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
Defintion
 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
Societal
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
industry,
growth and
location
 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
“weaknesses”
and link to
societal needs,
efficiency gains
and economic
development
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* term borrowed from Bergek
Instruments - Typology
 Public Procurement (policies): direct/catalytical; strategic/general
 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
Framework
Domain policy
(social need)
Innovation/
economic
General
procurement
POLICY
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SUPPLY:
Innovation Producers
Sate of the art
Business infrastructure
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
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 !!
http://www.euspri-manchester2014.com/
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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
Demand tax
incentives
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
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