Systems Failure and the Case for Innovation Policy

Abstract

The topic of this chapter is the rationale for innovation policy in advanced market economies. Since innovation and its associates, invention and the diffusion of innovation, play such a central role in the performance of modem economies, indeed they constitute a defining element in the claim that they are knowledge-based, it is hardly surprising that this rationale should be an indispensable part of economic policy more generally. The Barcelona accord on research and development (R&D) spending^ suggests how important this issue is for European governments, and raises the question of whether policy frameworks and instruments exist to reach the objectives of this accord. In particular, will it be possible to protect any sustained increase in innovation expenditures from the effects of diminishing marginal returns in the short run and in the long run^? We shall argue that new perspectives are needed on innovation policy if innovation is to be stimulated in Europe while avoiding the spectre of diminishing returns. We also suggest that the traditional rationale for innovation policy, market failure, is flawed in its understanding of the innovation process and, more fundamentally, flawed in is understanding of the wider process of competition in the modem world. The reasoning behind this claim is that processes of innovation depend on the emergence of innovation systems connecting the many actors engaged in the innovation process, and that these systems are essentially self organizing. Innovation systems do not exist naturally, but have to be constmcted, instituted for a purpose, usually but not uniquely to facilitate the pursuit of competitive advantages by firms. To ^ To raise European R&D to 3% of GDP by 2010 with at least two-thirds of this contributed by industry. ^ Diminishing returns to the economic payoff, not diminishing returns to the growth of scientific and technical knowledge.

The Aims and Scope of Evolutionary Economic Geography

“…taken from Generalised Darwinism, especially those of variety, selection, novelty and retention (see, for example, Witt, 2003;Metcalfe, 2005). By comparison, complexity theoretic ideas have received less attention, although the potential of this approach is increasingly recognised, with some authors linking complexity concepts explicitly with the analysis of economic evolution (e.g., Potts, 2000;Foster, 2005;Beinhoker, 2006;Rosser, 2009).…”

The ‘fit’ between forward-looking activities and the innovation policy governance sub-system: A framework to explore potential impacts

“…Edquist, 2011;Malerba, 2009;Metcalfe, 2005;and Smith, 2000), of which at least three types can be tackled by FLAs, namely the lack of understanding of sectoral characteristics/ dynamics, poor (or lack of) vision building, and ineffective co-ordination. Hence, certain types of FLAs can contribute to design appropriate policies: more 'robust' policies can be devised when (i) multiple futures are considered, and (ii) stakeholders, given their diverse backgrounds, bring wide-ranging accumulated knowledge, experience, aspirations and ideas into policy dialogues.…”

A gap analysis of the South African innovation system for water

“…Under the neoclassical framework, knowledge is assumed to be easily assimilated without significant costs, but this can lead to a restricted and restrictive understanding of knowledge since it reduces knowledge to mere information while ignoring its tacit, cumulative, pathdependent and contextual aspects (Cohendet and MeyerKrahmer, 2005). 'Knowledge has a unique property' in that 'it always and only exists in the minds of individuals' (Metcalfe, 2005). Thus, all knowledge is tacit and its codification is only ever an imperfect public representation.…”

“…It follows that the neoclassical understanding of knowledge is flawed since knowledge cannot be entirely freely or perfectly transmitted, it cannot be either entirely non-rival or entirely non-excludable. Thus, the notion of market failure, which rests upon an understanding of knowledge as instantaneously and completely shared, is limited (Metcalfe, 2005). In contrast, the innovation systems framework views knowledge as tacit and imperfectly transferred, thereby highlighting the role of learning as vital to innovation.…”

“…It also tends to downplay the specific institutional frameworks in which innovative activities take place . It is for these reasons that Metcalfe (2005) argues that the 'market-failure framework', despite its formal elegance, is an empty box. It also explains why the innovation systems framework emerged in response to some of problems ).…”