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Economics & Finance

In search of an effective innovation policy

Sami Mahroum |
Sami Mahroum

Everywhere innovation has become a buzzword: in academic journals, popular media, corporate promotional materials and government strategies, writes Sami Mahroum. The use of the word has rapidly expanded from a noun to its various hyphenated transmutations.

Everywhere innovation has become a buzzword: in academic journals, popular media, corporate promotional materials and government strategies. The use of the word has rapidly expanded from a  noun to its various hyphenated transmutations. Thus, today we don’t only talk of the importance of innovation to societies, but often the importance of specific types of innovation too, such as green innovation, social innovation, open-innovation. The innovation jargon has expanded exponentially with colourful analogies ranging from innovation corridors, clusters, poles, and valleys, to “disruptive” , ‘radical’and ‘incremental’ innovations.

Not surprisingly then, the average policymaker finds herself lost in the maze of innovation studies jargon. Academics and researchers of innovation have produced a new genre of literature that is difficult to use in order to generate effective (policy) solutions. In fact, little in the way of standard public policy analysis finds its way into innovation policy work and hence too often the political, social, and economic feasibility of many recommendations is not taken into consideration.

One reason for this is the tendency of many innovation policy analysts to focus primarily on the big picture, such as the industrial structures of nations, their business cultures, education systems, and legislative frameworks. As a result, governments are often offered recommendations requiring some major socio-economic changes, ranging from calls to overhaul existing educational systems to calls for centralising (or decentralising) governance structures. The malleability, risks and costs of such recommendations often go unnoticed, and the policymaker becomes either sceptical or dismissive despite the validity of many such calls.

Deep structural, cultural changes are often difficult to implement

Governments are primarily interested in interventions that can make a system work better, rather than those aimed at overhauling a system altogether. For the majority, socio-economic re-engineering policies are too big to undertake and with no guarantees that they would deliver in practice what they promise in theory.

Historically some success stories have indeed emerged on the back of major socio-economic re-engineering plans such as the post-war European industrial oragnisation policies, the Korean Chaebol, or the Japanese keiretsu, but these were made possible by extraordinary historic conditions, such as World War II, the Cold War, and the Marshall Plan. They also took decades to deliver.

Deep cultural and structural changes are rarely achieved within the reign of one or two terms of government and are thus less likely to be adopted by policymakers. Even today, when one might assume that the global economic crisis might lead to some major socio-economic re-engineering, there have so far been no signs of governments initiating such changes. The recent failure of the COP15 climate talks in Copenhagen is a vindication of the unwillingness of governments to indulge in major socio-economic change. Instead, most governments have chosen to try to ‘fix’ existing systems rather than overhaul them.

The space between government and firms hides many of the secrets of success and failure

Individual stories of success and failure often coexist within the same macro-picture (e.g. national economy), and the policy analyst needs to understand how and why success and failure coexisted under the same socio-economic conditions.

Success stories of firms like Google, Apple, Tata, Nokia, Zara, Skype or Subaru come from places where success and failure rub shoulders. In every country and region, for every successful innovation story there are many stories of failure. Likewise, among failure exists success. Attributes associated with failure such as red tape, lack of seed funding and skills shortages do not seem to cause all firms to fail, even when these are operating in the same industries and same locations. Some important factors for success and failure must then lie in the meso- and micro-levels of socio-economic activities.

Yet while there exists a long tradition of studying the factors of success and failure at the micro-level (i.e. at the level of the firm), the meso-level, between the macro and micro remains understudied. This is the space occupied by intermediate agencies that manage and deliver public policies, as well as organisations that manage relationships with governments. This space is important because it is where the interaction between public policy and private enterprise takes place, and where success and failure can be best observed. If policy analysts want to see change happen, they need to pay more attention to this particular space as it is here where the instruments of change lie.

Towards a more effective innovation policy

How may governments then create favourable conditions for innovation? To answer this question, many governments in major advanced economies have launched national innovation strategies over the past few years. The summer of 2010 will also witness the launching of the OECD’s own Innovation Strategy. Unfortunately, more often than not, these strategies emerge in the shape of laundary lists of tall orders. The urgent need to prioritise problems and solutions in the face of scarcity and competition for resources often goes unnoticed. Consequently, too often policymakers tend to treat such strategy documents, at best, as wish lists from which to cherry-pick and, at worst, as PR material.

An effective innovation policy is therefore one that should at least involve some of the following:

First, it needs to focus more on what is urgent and less on what is desired. In other words, a greater focus on removing barriers rather than setting targets and milestones. The Silicon Valley success story was not inspired by a government-designed socio-economic plan, but by a strong culture of entrepreneurship fuelled by immigration, foreign students and venture capital. In fact some might argue that Silicon Valley businesses succeeded despite and not because of government.

Second, it needs to be based more on what is available and less on what is missing. Too often, innovation policy recommendations overlook or underestimate the existing potential and exaggerate the value of what is lacking. For example, if family and friends happen to be an important source of finance for new ventures in an area where seed capital is scarce, then introducing (tax) incentives to entice more friends and families to invest in such ventures might be a more effective policy instrument than to propose setting up a government fund. This would be an example of a policy based on what exists, rather than what is missing.

Third, innovation policy needs to recognise that the role of government can be critical without necessarily being radical and thus give priority to improving, rather than overhaul existing systems. Making adjustments to existing education systems, financing channels and public delivery institutions can be easier to achieve than creating new replica of whatever works in other countries. The Nordic countries may serve as excellent models in this regard, where socio-economic systems were improved to become more competitive and more sustainable, without doing away with the main pillars of their socio-economic systems.

For a more effective innovation policy it is important to understand the factors behind success and failure within existing socio-economic framework conditions, and then to explore and identify the most malleable interventions that can be done on the system to increase its rate of success and reduce the rate of failure. Finally, it needs be pragmatic and not ideological, and so needs not be universal and valid for all players and places at all times.

Dr Sami Mahroum is the Director of INSEAD’s Innovation & Policy Initiative based in Abu Dhabi.

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