Policy rationale for innovation support

1

• Policy rationale for innovation support
• Mini-study 2 (Hugo Hollanders)

2
Objective of the mini-study

• Which persisting barriers hamper enterprises to
  innovate?
• What are the major market failures that need to
  be addressed to fully exploit the innovation
  potential in Europe?
• What does economic theory suggest, and which
  needs for innovation support are supported by
  empirical evidence?

3
Most important hampering factors (CIS-4)

• Cost factors
• Lack of own funds (21)
• Lack of external funds (15)
• Market factors
• Markets dominated by established firms (13)
• Uncertain demand for innovative products (12)
• No demand innovative products (6)
• Knowledge factors
• Lack of skilled personnel (11)
• Difficult to find cooperation partners (8)
• Lack of information on markets (6)
• Lack of information on technology (5)

4
Different market failures, different markets
5
Technology market

• Technology is non-rivalrous and non-excludable
• Market fails too little investment in RD
• Knowledge spillovers
• Rent spillovers
• Market fails too much investment in RD
• Business-stealing-effect
• Market fails but built-in correction mechanism
• RD co-operation
• RD networks
• Technology is rivalrous (whereas the diffusion is
  non-rivalrous)
• No market failures

6
Product market

• Competition favors innovation
• Theory but only up to a certain inflexion point
  inverted U-shaped relation
• Empirical evidence different shapes for
  different industries
• Inverted U-shaped Food, Chemicals, Machinery,
  Automotive
• Concave Energy
• Linear Aerospace, ICT
• U-shaped Textiles
• Inflexion points not known to policy makers
• Market failure might result from entry barriers
  protecting incumbents

7
Financial market

• Market failures resulting from imperfect and
  asymmetric information
• Adverse selection
• Moral hazard
• Market failures affect in particular SMEs and
  Start-ups
• But built-in correction mechanism
• Banks act as screening and monitoring device

8
Labour market

• Human capital drives productivity growth
• But no empirical evidence that human capital also
  drives innovation
• Market failures results from
• Poaching externalities
• Hold-up problems
• But only weak empirical evidence for the
  existence of such failures

9
Education market

• Market failures resulting from imperfect and
  asymmetric information
• No empirical evidence

10
Summary
11
Need for policy intervention

• Risk of government failures when governments
  intervene to correct for market failures
• Subsidies and tax credits can replace private
  investments
• An increase in investments could result in higher
  wages
• Lack of knowledge about which innovation projects
  are socially most productive
• Lack of knowledge about competition inflexion
  point
• Income-equality policies create reduces
  incentives for on-the-job training in the labour
  market
• Evidence from the Innobarometer (2007)
• For most firms that have received publicly funded
  innovation support, this support was not crucial
  for their innovation activities