Demand for innovation. What policy can and cannot do for it. Jakob Edler, MIoIR

1. Demand for innovation.What policy can and cannot do for it.Jakob Edler, MIoIR Seminar on The New Agenda of Innovation Studies: Policies Madrid, March 31 2014 Manchester Institute of Innovation Research

2. Structure and Basic Idea • Policy trend • Demand and Innovation • Role of Policy • Rationales • “Instruments” • Examples • Private Demand Instruments • Public Procurement as policy tool • Challenges • Conclusion Manchester Institute of Innovation Research

3. Policy Trend (innovation policy!) • Demand measures for decades (e.g. market transformation…) • EU level driving: • Kok and Aho Reports • PCP (ICT area), LMI, Horizon 2020 (New regulation proposal) • Many countries: studies, intentions, new schemes (OECD 2011, Izsak/Edler 2011), small countries (Georghiou et al 2011) • Regions have started as well (Wintjes 2012) • Demand conditions recognised as important (UK 2009, 2010) • Demand based innovation policy: „ most important“ area to learn (Trendchart Users, July 2011) Manchester Institute of Innovation Research

4. The meaning of demand for innovation • Long standing theoretical debate (Marshall, Schmookler, Rosenberg, Metcalf…) • Successful innovations: most often reaction to perceived changes in demand rather than to technological advances • Innovation failures often due to a misperception of what the market is ready and willing to accept (Rothwell 2007) • Eco innovation: demand more important than public subsidies, growing demand is most importance incentive for innovation (Horbach et al 2012, Newell 2010) • Firm survey (Commission 2009) • Policies to improve demand for innovation highly relevant • Uncertain demand most important obstacle • Demand for demand policies.. Manchester Institute of Innovation Research

5. Demand andinnovation (eco-innovation) Source: INNOBAROMETER, EUCom (Gallup) 2011

6. Demand and Innovation (eco-innovation): SPAIN: 80% saydemandisveryseriousorseriousobstacle Barriers to accelerated eco-innovation uptake and development for companiesUncertain demand from the market (Gallup 2011, p. 31) Source: INNOBAROMETER, EU Com (Gallup) 2011

7. Different ways in which demand influences innovation • Demand triggering innovation: asking for new products / services (new functions, more efficient…) • Demand being responsive to existing innovation: absorbing, adopting, using, accepting innovations • Innovation role of users • Co-production (co-adaptation): user – producer • User produced innovation Manchester Institute of Innovation Research

8. Demand based Innovation PolicyDefintion • all public action to induce innovation and/or speed up the diffusion of innovation through • increasing the demand for innovation • i.e. influencing the willingness and ability to buy and use an innovation) and/or • defining new functional requirements for products and services and/or • improving user involvement in innovation production (user-driven) • Innovation defined form demand perspective (including “diffusion”) Manchester Institute of Innovation Research

9. Rationale - Three sets of justifications • Information asymmetries (producers do not know preferences, users do not know innovations) • Poor articulation by consumers/policy • Adoption externalities • Lack of interaction between users and producers • High switching and entry costs: lack of capabilities and willingness to use new technologies • Technological path dependencies system weaknesses* hamper market entry and diffusion • Logic: Intelligent public action to overcome various kinds of “weaknesses” and link to societal needs, efficiency gains and economic development Societal goals, Public sector needs • Contributing to sectoral / societal policy needs and goals (e.g. the eco-agenda) • Making public service more effective and efficient (value for money, long term) • Support (local) producers, service providers • Indirect: Triggering something bigger, market creation • Dominant designs, Demonstration effects • Scale/scope advantages • Learning / upgrading for buyer and provider • Keep up innovation pressure in system • Attractive investment location (demand conditions) Support industry, growth and location Manchester Institute of Innovation Research * term borrowed from Bergek

10. Instruments - Typology • Public Procurement (policies): direct/catalytical; strategic/general • Private Demand: • Demand Subsidies, Demand tax incentives • Awareness measures, labels.. • Training • Demonstration projects • Articulation of needs, joint need definition (e.g. foresight) • Support user – producer interaction • Support user driven innovation • Regulation / Standardisation (creating markets, security, health etc.) • Mix of Measures • Various demand measures • Demand and supply link • Pre-commercial procurement (direct support to supply, but based on need, potential purchase afterwards) Manchester Institute of Innovation Research

11. Examples Manchester Institute of Innovation Research

12. Demand Subsidies – Tax Incentives • Applied and analysed mainly in energy • Very mixed messages – no clear „best“ approach • Example: Subsidies for eco-innovation purchase • Diffusion and size of markets push innovation • Positive impact of subsidies on uptake, but often not „significant“ • E.g. 15% price reduction (insulation): „limited“ effect (8% to 11% of respondents) • Other factors often more important (cost savings over time, other input factors) • Considerable windfall • Cross country differences in context and design Manchester Institute of Innovation Research

13. Demand Subsidies – Tax Incentives • Comparison supply vs. demand instruments: • Limited evidence, often wrong indicator (patents only) • R&D subsidies more important for R&D leading to patents; product innovation, • Demand subsidies: process innovation (diffusion effect) • Older studies: (public) demand more important than R&D subsidies • Demand measures also have innovations effects abroad • Dependent on need for user – producer proximity • Command & control: radical innovation • Price based: incremental Manchester Institute of Innovation Research

14. Demand Subsidies – Tax Incentives • Subsidy effect: Immediate monetary effect more important than savings over time • Right level of incentive: • too high: inefficient, too low: no sustained diffusion • Timing • Leverage effect on diffusion higher in early phase (but risk: too early) • Reduction over time reasonable • Demand measures risk of creating lock in (developing niche, but no incentive for next generation) Manchester Institute of Innovation Research

15. Policy measures to support public procurement • Note: public procurement NOT an instrument for innovation per se • Policies to support PPI tackle a set of well-known weaknesses • adverse incentive structures (leading to risk aversion and lack of innovation orientation), • dysfunctional internal division of responsibilities (disconnecting users, budget holders and procurers), • lack of internal capabilities and skills (market knowledge, need definition, business case, using wrong procedures), • lack of interaction between public bodies and, • lack of political commitment and organisational leadership. • Poor roll out of those policies, multiple challenges Manchester Institute of Innovation Research

16. I N N O V A T I O N P R A C T I S E A. Conceptual: Policy and innovation system, Rationale, Appropriateness B. Discursive: CTA, supplier-user discourse C. Operational: Market&Technology Intelligence D. Evaluative: ex ante / ex post – impact STRATEGIC INTELLIGENCE P O L I C Y DEMAND: Innovation Users or co-preoducers private Public (users, procurers, policy makers) consumers firms Framework Domain policy (social need) Innovation/economic General procurement Challenges for Policy Design and Implementation SUPPLY:Innovation Producers Sate of the art Business infrastructure Manchester Institute of Innovation Research

17. Conclusion • What policy can do • Using demand to pull innovation in specific directions (societal benefit) • Improving how markets work: Reducing market uncertainty and tackling system weaknesses, awareness, skills • What policy cannot (should not) do • Prepare long term supply-demand roadmaps • See demand based innovation policy as economic policy only (tension societal welfare and economic benefit) • Limiting variety and failure Manchester Institute of Innovation Research

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19. The meaning of demand for innovation • Theory • Demand for innovation: signal to market to acquire new product / service on the basis of a need for a certain price • Demand crucial for innovation (back Alfred Marshall) • Strong theoretical demand debate in 1960s and 1980s • Importance of the market pulling (incremental) innovations from suppliers (Schmookler 1966) and “steering” firms to work on certain problems (Rosenberg 1969) • Interplay of demand and supply (Metcalf 1995) • Users assourcesforinnovation (co-production, inputs, von Hippel 1986…) Manchester Institute of Innovation Research

20. Price based instruments Manchester Institute of Innovation Research