Demand-side innovation Policies
Mario CERVANTES
Country Studies and Outlook Division
Science and Technology Policy Division
OECD
Relevance (1)
Demand-side policies have raised a lot of interest Since
Aho report in 2006 - explicit policy statements on importance of
demand-side innovation
(e.g. European Commission, Finland, Japan and the UK but also China,
Brazil)
Current debates
• Context of fiscal consolidation = use demand-side policies to
leverage innovation without new programme spending
• Urgent need to stimulate innovation to meet strong societal
demands in key sectors (e.g. health, environment, energy)
• concerns at international level over « techno-protectionism »
(i.e. procurement of R&D not covered by WTO rules or EU
Procurement Directives, trade conflicts over standards and
procurement)
2
Relevance (2)
Other trends explaining interest in demand-side
policies:
1. Adoption of a broader-based approach to innovation
policy (considering full scope of the innovation
cycle/innovation system)
2. Globalisation puts pressure to accelerate innovation
(ICTs and global value chains speed up the feedback between
supply and demand; more demanding users)
3. Some OECD countries face a persistent « innovation
paradox »: high or rising R&D, but low rates of
innovation, low TFP
3
Traditional government support to the
demand-side limited
– Economic growth ascribed to increases in supply factors (land,
capital, labour, etc)
– Endogenous growth model and focus on innovation ascribe a
greater role to demand : more innovation increases demand for
innovation
– Nature of market failures on the demand-side less prone to direct
government action, often resolved by:
• Macroeconomic policies to sustain demand/income growth
• Good framework conditions (e.g competition policy and removal of
barriers to firm entry and exit)
• Getting prices “right” (IPRs, tax, subsidies)
• Use of mission-oriented procurement of R&D limited to societal demands
4
(e.g. public procurement in defence, health, transport sector)
Demand for innovation in context
Innovation
Value Chain
Demand
Societal
Challenge
Market Conditions
Users
Idea Generation
Open
Innovation
Market dynamics
Conversion
Regulations
Standards
SocioCultural
Legal
Consumption
conditions
Diffusion
Supply
Competencies and
financing
Capabilities/
Infrastructures
Commercialisation
More “targeted” demand-side policies
Have three main objectives (Edler 2007):
1. Increase demand for innovation
2. Improve the conditions for the uptake of
innovations
3. Improve the articulation of demand (e.g. Sweden
combining demand for energy efficient products with –
industry and consumers)
Source: OECD based on Georghiou, 2007.
6
« Targeted » Demand-side policies and
instruments
Take several forms:
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 schemes
7
General findings (1)
1.
Sector specificity of innovations and innovation dynamics
requires a sectoral 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.
Diverse policy instruments; 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)
8
General findings (2)
4. Need for evidence on the area targeted (metrics) (e.g. size of public
procurement); need for evaluation of public interventions
5. 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)
6. 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
9
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
Lack of measures of 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)
Funding instruments to provide incentives (e.g. Finland)
10
Procurement of Innovation
• Finland – TEKES funding instrument
• Germany – High Tech Strategy and Interministerial agreement
• EU - Discussion of 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:
– 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
TEKES approach in Public Procurement for innovation
Procurer
Risk due to failure, public
accountability
Innovative product or service
Tekes funding instrument for innovative
public procurement to cut down the risk
Risk due to uncertain nature
of new product/service
Supplier
Innovation-friendly regulation
–
–
–
–
–
From a conceptual and empirical perspective, the relationship
between regulation and innovation is ambivalent
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
13
Clear policy signals can spur demand for
innovation
11
10
Wind power
9
Fuel cells
8
7
Lighting
6
5
Solar PV
4
Electric cars
3
2
All tech. sectors
1
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
0
1980
Patenting activity in Annex 1 ratification countries
(3-year moving average, indexed on 1990=1.0)
12
1997- Kyoto Protocol
Source: OECD (2010), The Invention and Transfer of Environmental Technologies
Environmental regulations or taxes on pollution are
the main driver of environmental innovations
Source: OECD (2011), Science, Technology and Industry Scoreboard
15
Innovation promoting standards
–
–
–
–
–
–
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
16
Lead Markets for Innovation
–
–
–
But
–
–
–
–
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
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
17
Pricing and innovation
–
–
–
–
–
–
–
–
Market based mechanism (in contrast to command and control
regulation)
Widely applied in environmental and energy where there are large
externalities to correct market failures (e.g. carbon pricing, feed-in
tariffs for renewable)
But also used to sustain social goals in public goods (e.g. water,
medicines)
Positive effects to promote innovation compared to regulations
(firms retain margin of manoeuvre)
But
Pricing mainly induces incremental innovation
Time and inertia are key constraints
Pricing does not, alone, address technology lock-in
Good practice:
–
–
Pricing policies work best to meet social demands and to correct
market failures (e.g. externalities) in private markets
Need for complementary policies, e.g. research, support for
technology diffusion
Pricing
NOx Tax in Sweden
• Swedish NOx tax
180
Firms were quite innovative and found
many solutions involving changes in
organisational and production practices
that did not result in patenting of technologies
• UK Climate Change Levy
Firms that agreed to a voluntary
emission-reduction agreement received
a 80% reduction on carbon tax = > innovated
less
•
OECD (2010) Taxation, Innovation and the Environment
140
SEK per kg NOx
• Swiss VOC tax
Marginal Abatement Cost
Curvesof Taxed Emitters
160
Patents increased; emission intensities
declined; Marginal Abatement Costs fell
120
100
80
60
40
20
0
-20
0
100
200
300
400
500
600
700
800
Emission intensity in kg NOx per GWh
1991
1992
1994
1996
900
User-driven innovation
User-driven innovation programmes (e.g. Denmark)
–
–
–
Uncovering user needs does not necessarily lead to
innovation
Innovation from users takes time
Requires involvement of top management in firms
Good practice:
–
–
Enhance access to government data, including public
research data (e.g. Australia, US, UK )
Develop ICT infrastructure to enable users
20
Challenges to demand-side policies
1.
2.
3.
4.
5.
6.
7.
Definition of Public procurement for Innovation tends to
restrictive
PP4 Innovation can be at odds with competition policy (e.g.
WTO GPA rule) and favour large players.
Standards-setting might lock-in inferior know-how.
Problems in Timing of demand policy intervention in the
innovation cycle – too early or too late
Evaluation of demand-side policies
Lead-Markets initiatives might be neutarlised by larger
market and techno-economic forces.
Important links in the value chain might lie largely in other
jurisdictions (i.e. countries, or regions with legislative
powers) - global open innovation
21
Open issues
1. Linking supply and demand by focusing on “societal
challenges”
2. Demand-side policies to foster new innovation or to foster
diffusion?
3. Evaluation metrics and impact methodologies for the
demand-side
4. Adopting a value-chain-approach to innovation policy that
links supply and demand
22
Conclusions
• Innovation Policies on the supply and
demand-side need to become better
integrated = systemic 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 demand-side measures needed
Difference in impacts of supply and demand-side
policy instruments
Relative impacts of policy on patent activity
12
10
R&D impact normalised to 1
Standard is US Zero Emission Vehicle standards
Standards
8
Fuel prices
6
Fuel prices
4
Standards
2
Public R&D
Public R&D
0
Electric
Hybrid
The histogram shows empirical estimates of elasticities, evaluated at sample means, and normalized in terms of the effect of “public R&D spending” (R&D=1.0). Bars shown without fill
represent estimates that are not statistically significant at the 5% level. Forthcoming in OECD (2011) Invention and Transfer of Environmental Technologies
24
What next?
1. Next steps in 2011-2012:
–
Best practices for linking supply and demand-side policies
for green growth
25
Environment
NZL (2008)
JPN
KOR
AUS
CAN (2008)
MEX (2006)
FIN
ESP (2009)
FRA (2008)
EST (2009)
DNK
DEU
ITA
EU27 (2008)
NOR
CZE
SVN (2009)
SWE (2009)
POL (2008)
OECD (2008)
IRL (2009)
SVK
PRT
LUX
GRC (2008)
BEL (2009)
AUT
GBR (2009)
HUN
NLD
ISL (2009)
USA (2009)
RUS (2009)
ISR
CHE (2008)
Energy
GBAORD for
energy and
environment
programmes
(Millions USD
PPP)
0
5
10
92
4,277
1,813
506
815
270
215
1,081
1,402
14
155
1,940
817
7,335
149
120
27
193
116
16,901
53
20
132
12
44
113
108
561
29
148
3
3,702
324
17
29
15
%
Government R&D budgets for energy
and the environment, 2010
As a percentage of the total government R&D budget
Source: OECD, Research and Development Database 2011, May.
Thank you for your attention!
Mario.cervantes@oecd.org
www.oecd.org/sti/innovation/demandside