovation): SPAIN: 80% say demand is very serious or serious obstacle
Barriers to accelerated eco-innovation uptake and development for companies Uncertain demand from the market (Gallup 2011, p. 31)

Source: INNOBAROMETER, EU Com (Gallup) 2011

Different ways in which demand influences innovation

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

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Demand based Innovation Policy

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)

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Rationale - Three sets of justifications

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 dependencies 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)

Logic: Intelligent public action to overcome various kinds of

Societal goals, Public sector needs

weaknesses
and link to societal needs, efficiency gains and economic development

Support industry, growth and location

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* term borrowed from Bergek

Instruments - Typology

Public Procurement (policies): direct/catalytical; strategic/general (Rolfstam Private Demand: Demand Subsidies, Demand tax incentives Awareness measures, labels.. Training Demonstration projects Articulation of needs, joint need definition (e.g. foresight) Support user producer interaction Support user driven innovation Regulation / 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)
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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

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Demand Subsidies Tax Incentives

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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Demand Subsidies Tax Incentives

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)

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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

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Challenges for Policy Design and Implementation

I N N O VATI O N PRACT I S E
DEMAND: Innovation Users or co-preoducers

Public
(users, procurers, policy makers)

private
consumers firms

SUPPLY: Innovation Producers Sate of the art

Business infrastructure

Domain policy (social need) Innovation/ economic General procurement

A. Conceptual: Policy and innovation system, Rationale, Appropriateness B. Discursive: CTA, supplier-user discourse C. Operational: Market&Technology Intelligence D. Evaluative: ex ante / ex post impact

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Framework

POLICY

STRATEGIC INTELLIGENCE
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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

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Thanks - and see you soon again !!

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The meaning of demand for innovation

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)
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Price based instruments

Instrument Type Examples De facto reduced purchase price: Cash grants, cash back, Direct Demand cash equivalent credits, points and vouchers, fixed price Subsidies
Less financing burden over time (plus risk reduction): loan guarantees, preferential loans
Guaranteed benefit from purchase (plus risk reduction): feed-in-tariffs 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

Demand tax incentives

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