Stimulating demand for innovation


Rationale and objectives

In spite of long-standing efforts to boost innovation performance through supply-side policies, such as public support to higher education and research, some OECD countries face a persistent “innovation paradox” : high or rising research and development (R&D), but low rates of innovation. Today, demand-side innovation policies – from public procurement of innovation, to standards and regulations, to lead markets and user-/consumer-driven innovation initiatives – are gaining ground in OECD countries (see policy profile on innovation policy mix for business R&D and innovation in Chapter 6). This trend reflects the adoption of a broader approach to innovation policy that addresses the full extent of the innovation system and cycle. In a context of fiscal consolidation, there is also interest in using demand-side policies to leverage innovation without creating new programmes. An additional focus is innovation to meet strong societal demand in key sectors (e.g. health, environment, energy).

Major aspects

There is no single definition of a demand-side innovation policy, but it is often understood as a set of public measures to increase demand for innovations, to improve conditions for their uptake or to improve the articulation of demand in order to spur innovation and facilitate diffusion (Edler, 2007). It often aims at lowering barriers to the market introduction and diffusion of innovations. Demand-side innovation policies take a variety of forms, with innovation-oriented public procurement, innovation-related regulations and standards as the key instruments (Table 6.4). In addition, consumer policies or tax policies that affect demand for innovation (e.g. for green innovation) are also very important.
However, demand-side innovation policies, notably public procurement of innovation, are not without risk, as they may favour large firms over small firms or specific technologies and thus lead to technology lock-in.

Table 6.4 Key features of demand-side innovation policy instruments

Demand-side policy

Procurement

Regulation

Standards

Objective

Innovative product or service

Market uptake, increased competition and social goals

Market uptake, interoperability, transparency

Input

Finance, performance requirements, skills

Legal process, need to co-ordinate

Participation of standards agencies, co-ordination of participants in the standards development process

Participatory incentive

Sales, risk reduction, preferential treatment (e.g. SMEs), attraction of additional private-sector finance

Mandatory

Voluntary

Main player

Government

Government

Industry

Effects of success

Improved and less costly public services, stimulation of innovation

Reduced market risk, transparency, stimulation of innovation

Reduced market risk, transparency, increased interoperability, increased trade

Possible risks

Insufficient skills in the public sector, Lack of co-ordination across government, Idiosyncratic demand

Conflicting goals, length of the process

Technology lock-in, inadequate attention to consumer needs (with industry-driven standards)

Source: OECD based on Aschhoff, B. and W. Sofka (2008), “Innovation on Demand: Can Public Procurement Drive Market Success of Innovations”, ZEW Discussion Papers 08-052, ZEW – Zentrum für Europäische Wirtschaftsforschung/Center for European Economic Research.

Recent policy trends

The Australian Climate Ready programme provided small and medium-sized enterprises (SMEs) with support to undertake R&D, proof of concept and early stage commercialisation activities to develop innovative clean green products, processes and services to address the effects of climate change. The programme is closed to new applications. The Clean Technology Innovation Programme scheduled to open in mid-2012 will support the development of innovative clean technologies and services that reduce greenhouse gas emissions. At the strategic policy level the programme stimulates a market for technological and other innovative solutions to the challenge of climate change.
In Belgium, the Flemish government approved in July 2008 an Action Plan on Procurement of Innovation (PoI), which focuses on procurement of innovation requiring pre-commercial R&D and horizontal integration in the innovation policy mix. The government buys innovations from companies and knowledge institutes in 13 policy areas.
The Danish programme takes a user-driven perspective on innovation to strengthen the development of products, services, concepts and processes in companies as well as public institutions. The programme focuses on areas that have a strong business specialisation, that require innovative solutions to solve societal issues, or that concern public welfare.
Demand- and user-driven innovation policy is one of four key areas of Finland's Innovation Strategy adopted in 2008. Under the national innovation funding agency, Tekes, public procurement units and public utilities (at central and local level) can apply for funding for public procurement of innovations. Tekes funds can be used both for the planning and R&D stages. To support the procurement process, external advisors can be involved in the planning stage (to address legal, commercial and technological as well as user experience issues).
Korea's New Technology Purchasing Assurance scheme requires public agencies to give preference to SMEs when procuring goods and services. Under this programme, the Korea Small and Medium Business Administration finances the technological development of SMEs, and public institutions purchase the products for a certain period. The SMEs receive a technology guarantee from the government.
In the Netherlands, the Launching Customer Scheme promotes awareness and information on the use of public procurement by government procurers and suppliers. The Dutch Innovation Agency, NL Agency, complements the scheme by advising municipalities and other agencies on how to promote innovation through tendering.
The Spanish State Innovation Strategy (E2i) is developing innovation policy measures for specific markets: health and welfare, green economy, e-government, science, defence, tourism and information and communication technology (ICT). For these markets, public procurement policies encourage innovation through public-sector demand under the recently established legal framework on public contracts and on a sustainable economy.
The UK government supports standardisation in biometrics and technical standards involving interchangeability and interoperability. The objective is to reduce risk for the procurer, system integrator and end user by simplifying integration and enabling vendor substitution, technology enhancement and development.

References and further reading

Aschhoff, B. and W. Sofka (2008), “Innovation on Demand: Can Public Procurement Drive Market Success of Innovations” , ZEW Discussion Papers 08-052, ZEW – Zentrum für Europäische Wirtschaftsforschung/Center for European Economic Research.
Edler, J. (2007), “Demand-based Innovation Policy” , Manchester Business School Working Paper, No. 529.
OECD (2010), Demand-side Innovation Policies, OECD, Paris.

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Stimulating demand for innovation

  • Public procurement
  • Other demand-side instruments