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Two definitions for innovation policy
Two definitions for innovation policy

  • Narrow definition: The government is responsible of support innovation process, help companies to commercialize innovative ideas. Policy instruments include public funding for R&D, patent rights and support of basic and applied research in universities and research institutions.

  • Broad definition: Includes the narrow one plus policy instruments which enhance education in all levels, laws that regulate competition, taxation and policies which are related to such fields as health, energy and environment.

  • Broad innovation policy expands government involvement in the ‘content’ of R&D by favoring certain fields. This is done by using ‘technology programs’, establishing ‘special committees’ or supporting designated research institutions and universities.

  • Pros and cons:

  • 1. Strong government involvement secures funding and lowers the risks.

  • 2. Strong government involvement focuses critical mass or intellectual and financial resources to areas where innovations are mostly needed.

  • 3. Strong government involvement shortens the time span of R&D

  • 4. Government involvement focuses intellectual energy to innovation process while the need could be somewhere else.


The roots of innovation policy
The roots of innovation policy

  • Second world war demonstrated how scientific and technological research can contribute to the military strength and national security.

  • Science and technology policy during the Cold War emphasized high technology research – ambitious goals: space programs, computers, nuclear energy, antibiotics, medical technologies, electronics.

  • 1970’s the energy crises inspired technology and innovation policies. Opening of the international trade increased competition and enforced nations to invest in education and research – New emphasize: Chemistry, new materials, high quality metals, electronics.

  • 1980’s microelectronics replaced metals and chemistry. Computers, ICT, biotechnology and material technologies. Technology and innovation policies focused on new fields which could generate growth and enhance competences.

  • 1990’s integration of regional, national and trans-national innovation policies. More emphasize on innovative companies which operate on high technology fields – biotechnology, environmental technologies, ICT,


Market failure theory
Market failure theory

  • Kenneth Arrow (Nobel price of economics 1972), developed the market failure theory: Free market economy guarantees that companies invest enough to R&D. This is done because innovations create surplus and improve competences. Companies have narrow interest in R&D, focus is on fields which bring rapid wins and easily applied results.

  • Companies are not interested in long term research and risk taking in R&D.

  • This part of the innovation is funded by the government and carried out by public institutions (universities, R&D institutions)

  • Three sources for market failure: Indivisibility, Inappropriability, Uncertainty.

  • 1. When there is rapid diffusion of technology, individual companies loose resources to innovate (indivisibility). 2. When companies originating the technology cannot capture all benefits, the incentive for invest maybe insufficient (inappropriability), and 3. When the risk of loosing too much money is included in the R&D activity, companies tend to underinvest in R&D.


Evolutionary economics
Evolutionary economics

  • Stresses complex interdependencies, competition, growth and structural change.

  • State intervention to scientific and technological research is necessary, because economic structures don’t support R&D and there are system failures in society.

  • Typical system failures are non-cooperation between universities, R&D institutions and companies.

  • Also some industries can ignore innovation process and rely on ‘tested technologies’

  • State intervention is needed to enhance cooperation, eliminate rigid structures and speed up innovation process in crucially important industrial sectors.

  • State intervention is also needed to reallocate resources, recreate institutions and enhance networking between public and private sectors.


Seven steps to effective innovation policy
Seven steps to effective innovation policy

  • 1. State supports basic research and education in universities and maintains the foundation for high technology research.

  • 2. State corrects system failures, invest in non-profit R&D institutions and enhances knowledge transfer between universities, R&D institutions and companies.

  • 3. State enhances networking between the actors of innovation system. State funds research programs and funding organizations and create national and international networks for high technology research.

  • 4. State protects innovative ideas and infant R&D by supporting national research institutions and companies.

  • 5. State extends the time span for innovative research by providing risk funding and initiating new promising fields of research.

  • 6. State balances the risk that is present in R&D by providing seed money and funding the preliminary research. State can also support companies which are operating on risky but promising fields.

  • 7. State compensates negative effects of innovative R&D. State compensates environmental damages or other harms caused by the innovative R&D.


Government failure
Government failure

  • If markets can fail to accelerate innovative R&D, also the government can fail to support innovation system.

  • Innovation strategy includes politically sensitive issues which can enhance, but also hinder innovative R&D.

  • State officials and politicians are obliged to enhance domestic industries, but this can harm international companies which operate on very different environment.

  • Political decisions are tied to political elections (usually every 4yrs.) which can change the direction of innovation and technology policy.

  • Political support of R&D is often focused on spectacular large scale projects which consume lots of money but bring little technological rewards.

  • Political support of R&D is often tied with other strategies, for instance military strategy which again consumes lots of money but brings little technological rewards.


Linear innovation process
Linear innovation process


  • Linear model of innovation, from 1950’s to 1980’s

  • Basic research (universities) – Applied research (R&D institutions) – R&D (companies)

  • Separating science from technology and technology from the markets.

  • Innovation policy is based on linear progress of knowledge.

  • Innovation policy is based on idea that science is an autonomous phenomenon, but applied and R&D connected to the markets.


R & D







Basic research

Innovation system 1990 2010
Innovation system 1990-2010

  • Innovation policy:

  • Integrating public and private R&D and public funding in the seamless web.

  • Innovation system reflects the goals of the innovation policy

  • Innovation system creates long term and dynamic sytem than elimininates both market and government failures.

  • Innovaation system is chanel for public funding of science and technology.


  • Michael Porter has argued that clusters are central to any competitiveness agenda.

  • Cluster theory provides policy basis for competitive microeconomics and firm-level development.

  • In the past policy makers have used targeted incentives to support industries.

  • In the global economy, innovative-driven economy should be the focus of development policy.

  • Porter argues that it is not what a country or region produces, but how productively that leads to growth and competiveness.

  • Re-directing innovation policy to clusters, which are most promising and most aggressive in growth.

  • Clusters are not single-industry groups, but complexities in which several different industries feed each other with innovative ideas and contribute to common growth.


From clusters to shoks
From Clusters to Shoks

  • Clusters supported industrial and technology policy which aimed at enhancing industrial activity.

  • This became obsolete during the early part of the 21st century, when the globalization re-consentrated industrial production to Asia. New geography enforced post-industrialized countries to adopt new innovation policies.

  • Emphasize on the production of tacit knowledge and centers for excellence.

  • In Finland and in many other countries, innovation policy targets funding and support to dedicated fields of excellence: Energy and environment (CLEEN), metals and machine building ( FIMECC), forest (Forestcluster), knowledge and communication (TIIVIT) and health and wellnes (HW).

  • Centers of excellence offer research institutions and industry a forum for collaboration. Tacit knowledge flows from the research to the industry and the demand of knowledge from industry to research.

  • SHOKs are no longer defining the aims and goals for research but targets are defined jointly by the research institutions and industry. (Customer orientation)


Finnish innovation system
Finnish innovation system

  • Questions from Hämäläinen and Schienstock:

  • Is Finnish innovation system adequate to answer the challenges of the post-industrial society?

  • What is needed to develop the system?

  • Who should develop the system?