A Practitioner’s Guide to Innovation Policy Instruments to Build Firm Capabilities and Accelerate Technological Catch-Up in Developing Countries Xavier Cirera, Jaime Frías, Justin Hill, and Yanchao Li A PRACTITIONER’S GUIDE TO INNOVATION POLICY Instruments to Build Firm Capabilities and Accelerate Technological Catch-Up in Developing Countries INNOVATION POLICY plays a central in the growth strategies of developing and developed countries by removing barriers to business innovation and facilitating the adoption of technologies. However, innovation policies in develop- ing countries tend to be fragmented, often mimicking conditions and designs of policies in most advanced economies, which are likely to be inadequate for domestic innovation capabilities. Thus, improving the effectiveness of these pol- icies is critical, especially in the current context of rapid technological change and digitalization. However, improving such policies is not an easy task. Policy makers face a shortage of information and lack of clarity about what works and what doesn’t and what innovation instruments are most effective at different stages of devel- opment. This policy guide aims at filling this information gap and supporting policy makers in developing countries in their quest to design more effective policies to foster innovation. From invention to upgrading: A broader Related to this more inclusive view of innovation, innova- definition of innovation is needed to tion policy involves the design and delivery of an array of enhance the impact of innovation policy policy instruments through which governments attempt to overcome market and systemic failures that prevent Innovation has traditionally been associated with science broadly desired innovation outcomes from being attained. and research and development (R&D). This view has bi- Thus, innovation policy encompasses a combination of in- ased the formulation of innovation policies and institutions struments that interact and complement one another—the in many countries by focusing on a “linear” or “supply so-called policy mix—to encourage various types of inno- side” approach, whereby research is seen as generating vation. This guide focuses on the group of instruments that R&D and inventions and then is transformed into innova- target innovation in businesses, and that take the firm as tions introduced by firms in markets. This view of innova- the target group. These innovation instruments are typical- tion, which has been very influential in defining innovation ly designed to influence the behavior of firms and induce policies, prioritizes policies that aim to create new knowl- them to invest in innovation activities broadly defined, with edge and more radical, disruptive, and novel innovations, the medium-term goal of increasing sales, employment, at the expense of efforts to adopt existing knowledge and and productivity. technologies, and more generally, create and build basic innovation capabilities. While more novel or radical innova- The innovation imperative in developing tions are, of course, important, the “linear” view misses the countries fact that incremental innovation and upgrading are more characteristic of innovation systems in developing coun- Innovation is widely recognized as a central factor in driv- tries. Crucially, most firms in developing countries can ob- ing economic growth. Innovation drives the Schumpeterian tain substantial improvements in productivity by adopting creative destruction process and can facilitate econom- knowledge and technologies that have already been gen- ic convergence for the countries farther from the frontier erated. Thus, a broader view of innovation that includes in- (Schumpeter 1942). Innovation is the critical ingredient in cremental innovation and upgrading is needed to improve historical accounts of how countries achieve economic innovation policies. 2 A PRACTITIONER’S GUIDE TO INNOVATION POLICY growth and prosperity. A growing body of evidence has these new technologies will succeed. This increases the shown that increased innovation activity has a measurable urgency for more effective and focused innovation policies and positive impact on firms’ productivity (Mohnen and Hall that address the key challenges in adopting these new 2013). This is becoming ever more important with the rapid technologies. development of new technologies. Countries and regions with vibrant innovation ecosystems tend to experience The innovation policy challenge in higher productivity rates, increased economic growth, and developing countries more robust job creation. Managing complex innovation policies with Innovation is becoming more important in a world that is scarce government competencies undergoing significant and rapid technological change that is reshaping how and where goods and services are Innovation is inherently risky and uncertain. Thus, firms produced. Some refer to this transformation as either the may undertake less innovation than they should, or under- Fourth Industrial Revolution or Industry 4.0, where produc- take it less effectively than they could. This is especially tion is characterized by the integration of cyber-physical the case in developing countries where market and system systems such as robotics, 3D printing, artificial intelligence, failures that prevent investments in innovation activities are and machine learning. While production processes are still pervasive. Research quality is often insufficient, the skills transitioning to this new technological regime, a signifi- base is very thin, the business environment is frequently cant increase in digitalization of business and production costly and unfavorable, and markets may not reward in- functions is already occurring, given rise to new business novation because prospective consumers lack purchasing models and economic activities. Some commentators see power. In addition to these challenges, policy makers and this new paradigm as an opportunity for firms in developing practitioners in developing countries often do not have the countries to “leapfrog” stages of development and join the necessary competencies to diagnose and identify ade- leaders at the technological frontier. But there is a more quate policy solutions and implement policies effectively. plausible possibility that the technological gap and the in- This situation translates into an important policy dilemma come divide between developing and developed countries for policymakers: how to manage complex innovation poli- will widen. The scant evidence available documenting the cies with scarce government capabilities. adoption of general-purpose technologies supports the Confronting this dilemma and minimizing the risk of failed second view. While the speed of technology adoption (the innovation policies requires action in three different areas: key form of innovation for developing countries) across countries has accelerated, the intensity of adoption within ● Getting the right focus and appropriate mix of countries has diverged (Comin and Mestieri 2018)—which innovation policies using a gradual approach and means that most firms in developing countries may fall fur- prioritizing the support to build innovation capabilities. ther and further behind. These new technologies are likely ● Investing in government capabilities and competencies to be more demanding in terms of some of the comple- through better processes and institutions. mentary factors needed for effective adoption across firms, ● Addressing the information gap about what works and such as sound infrastructure, a supportive business envi- what does not and in what context. ronment, workforce skills, and core competencies in rela- tion to key firm-level business practices, including market- Getting the set of policies right—Supporting the ing and management skills. capabilities escalator Technology leapfrogging is a challenging prospect for de- Improving innovation policies starts with a clear and realis- veloping countries and only those countries that have well tic focus on the existing capabilities the private sector has designed policies and a good support system to adopt for innovation. To have a sizeable impact on innovation and A PRACTITIONER’S GUIDE TO INNOVATION POLICY 3 Figure ES.1 Policies variation along the capabilities escalator STAGE 3 • Long-term R&D and Mature NIS technological programs • Minimize innovation gap leaders and laggards • Collaborative innovation projects Level of development STAGE 2 • Building technological capabilities Maturing NIS • Incentivize R&D projects • Link industry and academia • Improving quality of research, innovation and export infrastructure STAGE 1 • Building managerial and organizational capabilities Incipient NIS • Start collaborative projects • Need to develop STEM skills and engineering • Need for basic infrastructure—NQI and Incubation • Elimination of barriers to physical, human and knowledge capital Source: Cirera and Maloney 2017. Note: NIS = National Innovation System; NQI = national quality infrastructure; R&D = research and development; STEM = science, technology, engineering, and mathematics. productivity, innovation policies in developing countries necessary for the successful development of innovation need to aim first to ensure that most firms develop the nec- projects and the accumulation of learning and technologi- essary capabilities to undertake basic incremental innova- cal capabilities. tion. Redressing the frequent funding bias towards R&D is Improving these managerial capabilities is the building crucial for effective policy targeting. The objective is not to block for innovation policy. However, countries also need stop funding instruments to foster R&D, but to balance the to foster other complementary instruments and policies composition of budget allocations to be more aligned with to effectively support innovation. For example, a high cost the actual and evolving capabilities of the private sector. of doing business will reduce the incentives to invest in Innovation policies in developing countries also need a knowledge, lack of skills in the workforce will make tech- clear focus on building managerial and organizational prac- nology adoption challenging, or lack of university-industry tices to manage and accumulate knowledge and organize collaboration will limit the use of the knowledge created by the business routines needed for innovation. The intuition is universities with potential to be commercialized. simple. Managing R&D projects or the introduction of new One framework to guide the choice of policy instruments processes efficiently and successfully requires the effective is the capabilities escalator (Cirera and Maloney 2017). For use of human resources, the deployment of effective mar- each country, combinations of technological capabilities keting strategies, and the efficient implementation of other differ across firms and sectors. There is no unique policy key business functions. For example, target setting, or qual- mix that can be implemented in all countries. However, ity management and monitoring, are key activities to man- the escalator suggests how to deal with these variations age innovation projects across different sectors. Innovation by focusing on changing the intensities and focus of poli- requires internal incentives to ensure that workers are allo- cy support as firms in the country accumulate capabilities cated to tasks where they can be more productive, and are and climb the technological ladder. Thus, depending on incentivized (or not penalized) to propose improvements at the degree of maturity of the National Innovation System early stages and later to propose and execute more so- (NIS), a certain set of policy instruments is more likely to be phisticated innovation. Innovation also demands a busi- appropriate (figure ES.1). The framework is helpful to struc- ness culture with an outward focus that is curious about ture and sequence the combinations of innovation policy learning what others are doing, seeking new approaches instruments that are most appropriate to support existing and insights and then being prepared to implement at least capabilities—not only in firms , but also in governments— some of them, and manage the change that these new to implement more complex policy instruments. approaches may induce. These basic competencies are 4 A PRACTITIONER’S GUIDE TO INNOVATION POLICY Investing in government capabilities through through lack of indirect complementary factors such as better processes and institutions skills and infrastructure. Policy makers need to be espe- cially careful in ensuring that they address the true problem A second critical element to improve innovation policies is and do not simply “borrow’” a diagnosis that is common to invest in government capabilities. This not only requires in advanced countries. Firms may not innovate because investing in human capital of public managers, but more capital markets imperfections hamper longer-term bor- importantly (1) adopting good practices in the design and rowing. But it is also possible that innovation activities are implementation of policies, and (2) designing and support- constrained by information asymmetries that limit learn- ing well-functioning implementing agencies. These pro- ing in firms or shortages of technology and skills, or even cesses require time and resources, but are key to effective by general distortions general distortions that weaken the implementation of complex policies. business case for investing in innovation. Identifying the innovation problem, therefore, is the key to identifying the Identifying the right cause of the innovation problem appropriate instrument. Table ES.1 pairs common innova- tion problems in developing countries with instruments that Low rates of innovation may be driven by either failures can provide solutions to address these problems. or problems in any number of markets working directly or Table ES.1 Common innovation problems and potential instrument solutions Innovation problem Instrument What for? 1 Low general innovation Business advisory services Capabilities building (management) performance due to low Technology extension services Capabilities building (technology) capabilities National quality infrastructure Quality and standards Supplier development programs Capabilities building (management); Quality and standards Clusters/networks Collaboration Vouchers Collaboration 2. Use of old and Business advisory services Capabilities building (technology) outdated technology/ Technology extension services Capabilities building (technology) and transfer low technology Technology centers Capabilities building (technology) and transfer adoption Loans Finance Grants Finance and appropriation 3 Weakness in technol- Technology transfer offices Technology transfer ogy generation and Technology centers Capabilities building (technology) and transfer commercialization Technology extension services Capabilities building (technology) and transfer 4. Low number of young Incubators (business advisory services) Capabilities building innovative ventures Accelerators Capabilities building and scale up Equity Finance and scale up 5. Lack of collaboration Clusters/networks Coordination and mindset leading to poor quality Vouchers Mindset and incentives business innovation Grants Incentives and finance Technology transfer instruments University-industry 6. Suboptimal investment Grants Finance and appropriation in R&D Loans Finance Tax incentives Incentives and appropriation A PRACTITIONER’S GUIDE TO INNOVATION POLICY 5 However, even if the right problem and its cause have been There is significant overlap between the innovation policy reasonably identified, the impact of each intervention will space with the objectives and instruments to support the depend on the quality of its design and the effectiveness development of small and medium enterprises (SMEs) and of its implementation. Identifying the right problem is a entrepreneurship, industrial/sectoral interventions, or re- necessary but not sufficient condition for success, and gional growth, given that all these policy areas often focus government failure is a potential risk. This guide offers a their support on firms. check list of good practices for the design and implemen- The book provides a description of 21 policy instruments tation of innovation policy instruments, including the need that can be grouped in 10 types or families of instruments for appropriate and simple selection criteria, adequate according to their innovation objective. The summaries that public management practices, and thorough monitoring follow provide a profile of the most important instruments. and evaluation (M&E). Moreover, given that innovation pol- They summarize existing evidence about their impact and icy is implemented by a diverse array of institutions that the institutional and contextual factors that determine have different incentives and objectives, and that are often their effective design and implementation. Specifically, competing for public resources and beneficiaries, having for each instrument, the summaries present the problem sound governance, a clear mandate and objectives, and that it seeks to address; the key target group that seeks to adequate resources are critical for effectively implementing benefit; the strengths, limitations, and risks behind its use; innovation policy. the evidence of its impact; and the extent of its estimated replicability in developing countries’ institutional settings. Addressing the information gap on how to The latter is particularly important given the extent of in- do innovation policy adequate replication of innovation policies. For instance, A final challenge for innovation policy makers is that there is many science, technology, and innovation ministers aspire a lack of information about the right innovation policy tools to replicate the success of Silicon Valley in their respec- for different problems and policy contexts. Policy makers tive countries. However, given their existing domestic con- are often unaware of the range of instruments available to ditions, a “Silicon Valley solution” is probably inappropri- address a specific innovation problem, and the institution- ate, especially given that Silicon Valley is the outcome of al capacity and market conditions required for successful a unique mix of factors that cannot be easily replicated. policy implementation. Despite important recent efforts to Understanding all the factors needed for implementation systematize evidence on the impact of innovation policy can help policy makers ask the right questions and make instruments,1 the few existing studies and reviews focus informed decisions that can lead to the selection, applica- primarily on OECD countries. Consequently, agencies of- tion, and support of more appropriate and effective innova- ten copy policy instruments from other countries without tion policy instruments. adequate consideration of these issues, which can lead to Finally, the summaries provide relevant information to re- significant missed opportunities to formulate effective in- dress the huge information gap that policy makers face in novation policies and waste of public resources. innovation policy making. However, implementing new in- Figure ES.2 illustrates the innovation policy space and struments requires experimentation and finetuning, good the different options available to policy makers to support sequencing, and more importantly, good measurement and business innovation. These instruments represent differ- learning to adapt and adjust the instrument design to the ent mechanisms of intervention—grants, loans, advisory, local conditions. This guide is not a substitute for having tax incentives, services, and infrastructure—with specific good processes in place for the design, implementation, goals of supporting different types of business innovation. and governance of innovation policy. 1 See, for example, the Compendium of Evidence on the Effectiveness of Innovation Policy by MIoIR and Nesta (http://www.innovation-policy.org.uk/compendium/). 6 A PRACTITIONER’S GUIDE TO INNOVATION POLICY Figure ES.2 The innovation policy space Advocacy & Nonmarket Market-based incentives Direct provision of services and infrastructure Collaboration voluntary Regulations/policies incentives agreements Indirect Direct Direct financial support financial Other direct support financial Legislation, regulation and standards support support Research grants Basic research infrastructure Research excellence Demand-pull Technology adoption/ Early-stage support Higher instruments generation instruments instruments education and Industry research placements framework Technology /Industry & transfer and PhDs incentives Pre- Technology science- Intellectual commercial transfer industry procurement offices property collaboration rights 5 Science & 10 & patent technology databases parks 9 Business Grants and Tax matching Commercial Inducement R&D and grants for incentives procurement Technology prizes & R&D-based innovation for R&D Clusters centers recognition innovation network & and 4 awards NQI systemic collaboration 8 Corporate Technology (standards, policies for 13 Equity Codes of Innovation open extension Accelerators metrology, innovation Standards 1 finance conduct & Competition, loans innovation services testing) for voluntary trade and 11 services 15 innovation 12 agreements industrial Non-R&D 3 7 policies innovation, Loan Supplier Business 14 Innovation Incubators technology guarantees development advisory vouchers adoption/ programs services 11 diffusion 2 3 6 7 Within the scope of this guide Outside the scope of this guide A PRACTITIONER’S GUIDE TO INNOVATION POLICY Note: NQI = national quality infrastructure; R&D = research and development. The numbers represent the order in which the summaries are introduced in the remaining of the document. This order does not represent any priority ranking for innovation policy. 7 1 GRANTS AND MATCHING GRANTS FOR INNOVATION AND/OR R&D PROJECTS DEFINITION Grants are a direct provision of funding from public agencies to firms and other innovation agents to finance all or part of an innovation project. This is the most common mechanism of intervention and varies widely in complexity depending on the policy objective. Design variations occur in selection mechanism, size of grant, duration of projects, type of innovation supported, type of target firm, or whether an individual or a collaborative project. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Externalities and spillovers not appropriated by the firm lead to ● The evidence covers a wide range of countries/regions, but firms investing less in R&D and innovation. mainly from OECD countries, and mainly for R&D grants; there is limited insight into the effectiveness of grants to support ● Coordination failure: high costs and lack of motivation hinder innovation activities that are not related to R&D. collaborative innovation. ● The evidence suggests that grant schemes tend to have a ● Capability failure: firms, especially SMEs, lack capabilities to positive impact on input additionality (increasing the resources innovate. devoted to innovation), rather than on output additionality (the outputs/outcomes/impacts). ● Policy makers might want to take publication bias (mainly TARGET GROUP successful results published) into account in making decisions based on this evidence. ● Individual firms, especially SMEs. ● Collaboration between firms or between firms and other organizations. KEY “MUST HAVE” FOR REPLICABILITY ● Effective marketing strategy to raise awareness among the most STRENGTHS suitable participants. ● Simple and effective implementation mechanisms to simplify ● Selectivity: can target specific topics, regions or types of firms the application and disbursement processes and reduce costs; where intervention is needed. grant application process should be automated. ● Flexibility and control: can be designed to apply to different ● If there is little experience with grants, then simple modalities are stages and types of innovation. preferable over complex schemes. ● Relatively easy to implement: most agencies already have ● Selection of beneficiaries ideally should be based on knowledge of using grants. independent assessment by experts. ● Signaling effects. The process of evaluating grants can also serve the purpose of assessing firms’ capabilities. DO’S POTENTIAL DRAWBACKS AND RISKS ● Combine grants with mentoring to improve the quality and effectiveness of the program. ● Potentially high management and bureaucratic costs. ● Be specific about what group to target given that different types ● Need to be adequately funded with budget stability to ensure of firms may require different grant designs. continuity. ● Introduce matching rates to ensure commitment and also consider repayable models, given that they provide an avenue ● Risks of interference with selection process when poorly for revolving funding problems, designed. ● Risk of crowding out private funding and capture by repeated applicants. DON’TS ● Don’t assume that grants or matching grants are the right instrument for any innovation problem or to automatically induce collaboration for innovation. ● Don’t expect grant programs to generate impacts immediately and also expect some failures as innovation is risky. ● Don’t design complex (and costly) application processes for 8 A PRACTITIONER’S GUIDE TO INNOVATION POLICY applicants. 2 VOUCHERS FOR INNOVATION AND COLLABORATION DEFINITION Vouchers are small, nonrepayable grants allocated to potentially innovative SMEs to purchase services from external knowledge providers. The main objective is to induce noninnovative SMEs to start collaborating with knowledge organizations and knowledge providers. Vouchers are often entitlement based rather than competition based. They typically have light management but strong auditing. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Capability failure, firms lack basic capabilities for innovation. ● The bulk of the evidence comes from developed countries. With the small samples used in evaluations and outcomes dependent ● Information asymmetry; firms and knowledge providers have on context, the generalizability of findings remains low. Nearly no different incentives and operating models. experimental approaches for impact evaluation could be found; results shown in the guide rely mostly on self-reporting. ● High growth in sales, job creation, and gross value added has TARGET GROUP been reported, including for nearly four-fifths of all participants. ● SMEs and knowledge providers, including both public and ● In addition, there is evidence of change in attitude toward private sector knowledge providers. collaboration resulting from these interventions, with strong positive changes in attitude toward engaging with vendors and universities. STRENGTHS ● Simplicity in design, implementation, and evaluation. Minimal KEY “MUST HAVE” FOR REPLICABILITY bureaucracy, low cost. ● Required competence from SMEs: Identifying the challenge and ● Flexibility for recipient to decide how to use them. providing detailed description of the services required. ● Demand orientation. Projects are defined according to the ● Competence from knowledge providers: Capability and objective to promote collaboration. Vouchers can trigger willingness to work with SMEs. collaborative relationships between SMEs and knowledge ● Using matching and brokerage support smooths project providers actual need of the SME. development and implementation and reduces fraudulent use. POTENTIAL DRAWBACKS AND RISKS DO’S ● Risk of one-off transaction, lack of long-term behavioral ● Take stock of supply/demand for knowledge services and have change. ‘accredited’ providers. ● Difficulty of reaching the targeted group. The entitlement- ● Design simple application and selection procedures. based nature of voucher schemes implies a high risk of nonadditionality. ● Define the range of services covered. ● Risks of lock-in with local knowledge providers if they are few ● Design (small) voucher amounts. in number. ● Adopt proactive advertising to reach SMEs that are not typically targets for support. ● Poor supply of advisory services. SMEs may be restricted by the capacities and level of interest of the research and advisory ● Set up brokerage services. sector in supplying services. ● Have strong audit function to reduce fraud. ● Fraudulent use of the scheme; complicity of SMEs and service providers. DON’TS ● Overcomplicate application procedures. ● Leave the list of service providers open. ● Underestimate the role of intermediaries in easing application paperwork. ● Have unnecessary expectations of large impact. Vouchers work best to change behavior through small projects and are a step A PRACTITIONER’S GUIDE TO INNOVATION POLICY 9 to more significant innovation. 3 LOANS AND LOAN GUARANTEES FOR INNOVATION DEFINITION Loans, supplied either by government or via intermediaries, have become popular due to their reim- bursable nature. Credit guarantees cover a portion of the losses to lenders when firms investing in innovative projects default on loans. a guarantee applies exclusively to assets explicitly covered under its provisions, in return for a fee. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Imperfections in financial markets (loans only) including a lack ● There is ample evidence that subsidized loans promote R&D, of SME focused lending but the evidence is often confounded by interventions that mix several instruments. Most of the evidence reports a strong ● Information asymmetry. Commercial lenders do not understand positive impact on R&D intensity, particularly among technology- the financial viability of innovation projects proposed by intensive and smaller firms. Evidence of impact on productivity is borrowing companies. SMEs’ lack of collateral. weak, but some results indicate positive results for new product ● Coordination failures. Credit guarantee schemes also can and patents. address weak institutional coordination. ● The general evidence of impact for credit guarantees is ample, but for the specific purpose of innovation remains scarce. Results for R&D investment have been positive, but only for TARGET GROUP smaller and technology-intensive firms. Output additionality has been found in terms of positive growth in sales and productivity. ● Innovative firms that may not fulfil normal collateral Take-up rates have been higher among exporters and high- requirements. SMEs that wish to innovate but remain credit tech firms. constrained. An indirect target group consists of financial providers that may otherwise not service this type of innovative business. KEY “MUST HAVE” FOR REPLICABILITY ● Policy makers need to assess the viability of the schemes in STRENGTHS the light of alternative choices faced by firms, the presence of a legal framework for upholding creditor rights and judicial ● Can be tailored to target specific types and profiles of firms enforcement of contracts, an adequate solvency ratio for banks, and projects. a set of transparency standards to ensure fluidity and liquidity in credit guarantee schemes. ● Operate through market mechanisms, relying on skills of specialized lenders to assess risk. ● Firms need to acquire basic competencies to participate in credit guarantee schemes successfully. ● Provide records of SME borrowers and lender capacity, allowing credit registries to improve information available. DO’S POTENTIAL DRAWBACKS AND RISKS ● Promote and advertise credit guarantee schemes (CGS). ● Trade-offs between innovation scope, eligibility, and outreach ● Provide financial and operational independence to CGS. of SMEs (critical mass needed for viability). ● Provide transparency and disclosure of public funding available, ● Moral hazard for banks, which can be less careful when and of rules, procedures, and arrangements. selecting borrowers. ● Build an adequate governance structure for the CGS. ● The risk of government failure due to lack of expertise and to political capture of decisions on lending. ● Crowding out of private schemes. DON’TS ● Don’t overintervene and distort market mechanisms. ● Don’t expect credit guarantees to become a solution for structural problems such as weak financial regulation. ● Don’t make eligibility requirements for either SMEs or lenders ambiguous. Don’t expect that loans will be effective with all types of firms. Loans are more appropriate for more established firms and more developed innovation projects. 10 A PRACTITIONER’S GUIDE TO INNOVATION POLICY 4 TAX INCENTIVES FOR R&D DEFINITION Tax incentives reduce the tax burden of firms that invest in eligible R&D activities, representing an in- direct way of supporting investments in R&D. There are two broad types: • Tax incentives based on expenditures in R&D. • Tax incentives based on results from R&D or related innovation activities. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Incomplete appropriability of potential returns. ● There is a substantive evidence of impact for developed countries, but less so for developing countries, including a ● Coordination failure between knowledge providers and firms, few systematic reviews. The majority of the evidence relies often linked to transaction costs and poor interaction between on econometric approaches, although some studies employ stakeholders (when collaborative activities included in scheme). experimental and quasi-experimental approaches to build counterfactuals. ● The majority of studies report positive R&D price elasticities TARGET GROUP (but within a wide range), new product lines, new patent applications, and growth in productivity. ● All firms, although some are sector specific. ● Impacts have been larger for volume-based incentives because ● Specific schemes extend to SMEs and startups by offering they tend to be more generous. special terms. ● Smaller firms have been more responsive to R&D tax incentives than larger firms. STRENGTHS ● Lower administrative and compliance costs than direct support KEY “MUST HAVE” FOR REPLICABILITY instruments. ● Long-term political commitment. ● Simpler implementation structure. ● High level of required skills for evaluating, monitoring and ● Flexibility for beneficiaries to choose projects. Greater efficiency verifying eligible activity. in the selection of R&D projects, given that beneficiaries are most knowledgeable about their own opportunities. ● Predictability and stability to underpin strategic R&D activity. ● Fewer allocative distortions. Tax incentives do not crowd out ● Competencies from beneficiaries. Beneficiaries need to be able market mechanisms. to file the required forms and applications, which often requires hiring tax experts and accountants. ● Link to efforts to attract investment. Tax incentives can encourage multinational enterprises (MNEs) to locate innovation activity in a country DO’S ● Minimize the bureaucratic burden for applicants. POTENTIAL DRAWBACKS AND RISKS ● Consider offering carryover provisions to add flexibility for young ● Budgetary uncertainty in assessing how much revenue is being companies. foregone. ● Favor R&D activities with high potential for knowledge spillover, ● Difficulty in verifying eligibility of R&D activity. such as wage bills for researchers and consultancies. ● Risk of short-termism. Tax incentives tend to induce investment only in R&D projects that generate greater profits immediately. DON’TS ● Difficult to target firms/types of innovation (compared to ● Don’t create compliance uncertainty for prospective grants). participants. ● R&D wage second-order effects. Schemes may distort labor ● Don’t create unpredictability with the term of the scheme. markets, with firms overrecruiting R&D-related staff, and induce increases in the wages of R&D professionals, ● Don’t give disproportionate discretionality to public officials. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 11 5 PUBLIC PROCUREMENT TO SUPPORT INNOVATION (DEMAND-PULL INSTRUMENT) DEFINITION Uses public procurement to induce innovations from firms. Public procurement can be used to support innovation during both pre-commercial and commercial stages. Pre-commercial procurement (PCP) aims to support the development of innovative solutions from ideation to prototype or field-testing stages. Commercial-stage procure- ment induces innovation that is already commercially viable. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry: the immaturity of the potential market ● The use of PCP as a large-scale innovation mechanism primarily and lack of clearly articulated demand. originated in the United States, with subsequent strong interest from European policy makers. The evidence-base is strongly ● Coordination failures that result from risk aversion among firms biased toward the US Small Business Innovation Research or potential buyers. (SBIR) program. The series of assessments done by the US ● Institutional failures that result in barriers to access the public National Research Council (NRC) suggest that around half of the markets. beneficiaries reported increased investment in R&D. ● Evidence on commercial-stage procurement is mostly qualitative, focused on implementation rather than effectiveness. TARGET GROUP The reviewed studies mostly confirm positive results such as improved public services, innovative solutions, and newly ● Prospective innovative suppliers, often innovative SMEs. created jobs. ● Contracting authorities; particularly relevant for agencies with large research funding and appetite for leading-edge technologies. KEY “MUST HAVE” FOR REPLICABILITY ● End users (if different from procurers). ● The complexity of PCP and commercial procurement programs require a high level of capacity of both policy agencies and targeted firms. STRENGTHS ● Sector-specific agencies can potentially perform as implementors of innovation procurement because they have the ● For PCP: Can encourage novel R&D and solutions through technical expertise to assess technologies and they may have risk-sharing between public and private sectors. access to procurement budgets. ● Provide an immediate market and generate turnover for beneficiaries. ● Generating positive externalities and guiding strategic DO’S investments. Can be oriented toward addressing societal challenges. ● Before rolling out a full program, try experimenting with pilot schemes in environments with the most appropriate conditions, such research-intensive regions or state-owned enterprises. POTENTIAL DRAWBACKS AND RISKS ● Define procurement requirements using criteria in performance terms instead of technical terms. ● Requires a high level of capacity of public agencies and government procurement systems. ● It is challenging to balance typical drivers of public DON’TS procurement (cost, reliability) with the desired innovation outcomes. ● Don’t seek a one-size-fits-all approach, as expertise related to ● Risk of no commercialization. Suppliers face the risk of procurement and technology tends to vary across sectors and spending time and effort on concept development that leads regions in developing countries. to little return. ● Don’t ignore international regulations on procurement when using procurement for innovation domestically. 12 A PRACTITIONER’S GUIDE TO INNOVATION POLICY 6 SUPPLIER DEVELOPMENT PROGRAMS AND CORPORATE OPEN INNOVATION (DEMAND-PULL INSTRUMENTS) DEFINITION Supplier development programs (SDPs) support firms in upgrading product quality and processes, aiming to link them with existing large buyers, often multinational enterprises (MNEs). Corporate open innovation in- struments (COIs) are a variation of SDPs that try to identify new opportunities for supply chain in large companies and link them to potential suppliers. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry and coordination failures that exist ● Evaluating supplier development programs is challenging due to between MNEs and local SMEs in developing countries. high complexity and layers of expected outcomes and impacts. The few program evaluations reviewed suggest that SDPs can ● Missing markets: Local SMEs often struggle to find markets to generate positive impacts in terms of establishing new supplier achieve sustained growth. linkages, helping SMEs gain new contracts (domestically and ● Capability failure: Local SMEs often lack capabilities to supply internationally), and improving the value added per contract, as international market without support. well as labor skills and wages. ● From a supply chain perspective, the evidence suggests that SDPs have been able to help enhance competencies, create TARGET GROUP jobs, reduce costs, and improve overall productivity. ● Local SMEs and entrepreneurs in developing countries, which often need support in information, capabilities, and financing to serve large domestic and international buyers. KEY “MUST HAVE” FOR REPLICABILITY ● Large companies (often MNEs) that can benefit from ● Commitment from participants is essential given that SDPs are integrating with local suppliers. “matchmaking” efforts to bring supply and demand together. ● Need to integrate the agenda work of Investment promotion/ export agencies and innovation SME agencies to cover supply STRENGTHS and demand. ● Accurate identification and measurement of demand, as well as ● Achieve multiple policy goals in an integrated way. Can link good diagnostics of suppliers, is critical. the supply and demand sides together along value chains, addressing goals, including technology transfer, SME ● Beneficiaries need to have the competencies that make them upgrading, access to markets, and access to finance. potential suppliers to participate. ● Helps develop standards of quality and operations in participating firms that can be diffused to other firms. ● Encourage networking and group learning among SMEs. DO’S ● Ensure that there are high-quality program managers to interact effectively with large and small companies. POTENTIAL DRAWBACKS AND RISKS ● Customize the instruments to suit the industry/firm-specific needs (such as specific industry standards). ● Uncertainty on outcomes: SDPs do not guarantee access to buyers or the duration of that access, but only increase the ● Utilize group activity and incentivize peer learning as much as chance for SMEs to gain markets. possible. ● Transaction costs can be high, given the schemes require ● Use performance-based model, firms that demonstrate sophisticated brokering and facilitation. improvement and capacity building deserve ongoing support ● May require NQI services that are not locally available. DON’TS ● Don’t treat these initiatives as stand-alone programs; they can work together with other innovation programs. ● Don’t treat all supply chains as similar; different industries have very different dynamics and relationships. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 13 7 BUSINESS ADVISORY SERVICES AND TECHNOLOGY EXTENSION SERVICES (TECHNOLOGY ADOPTION AND GENERATION INSTRUMENTS) DEFINITION Building firm capabilities and promoting the use of new and improved technology is essential to in- crease the productivity of firms in knowledge-based economies. Business advisory services (BAS) and technology extension services (TES) focus directly on equipping firms with the capabilities to use and/or generate technologies. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry: firms do not value this type of support. ● Evidence of the impact BAS on innovation exists as many developed and developing countries have introduced and ● Coordination failures: Business associations do not organize evaluated them. Effectiveness has been positive for behavioral themselves to offer this support. practices and for sales growth, patenting, and employment. ● Capability failures: SME owners have trouble identifying what Uptake among SMEs has been limited, and effects of cost- their constraints are and how to overcome them. effectiveness ambiguous. ● The evidence for TES is less available than for BAS and it comes mostly from developed countries. Outcomes have TARGET GROUP been beneficial, but vary by context, and the combination of services offered. ● BAS: SMEs, advisory service and knowledge providers (public, private, and NGOs). ● TES: Same as BAS, plus knowledge providers, such as KEY “MUST HAVE” FOR REPLICABILITY research organizations, universities, and public laboratories. ● Need mix of services that can help build capabilities sequentially according to SME needs. STRENGTHS ● Face-to-face delivery of support for groups of SMEs is ideal. ● Strike a balance between tailored and standardized services. ● Offering BAS as a bundle of services can increase efficiency in delivery. ● Determine payment according to local conditions and observed results. ● Availability of diagnostics enables programs to be tailored to SME clients. ● Requires relatively high agency capacity to manage high quality TES. ● Provision of advisory services is relatively inexpensive. ● Need quality service providers, or for these need to be developed. ● BAS often support the building blocks of SME innovation capability. DO’S POTENTIAL DRAWBACKS AND RISKS ● Conduct market and feasibility analyses before launching programs. ● Potential to crowd out market providers. ● Ensure that appropriate resources are available to build program ● Risk of mismatch between demand and supply. awareness. ● Target beneficiaries may not be able to pay. ● Have high-quality delivery staff. ● Firms may misdiagnose their issues so interventions may be ● Ensure that managers are versed on technology. poorly targeted. ● Consultants are not always incentivized to transfer knowledge. ● Measurement challenges. Ascribing particular results to DON’TS specific advisory services is challenging, particularly given the length of time building capabilities can take. ● Don’t decentralize at the expense of losing local delivery flexibility. ● Don’t assume SMEs will understand the value of BAS and TES, ongoing marketing will be needed. ● Don’t disregard the importance of research systems as a condition for technology transfer. 14 A PRACTITIONER’S GUIDE TO INNOVATION POLICY 8 TECHNOLOGY CENTERS (TECHNOLOGY ADOPTION AND GENERATION INSTRUMENTS) DEFINITION Technology centers (TCs) are public or public-private infrastructure dedicated to providing TES, tech- nology awareness, innovation services and skills upgrading. They tend to be sector specific and accumulate deep sector technology expertise, often developing new technological solutions or adapting existing market technologies to the needs of the domestic sector. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Coordination failures between providers of technological ● Evidence for TCs remains extremely scarce. Five independent solutions and firms. studies, from both developed (Japan, United States) and developing countries (Mexico), find no systematic reviews for ● Information asymmetries: particularly for information about this instrument. available technologies. ● The evidence suggests that these centers have been effective in improving performance of SMEs (Japan, Mexico, United States), but that their performance, relevance, and ability to collect fees TARGET GROUP for services depends on contextual factors and the capabilities of the center (customer orientation, relationship management ● SMEs that lack awareness about new technology, the funding skills, and quality of technical staff, including PhD-level experts). or capability either to build internal capacity in specialized technological areas or to purchase equipment. ● Larger companies that are seeking to upgrade their suppliers and vendors. KEY “MUST HAVE” FOR REPLICABILITY ● Industry organizations with sectoral or technological focus. ● Cluster of relatively strong firms/industry who need and will support the center. ● Sufficient initial investment to provide quality services. STRENGTHS ● Business model reflects industry capability needs. ● Anchoring training and services close to the industry. ● Important instruments to support the diffusion of innovation DO’S and building SME capability. ● Can act as market developers and bridge availability gaps for ● Consider the TC as part of a broader strategy and define a advisory services. focus for intervention. ● Engage with the private sector in designing and delivering the intervention. POTENTIAL DRAWBACKS AND RISKS ● Ensure sufficient funding for set-up and maintenance stages. ● Seek strong buy-in from industry stakeholders to ensure ● Risk of capture, which may allow narrowing of services to suit relevance. insiders. ● Strike the right balance in the mix of services provided between ● Difficulty of maintaining relevancy to the industry while diffusion of established knowledge, and cutting edge technologies. operating under government rules and statues (caps in salary ● Ensure center governance has strong private sector focus. scales). ● Risk of too much focus on physical infrastructure and equipment rather than providing quality services. DON’TS ● Don’t just treat the TC as physical infrastructure, the service quality will make or break success. ● Don’t ignore the importance of maintenance and updating of equipment, this is capital intensive but is vital for continued relevance. ● Don’t run TCs as bureaucratic agency; they need to be responsive to customer needs. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 15 9 SCIENCE AND TECHNOLOGY PARKS (TECHNOLOGY ADOPTION AND GENERATION INSTRUMENTS) DEFINITION Science and technology parks (STPs) typically feature physical spaces offering infrastructure and various support services to high-tech and R&D-intensive firms. STPs aim at exploiting the spillover benefits from the agglomeration of R&D and technology transfer activities between multinational enterprises and other organizations. STPs typically have formal linkages with universities, such as being located close to campuses. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Coordination failures among different actors in local innovation ● Assessing impacts of STPs is difficult given the huge diversity systems that hinder collaboration. of STPs, and the complex impacts coming from the dynamics STPs stimulate. Qualitative methods have an important role to ● Create agglomeration economies and knowledge spillovers uncover the underlying causal linkages that are not typically between universities and on-site firms. addressed through quantitative methods. ● Geographical coverage of the evidence is skewed toward a few countries, such as the United Kingdom, the United States, TARGET GROUP Spain, and China. ● High-tech and R&D-intensive enterprises. ● Factors affecting the functioning of STPs include capabilities of managers, proximity to prestigious universities, and commitment ● Universities and public research institutions. from the central and local governments. Regarding output additionality, the reviewed literature reports either positive impacts or neutral effects of STPs on firms’ performance. STRENGTHS ● Maximize spillovers and network effects by agglomerating innovative activities in a specific location. KEY “MUST HAVE” FOR REPLICABILITY ● Can serve as the vehicle to implement a mix of policy ● Strong, specializing economies with a good local innovative instruments, such as grants, vouchers, tax incentives, ecosystem form a sound basis for successful STPs. procurement, loans, and advisory services to park users. ● The presence of competent knowledge institutions that already produce applied research with commercial potential. ● A local labor market of highly qualified workers to work on POTENTIAL DRAWBACKS AND RISKS innovation projects. ● STPs present high risk of becoming real estate development ● An attractive residential and living environment to retain the operations. skilled labor force. ● When lack of commercialization is due to either poor research ● Available sources of financing to support the operations of quality or intellectual property incentives, STPs as an STPs. instrument on their own can do little to improve the situation. ● STPs are less suited for early-stage support, as tenants tend to be established firms. DO’S ● Carefully assess whether the preconditions of setting up STPs can be met. ● Make sure that incentives are in place for universities to participate in contract research and commercialization. ● Have a long-term vision from the perspective of urban planning. DON’TS ● Don’t try to copy experience from one region to another without taking local circumstances into account. ● Don’t merely pursue quantifiable outputs; benefits of STPs can come from informal interactions. 16 A PRACTITIONER’S GUIDE TO INNOVATION POLICY 10 TECHNOLOGY TRANSFER OFFICES (TTOS) (TECHNOLOGY ADOPTION AND GENERATION INSTRUMENTS) DEFINITION Technology transfer offices (TTOs) are the dedicated entities created by universities and public research institutions to support and facilitate different aspects of technology transfer, managing activities related to intellectual property rights, such as disclosures, patent filing and licensing, relationships with industry, industry placements and research contracts. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry resulting from uncertainty about the ● The existing evidence look at impacts of TTOs in the contexts of valuation of scientific discovery. technologically advanced economies, using indicators such as number of licenses issued and income generated. The studies ● Externalities and lack of appropriation of knowledge that tend to focus on heterogenous outcomes and issues, so it is prevent firms from investing in innovation activities. difficult to form a general conclusion on TTO’s impact. ● Coordination failures that hinder interactive learning between ● A comparative study shows that European TTOs performed firms and universities/public research institutions. comparably to their US counterparts but earned significantly ● Capabilities failure. The technology transfer process requires less revenue from licensing activities. access to a number of informational, financial, and human ● Studies in the United States show that most TTOs emphasize resources, which are usually scarce in developing countries. licensing over scientist start-ups and economic development, that spin-off activities can occur without IP being formally licensed, and that social capital matters. TARGET GROUP ● Knowledge providers such as research centers, universities, and government laboratories. KEY “MUST HAVE” FOR REPLICABILITY ● Innovative businesses such as big firms, SMEs, and small ● A precondition for any TTOs to work is a good research system startups. that either produces applied and potentially usable research results or has physical assets and services that are valuable and relevant to the private sector. STRENGTHS ● High capabilities of TTO staff are essential, and the staff should understand both science and industry. ● Can stimulate ongoing business improvement activities within ● The research institutions themselves need to support the SMEs and cooperation between firms and research centers. business model of their TTOs with a long-term commitment. ● High potential to accelerate commercialization of new ● The presence of a transparent and well-articulated intellectual solutions. property rights regime, as well as an efficient court system, is ● Can support exchange of people between research and necessary to encourage technology transfer. industry, as well as knowledge. ● TTOs are an integral part of the third-stream mission of knowledge creation institutions. TTOs enable knowledge DO’S exchange and cocreation of knowledge with private actors. ● Where necessary, be prepared to invest in building the capacity of TTO staff as this is an unusual skillset. POTENTIAL DRAWBACKS AND RISKS ● TTOs should aim to benefit businesses as well as the wider community rather than just focus on the institution itself. ● Subject to failure if quantity and/or quality of knowledge creation is low. ● Cannot overcome the absence of incentives to support DON’TS commercialization of knowledge. ● Often subject to complicated government procedures. ● Don’t simply set up TTOs without assessing the supply side of knowledge production of the country. ● Considerable time, capacity, and resources are required to enable TTOs to function effectively. ● Beyond TTO efforts, policy makers should not overlook the bigger picture of promoting academia-industry collaborations in general. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 17 11 INCUBATORS AND ACCELERATORS (EARLY-STAGE SUPPORT) DEFINITION Incubators and accelerators target innovative companies and sectors, and are linked to public re- search organizations in order to support the commercialization of knowledge. The interventions seek to exploit the benefits of networking and spillover effects arising from co-location but vary as to the extent and duration of advisory services that may be provided as part of their suite of services. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry (accelerators). ● Evidence relies on a limited number of evaluations, and there is no generally accepted approach to analyzing the effectiveness ● Capability failures (incubators). of (and distinguishing between) incubators and accelerators. ● Network and infrastructure failures (incubators). ● Approaches to identification of impact, and the set of metrics, vary. Less evidence is available from developing countries than from developed countries. TARGET GROUP ● The evidence shows mixed outcomes, that are highly context specific. Some studies have found that treated firms performed ● Incubators: Early-stage enterprises in specific sectors. better, but others show that treated firms did not perform ● Accelerators: Early-stage enterprises with high growth significantly different than nontreated firms in terms of patenting, potential, presenting a viable business that could be scaled up. employment generation, and sales growth. Accelerator programs have been found to increase the level of company survival rates but by only the fifth year following exit. Finally, some studies have found that entrepreneurship education leads STRENGTHS to significant increases in venture fundraising. ● Network effects, technology transfer, and spillover effects. ● Economies of scale in fixed costs and service provision. KEY “MUST HAVE” FOR REPLICABILITY ● Dedicated advisory assistance. ● Signaling and enabling high-risk investment at early stages. ● Conduct a feasibility study for setting up an incubator to understand the current landscape of the entrepreneurial ● Accelerators can help identify and filter out poor business ecosystem, target market, and strategic direction. models resulting in more efficient firm development. ● Financial commitment: Incubation takes time to achieve results. ● Peer interaction and learning. Accelerators allow group interaction and learning among entrepreneurs. ● Competent, innovative, and knowledgeable management is critical to the success of an incubator or accelerator plus good mentors and potential investors. POTENTIAL DRAWBACKS AND RISKS ● High cost of running programs and limited outreach. DO’S ● Lack of clear policy on selection criteria. ● Plan the governance structure carefully. ● Proliferation of programs without effective screening ● Enable an accessible physical location. mechanisms. ● Ensure that mentors, managers and investors are seasoned ● Risks of not achieving self-sustainability financially. business professionals. ● Risk of duplicate investment. When there is insufficient ● Develop linkages and networks. coordination between different acceleration programs, some ventures might end up being accelerated multiple times. ● Understand your potential market, the deal-flow of entrepreneurs, and their needs. DON’TS ● Don’t use incubators, accelerators, and science parks interchangeably. ● Don’t set up unrealistic targets and milestones. 18 A PRACTITIONER’S GUIDE TO INNOVATION POLICY ● Don’t ignore the financial sustainability strategy. 12 EQUITY FINANCE FOR INNOVATIVE ENTERPRISES (EARLY-STAGE SUPPORT) DEFINITION Equity finance instruments involve the government providing capital used to invest in the equity of small and young high risk innovation-intensive companies, to support their growth. There are various equity finance mechanisms, which include coinvestment with individuals or angel investor groups, government run funds, or co-in- vestment funds. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Information asymmetry between the entrepreneur in need of ● Given that equity finance is a relatively new instrument, there financing, and the private investor who often lacks motivation are not enough data and/or methodologies to conduct rigorous to fund early-stage ventures given the difficulty of conducting evaluations. due diligence. ● The reviewed studies reach mixed conclusions: five out of the ● Coordination failures that lead to high costs of project appraisal eight studies report positive impacts generated by government- for investors, and high search costs for innovators looking for funded VC, while three report negative impacts. investment. ● Several studies find that government VC schemes provide value creation only when combined with private investment ● A few studies show that managers of public funds are less TARGET GROUP involved in value-adding activities than private VC managers. ● Private investors such as institutional investors and individuals. ● Venture capital (VC) fund managers, who put together prospective funds and marshal private co-investments. KEY “MUST HAVE” FOR REPLICABILITY ● Entrepreneurs, as the ultimate beneficiaries. ● The high complexity of equity finance requires a high level of capacity; policy makers in developing countries with underdeveloped ecosystems might consider having overseas experts train fund managers and investors. STRENGTHS ● Schemes should follow international norms of the VC industry to ● Alignment of interests: Both the investors and entrepreneurs attract overseas and diaspora investment. are equally motivated to succeed. ● Effective policy design should be built on an in-depth ● Risk sharing through the participation of private investors. understanding of the size, developmental stage, and availability of a country’s early-stage ecosystem. ● Leverage the expertise and investment from the private sector. ● Spillovers to the entrepreneurship ecosystem. Incentives such as tax concessions for investors can attract experienced investors to this market segment, and they bring both capital DO’S and knowledge. ● Ensure that there is a sound legal and investment climate ● Business angel networks as direct channel of communication environment for early- stage investors to operate within. between entrepreneurs and investors. ● Ensure that there is reasonable and growing flow of investible business opportunities. ● Always look to crowd in private investment. POTENTIAL DRAWBACKS AND RISKS ● The complexity of programs demands scarce policy skills and ecosystem infrastructure. DON’TS ● Risk of government failure, such as lack of competence in ● Don’t assume there will be quick wins; this is a long-term running a fund, inappropriate decision criteria, and crowding intervention. out private investment. ● Don’t expect there will be many commercial successes, as most ● Early-stage equity can crowd out private sector resources. If investments will fail. interventions are not limited to cover the equity gap, there is a ● Don’t assume that professionals with a banking or private equity risk that public support of innovative start-ups and SMEs can background can adjust to being effective early-stage fund crowd out private sector resources. managers. ● Investments have long time frames. These interventions do not typically provide quick impacts or results. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 19 13 INDUCEMENT INSTRUMENTS (PRIZES, COMPETITIONS, CROWDSOURCING, AND HACKATHONS) DEFINITION Inducement instruments—prizes, competitions, crowdsourcing, and hackathons—aim to trigger con- testants’ additional effort to address identified problems/challenges. Inducement prizes encourage external parties to develop an innovative solution. On the one hand, this type of prize can generate effort from competitors in developing the innovative solution; on the other hand, it externalizes the risk of parties that are not able to develop a successful solution. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Positive externalities from tackling challenges hindering societal ● The evidence is limited, and the contexts involved have been development that cannot be addressed by pure market diverse in terms of different jurisdictions, real-life settings versus mechanisms. laboratory settings, and ownerships of the schemes. Evidence comes from ex ante assessments, exploring design principles, ● Institutional failures that often prevent the development of rather than from reviews of ex post impacts. certain technologies, especially nascent ones that possess high social value. ● For input additionality, a few studies confirm the ability of inducement prizes in leveraging private sector investment in innovation, and the ratio of leveraging can be as high as 10 times. TARGET GROUP ● For output additionality, a few studies report evidence on prizes’ ability to stimulate new technologies, solutions, or even new ● Innovation providers—any entities, including individuals and firms. innovators. ● Innovation seekers (sponsors). ● General public (innovation users). KEY “MUST HAVE” FOR REPLICABILITY ● When designing schemes, it is critical to understand the social STRENGTHS desirability of new solutions to ensure the effort is worthwhile. ● Policy makers in developing countries should be particularly ● Openness: Can attract innovative solutions from cautious in embarking on this instrument, given the uncertainty unconventional areas. on its impact. ● Distribute risks among participants and leverage public ● Engaging with stakeholders can benefit all stages of inducement spending. prize schemes, from sponsorship and challenge definition, to ● Publicity, which might lead to public enthusiasm, venture execution, and further to prototype testing and dissemination. capital investment, and contracts for innovators. ● Competency requirements from participants. Inducement prizes schemes are “open” to all innovators, but those innovators without resources or innovation capabilities are excluded from POTENTIAL DRAWBACKS AND RISKS the process. ● Due to the ad hoc nature of technological requirements and the resulting target group, this is not a stable tool to support the build-up of deep knowledge over time. DO’S ● There is a danger of disconnection of results from a viable ● Assess the appropriateness of launching inducement schemes social solution if the prize is defined solely by the policy maker. in the first place. ● Transfer of risk and inefficiencies. Prizes can generate too ● Consider carefully the various roles government could/should play much effort and risk taking by those developing innovative in inducement prizes (program owner, coordinator, or contributor). solutions, given that most teams will not reap the reward of the ● Map the various stakeholders involved and their incentives and innovative solution produced. create win-win solutions. DON’TS ● Don’t merely focus on the potential leveraging effect and ignore issues of cost and quality control. ● Don’t assume that inducement schemes are low cost, since participants’ investments can be large and could be used in 20 A PRACTITIONER’S GUIDE TO INNOVATION POLICY projects with potentially higher returns. 14 QUALITY INFRASTRUCTURE, STANDARDS, METROLOGY, AND TESTING DEFINITION The national quality infrastructure (NQI) is part of a country’s innovation system. It helps determine whether a product, process, or service meets a defined set of requirements. These functions are delivered through services that support the development of local standards, and their application, including metrology, inspection, certi- fication, accreditation, and conformity assessments. MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Coordination failures. Need to bring stakeholders together to ● Most of the evidence comes from developed countries, and develop new standards. industries with network effects. The evidence for standards on innovation is conditional on product markets characteristics and ● Dissemination of market specifications of product the focus of the standards. Many of the impact effects have characteristics. been modelled, and do not rely on experimental methods. ● Information asymmetry. Firms may not know what quality ● Most of the evidence suggests that standards have a positive standards they require or how to upgrade to meet them. influence on economic growth, in terms of both GDP and employment. ● Certification has led to productivity increases. TARGET GROUP ● A few self-reported studies have found that standards were a ● Firms, particularly SMEs, and industry, but also relevant for reliable source of information for innovation activities. service providers and intermediaries (R&D practitioners, research labs, and scientific associations). KEY “MUST HAVE” FOR REPLICABILITY STRENGTHS ● Policy makers should institute good governance that is independent from political influence. Accreditation agencies ● Encourage positive network effects. should be independent from metrology and standard bodies, to avoid perverse incentives and loss of credibility. ● Essential for ensuring product quality and consistency which are building blocks for more sophisticated innovation. ● Metrology, accreditation, and standardization bodies must refrain from participating in the issuance of technical regulations. ● Support internationalization of innovation processes. ● Improving innovation efficiency. Standards that reduce variability promote economies of scale and learning, with suppliers saving costs. DO’S ● Serving as a building block of innovation capability. The ● Engage SMEs in quality standards. introduction of standards at the firm level can be an important ● Ensure political commitment to NQI development and step in building the capability for more complex innovation. standardization. ● Engage private stakeholders from the beginning. POTENTIAL DRAWBACKS AND RISKS ● Avoid technological lock-in through open standardizations. ● Potential conflict of interests and weak governance structures. ● Imposition of obstructive requirements and technology lock-in. DON’TS ● Significant compliance and conformity costs. ● Don’t create parallel organizations and flat structures in setting ● Risk of private capture and constrained competition. up NQIs. ● Don’t apply restrictive and mandatory technical regulations. ● Don’t allow fragmentation of responsibilities over NQI and dominance from the public sector. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 21 15 CLUSTERS AND NETWORKS FOR INNOVATION DEFINITION Clusters and networks supporting policies represent interventions that bring groups of firms together with other stakeholders to undertake joint innovation- related activities. These interventions can be geographically proximate (clusters) or in in the same sector but spatially dispersed (networks). Innovation can include joint technology diffusion, R&D, and product development. As a mechanism to aggregate activity, clusters and networks usually work in connection with other instruments (such as grants, research centers, and/or advisory services). MARKET AND SYSTEM FAILURE ADDRESSED EVIDENCE OF IMPACT ● Coordination failures that hinder firms’ interactions and ● There is a considerable body of literature on clusters. However, collaboration and cannot be addressed by firms themselves evidence on the effectiveness of deliberate cluster policy due to the costs required to run those schemes. initiatives remains very limited. Given the complexity, it is hard to attribute observed outcomes to the intervention. The evidence often addresses issues related to operations of clusters/ networks and “soft” impacts. TARGET GROUP ● The limited evidence suggests that the effectiveness of cluster policies in generating R&D input additionality is questionable, ● Innovative firms of all sizes. although innovation outcomes may increase as a result of R&D ● Related organizations, such as research organizations, spillovers. Different participants perceive the effectiveness of technology centers, finance institutions, public agencies, clusters/networks differently. The evidence, however, is too thin NGOs, associations, and local agencies. to show how robust these findings are. KEY “MUST HAVE” FOR REPLICABILITY STRENGTHS ● Tailoring policies to the context. The reviewed studies suggest that ● Enhance policy effectiveness by benefitting from economies cluster policies must be tailored to the level of sophistication of the of scale. sector. Need pre-existing industry agglomerations to work with. ● Potential for higher policy implementation efficiency enabled by ● Ensure high competences of cluster managers, as well as high geographical/virtual proximity. motivation and contribution from potential beneficiaries. ● Low costs of program administration and more participation ● Engage early with private sector actors and find industry from the private sector in management. champions to embed market orientation into cluster policies. The motivation and contribution from potential beneficiaries are ● Enable spillovers and learning among beneficiaries. Often important preconditions for cluster policies to be effective. supports complementary activities like joint export and skill development. ● Policy makers, while facilitating the set-up and maintenance of networks, should give enough space and autonomy to participants. POTENTIAL DRAWBACKS AND RISKS DO’S ● Risk of lock-in into clusters that have lost dynamism and ● Conduct thorough assessments to identify cluster candidates, competitiveness. based on solid methods/data and expert views. ● Difficulty of assessing effectiveness because a wide diversity of ● Be prepared to stop support if stakeholders are simply not motivations, rationales, activities, outputs, and outcomes are engaging. involved. ● Utilize the potential of network structures to aggregate needs ● Cluster management entities can absorb considerable and coordinate the delivery of policies to industry groups. resources but achieve little if they are not well structured and ● Identify quick wins that can prove value to participants. staffed. ● Complexity. Cluster interventions that generate real spillovers are inherently complex because they involve building DON’TS collaboration and mutual activity across a range of actors. ● Don’t overintervene or micromanage the dynamics of clusters and networks. ● Don’t ignore the importance of effective cluster/network management for success. ● Don’t try to apply clusters policies to all industries; select only 22 A PRACTITIONER’S GUIDE TO INNOVATION POLICY the ones with potential to maximize competitive advantage. REFERENCES Cirera, X., and W. F. Maloney. 2017. The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. Washington, DC: World Bank. Comin, Diego, and Martí Mestieri. 2018. “If Technology Has Arrived Everywhere, Why Has Income Diverged?” American Economic Journal: Macroeconomics 10 (3): 137–78. MIoIR (Manchester Institute of Innovation Research) and Nesta. No date. Compendium of Evidence on the Effectiveness of Innovation Policy. http://www.innovation-policy.org.uk/compendium/. Mohnen, P., and B. H. Hall. 2013. “Innovation and Productivity: An Update.” Eurasian Business Review 3 (1): 47–65. Schumpeter, J. 1942. Capitalism, Socialism and Democracy. New York: Harper & Brothers. A PRACTITIONER’S GUIDE TO INNOVATION POLICY 23 Rapid technological change is increasing the pressure on policy makers to improve the effectiveness of innovation policies needed to reap the benefits of innovation and technological catch-up. However, there is little information about what works when it comes to innovation policy, particularly for developing countries. Moreover, market and systemic failures that hamper innovation are pervasive in developing countries, but the institutions tasked to design and deliver innovation policies often lack the capabilities to design and implement policies that successfully address them. This practitioner’s guide aims to fill this gap and support policy makers in developing countries in their quest to design more effective policies to foster innovation. It does so by rigorously describing the range of innovation policy instruments available, the evidence of impact, and more importantly, the conditions and institutional capabilities necessary to successfully implement these policy instruments in developing countries.