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REVIEW OF POLICY MEASURES TO
STIMULATE PRIVATE DEMAND FOR
INNOVATION. CONCEPTS AND EFFECTS
BY JAKOB EDLER
MANCHESTER INSTITUTE OF INNOVATION RESEARCH
Economics of Innovation IV – Special Topics
Dajana Davidovic
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Structure
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3.
4.
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6.
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8.
Definition
The importance of demand for innovation –
theoretical concepts
The importance of demand for innovation Empirical evidence
The policy rationale for demand – based policy
Typology of demand – side instruments
Summary of findings
Discussion and conclusions
Possible further discussion points
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Demand side Innovation Policy - Definition
All public action to induce innovation and/or
speed up the diffusion of innovation through
–
–
–
increasing the demand for innovation (i.e. 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)
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The importance of demand for innovation –
Theoretical concepts
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Ongoing theoretical debate about the meaning of
demand for innovation (Knell (2012) for an historical overview of
economic thought)
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Adam Smith (1776): growth in market demand 
promotes further specialization of tasks  fosters
productivity.
Marshall (1890): demand is crucial for innovation
1960s and 1980s: leading innovation scholars
conducted analyses about the meaning of demand for
innovation:
Demand directs resources and capabilities for
innovation in a certain direction to meet societal or
market needs (Schmookler 1966; Rosenberg 1969)
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Empirical Evidence
•
•
Through surveys and company studies
Demand pull factors are regarded as more important for
the innovation process and success than supply factors
(Allman et al. 2011, Innobarometer 2009)
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Empirical Evidence
Source: Innobarometer 2009, p.64
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Empirical Evidence
•
•
Survey on Eco innovation on the main drivers for
innovation (Horbach et al 2012, Newell 2010): customer
demand more important than R&D subsidies, growing
demand is the most importance incentive for innovation
(direct profit, feedback and learning effects)
EU Comission Firm Survey (2009): uncertain demand for
innovation as most important barrier to investment into
eco-innovation
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Demand as main obstacle of European firms for innovation
Source: Flash Eurobarometer 315, p. 27
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Demand as main obstacle of European firms for innovation
Source: Flash Eurobarometer 315, p. 31
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The policy rationale for demand – based policy
Market and system failures
Adoption externalities :
High switching / entry
costs and learning
Technological lock in and
path dependency
Information asymmetries
and poor user – producer
interaction
Lower the entry costs
providing infrastructures,
complementary
technologies and shared
expectations
information campaigns,
awareness measures,
labelling, support of
standardisation.
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The policy rationale for demand – based policy
Demand for innovation as a trigger of economic growth
support the economy on
the supply-side
improving local market
conditions
attractiveness of markets
for investment and thus
for growth is being
increased (lead markets)
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The policy rationale for demand – based policy
Societal goods / Market transformation
Under investment into
societal need (e.g. low
time preference)
meeting a specific societal
policy needs and goals /
challenge (“Grand
Challenge”)
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General Typology of demand based measures
1. Public demand : state buys for own use
and/or to catalyse private market (Uyarra,
2013)
2. Support for private
demand
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General Typology of demand based measures
1. Public demand : state buys for own use
and/or to catalyse private market (Uyarra,
2013)
2. Support for private
demand
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2. Support for private demand
Direct support for private demand
Demand
subsidies
Tax
incentives
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2. Support for private demand
Indirect support for private demand: information and enabling
(soft steering): State mobilises, informs, connects
Awareness building measures
Labels
Training and further education
Articulation and foresight
User – producer interaction
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Summary of the findings
1) Very mixed evidence of price-based support measures,
wrong indicator (patents) is used. Weak signs that pricebased incentives promote incremental innovations.
2) Labelling and information campaigns...
... Increase awareness and security of the use for an
innovation
... Provide transparency through labelling
 However, limited evidence for the innovation and
diffusion effects. Built on pre-existing standards (state of
the art, status quo) and do not reward further (radical)
innovation. Risk of technological lock-in.
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Summary of the findings
4) Eco-innovation: positive impact of demand subsidies and
taxes on the uptake in the early stages of the diffusion
cycle (but not significant). Other factors are more
important.
5) Success of demand-based policies depends on concrete
regulatory and market context, phase of the innovation,
industry type, technology, ...  “different instruments
have different effects on different technologies”
6) Best innovation results out of a coherent mix of supply
and demand measures
7) Innovation spillover effects to foreign markets 
international (EU-wide) coordination required
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Conclusion and Discussion
Focus on demand-side policies is too one-dimensional, as
technologies require a certain institutional, social cultural
setting. Ex-ante analysis and evaluation should be targeted
towards both demand and supply.
 Very mixed empirical results and differences between the
industries, time, countries , ... no “one size fits all”
policy instruments
 Empirical evidence of price-based measures applied and
analysed mainly from the area of energy and
environmental policy
 Risk of premature technological lock in and supporting
second rate technology
 Right level and timing of the incentive is crucial

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Possible further discussion points
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
What could be seen critical in the approach of focusing on
policies stimulating the demand for innovation?
Using patents as an indicator for innovation activity
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Literature
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Gallup (2011): Flash Eurobarometer 315 Attitudes of European entrepreneurs towards
eco-innovation, Survey conducted by The Gallup Organization, Hungary upon the
request of Directorate-General Environment of the European Commission.
Horbach et al. (2012): Determinants of eco-innovations by type of environmental
impact- The role of regulatory push/pull, technology push and market pull, Ecological
Economics, (78): 112–122.
Innobarometer (2009): Strategic Trends in Innovation 2006-2008, Flash EB #267,
European Commission.
Knell, M. (2012): Demand driven innovation in Economic Thought. In UNDERPINN
conference materials: Demand, Innovation and Policy, Manchester Institute of Innovation
Research, MBS, University of Manchester.
Newell, R.G. (2010): The role of markets and policies in delivering innovation for climate
change mitigation. Oxford Review of Economic Policy, 26 (2): 253-269.
Rosenberg, N. (1969): The direction of technological change: inducement mechanisms
and focusing devices. Economic Development and Cultural Change, 18 (1): 1-24.
Schmookler, J. (1966): Invention and Economic Growth. Harvard University Press: Boston.
Uyarra, E. (2013): Review of measures in support of public procurement of innovation.
MIoIR NESTA: Manchester/London.