Learning and innovation is considered the engine of technological change and economic growth. Hence knowledge and innovation policies lay much of the foundation for the future welfare development of most industrialised countries.

It is therefore important that they develop sensible, coherent strategies in this area, as well as a set of policy measures that meet the specific needs of each country’s industry and social structure.

To develop such strategies, policy makers need a clear idea about how innovation takes place in society. And having taken part in research and innovation policy development both in Norway and in Europe for some 16 years, I know that that is not an easy task.

The systemic approach to learning and innovation

Innovation policies in the European countries are increasingly influenced by the so-called systemic approach to learning and innovation. It is also part of the policy discussions of countries as diverse as South Africa and New Zealand.

According to this view technological advance and competence building is characterized by constant interplay and mutual learning between different types of knowledge and actors, including firms, institutes, universities, sources of financing, relevant public agencies and more.

In short: The old linear model depicting science as the engine driving innovation is dead.

This new systemic view of technological change and competence development also forms the basis of, for instance, the EU Trend Chart on Innovation.

According to this way of thinking public authorities may encourage innovation by strengthening learning and by developing efficient networks for the distribution of knowledge and personnel. The general framework conditions for innovation, including taxation, physical infrastructure, public institutions, laws and regulations must also be taken into consideration.

This is why we now witness a new interest for the so-called third generation, “holistic”, innovation policy, i.e. an innovation policy that also includes policy areas that are not directly targeting innovation in companies as such, including educational policies and environmental measures.

Market failure

There are two approaches to the issue of rationales for government intervention in technological advance and innovation activities. One is the neo-classical market failure argument and the other is the system failure argument of evolutionary economics.

The two rationales may have different implication for what policy can and should do in relation to innovation. Both rationales give justification for government intervention, but they partly prescribe different policy instruments.

However, market and system failures are not necessarily mutually exclusive; and both require the attention of policy makers.

The traditional core of technology policies has comprised interventions such as managing the science base and designing financial incentives to industrial R&D as solutions to market failures.

According to the market failure rationale there is always a tendency for private firms to under-invest in R&D. The main argument is that companies will under-invest in R&D because they are unable to keep all the benefits from these investments to themselves. In other words: their competitors will also be able to make use of at least part of this new invention, technology or knowledge.

However, from society’s point of view these external effects (“externalities”) or spillovers may be beneficial, as they may contribute to an increased productivity in other parts of the economy (“additionality”). In order to encourage such research and increase the social returns policy makers develop R&D support schemes.

In some areas of the economy the market failure argument fits the bill. Firms may under-invest in R&D if they fear that their rivals may adapt their innovations right away.

Beyond market failure

As is often the case, however, the real world tends to be more complicated than economic theories.

Firms actually do co-operate because it makes sense. By co-operating they learn and get new trading partners.

Moreover, firms do not normally have the information needed to judge whether their competitors will gain more from their invention than themselves. They take their chances anyway, exactly because there is no such thing as “perfect information”.

Moreover, it takes time to find, understand and make use of a new technology, and during this time the innovating company might easily gain a profitable virtual monopoly.

In spite of this the market failure argument does make sense in one important respect: Society earns a lot from investments in R&D:

• Innovative companies are often profitable companies, and profitable companies lay the foundation for taxes and employment, two important factors in any welfare policy
• Innovations made – and knowledge developed — by one company will often lead to productivity growth in companies and institutions that make use of these inventions or services. The same applies to public and third sector institutions. Learning and innovation in one public institution may benefit their partners and the private and civil institutions they serve.
• Innovative companies and institutions broaden the general competence base in their area, leading to learning processes that may be used in other projects and in other areas of society
• Innovative companies and institutions may provide society with new socially beneficial products, processes and services, inventions that may contribute to the solution of important social, cultural or environmental problems
• Innovations may lay the foundation for new technologies, new branches of industry and new markets, thus creating an undergrowth of new companies that may replace firms and branches of industry that face extinction

Hence, the social rate of return may be much higher than the company’s own profit from a particular R&D program. Thus you may clearly use some kind of market failure argument to legitimize public intervention in this area. Parts of this kind of “expanded” market failure rationale can be found in what is called the systemic failure argument.

Systemic failure

In systemic “evolutionary” economic theories technology change and innovation is considered to be the most important factor behind economic growth. The issue of how technology advances and its driving forces and consequences are at the centre of this kind of evolutionary analysis.

Technological advance and innovation is characterised by constant interplay and mutual learning between different types of knowledge and actors. Technological change (including the development of services) can be seen as a learning process, which is gradual and cumulative in character.

Firms and institutions build upon their existing knowledge base when they search for new innovation opportunities, but they also use external sources of knowledge in this search . Overall performance is therefore not only dependent on how specific actors perform but also on how they interact with each other as elements of an innovation system.

This division of labour in the generation of innovations means that no firm or institution can be self-sufficient in regard to knowledge and thus gains from linkages with other knowledge generating organisations.

Through their innovative activities firms establish relations with other actors such as other firms, universities and R&D-institutes. If these market and non-market organisations interact poorly, technology change may be slowed. Mismatches between elements in an innovation system are one type of “systemic failures”.

The innovation processes are influenced not only by market forces but also by the character of the entire innovation system.

Systemic knowledge and innovation policies are about facilitation, i.e. developing the right framework conditions for the emergence of new knowledge, technology and innovation opportunities.

Systemic oriented learning and innovation policy therefore becomes a much more complex issue than in the market failure rationale. Policy makers must design and create an institutional structure that supports the innovation processes in firms.

If system failures exist then there is a rationale for policy intervention aiming at accelerating the rate of technological advance and innovation. Hence, the idea is that governments should intervene if such failures exist.

This is why the European Commission argues for the need for improving the key interfaces in the innovation system:
Every business sector, whether in manufacturing or in services, in traditional or “new economy” sectors, should aim to benefit from innovation.

For this to happen, enterprises need access to knowledge, skills, financial backing, sources of advice, and market information. While not loosing sight of the “system” view of innovation, the operation of some of these interfaces between enterprises and other innovation players need to be improved by action targeted at these interfaces.

Public sector innovation

Indeed, but this equally applies to public and third sector institutions:

The public sector plays an important role in all countries. It can be a source of innovation, and is certainly an important consumer of innovative products and services. Efficient, open and competitive public procurement can be a powerful instrument to push innovation. To develop its role as a source of innovation, the public sector could promote new types of services and the use of e-government, e-health, e-education etc.

In the future I will guess that we will focus even less on the differences between the public and private sectors, but instead study the functions the different institutions cover. Hospitals may be public or private, but they must nevertheless be considered important partners in any public welfare policy. Moreover, regardless of ownership, they may play an equally important part in innovation processes that involve institutions from all sectors of society.

Non-R&D types of learning

The systemic view of innovation has also lead to a new interest in non-R&D types of learning. The fact is that companies may perfectly well innovate without investing in R&D.

They may buy and apply technologies developed by others, they may focus on incremental innovation (step by step improvements of production processes, products or services) or they may innovate by the way of branding and marketing.

It might be that we will have to change our perspective a bit to get a grip on the whole concept of innovation. Maybe we should talk just as much about “competence-systems” as “innovation-systems” in our discussions on innovation policy.

This strong focus on learning in the broad sense of the word does not necessarily mean that research and development becomes less important. As a matter of fact, I believe the opposite to be true. We will now have to focus more on the indirect effects of research.

To give an example: University research do bring forth new ideas, products and processes. But its main importance for industrial performance may be that university research functions as a learning arena for students and PhD-candidates. It teaches them the theory and the methodology — the “craft” of science — and makes them able to find, understand and make use of knowledge developed elsewhere. This is exactly the kind of competences many companies need, even those companies that do not do much R&D themselves.

This text in based on work done within the framework of the PUBLIN project under the EU 5th Framework Programme at the Norwegian STEP/NIFU STEP institute, as well as studies under the EU Trend Chart on Innovation.

See for instance the PUBLIN summary report for a list of relevant litterature.

For a general introduction to innovation theory, see Jan Fagerberg: The Oxford Handbook of Innovation.

The Wikipedia has a short article on innovation systems.