Demand-side policy instruments for innovation in firms

The objective of demand-side policies is to increase demand for innovation so as to to create bigger incentives for innovation, to improve conditions for the uptake of innovations, and to speed up the diffusion of new technologies. The rationale for demand-side innovation policies is often related to the need to stimulate innovation in areas where societal needs are pressing and where government action can complement market mechanisms with, ideally, minimal financial outlays. In most OECD countries, governments have paid an increased attention to demand-side innovation policies in recent years.
 
Page Contents:

 

What are demand-side policy instruments for innovation in firms?

The objective of demand-side policies is to increase demand for innovation so as to create incentives for innovation, to improve conditions for the uptake of innovations, and to speed up the diffusion of new technologies (Edler, 2007). Demand-side innovation policies are often used to boost innovation performance in areas of strong societal demand such as health, population ageing and the environment. They have also received increasing attention as they might help improve the efficiency of public spending through innovation.
 
Demand-side policies may include different policy domains and support innovation in various ways:
 
 
In most OECD countries, governments have paid an increased attention to demand-side innovation policies in recent years. This evolution can be explained by a greater awareness of the importance of feedback linkages between supply and demand in the innovation process a general, and a general perception that traditional supply-side policies have not been able to bring the desired outcomes. Furthermore, pressures on public spending create incentives to explore how demand-side policies might boost innovation without new programme spending.

 

What are the rationales for demand-side policy instruments in support to innovation in firms?

Demand-side innovation policies respond to situations in which barriers affect the expression of demand and market introduction and diffusion of innovations. These barriers include a lack of interaction between producers and users (producers do not know users’ preferences, users do not know about innovations that might be useful to them), and high switching cost to new technologies due to “lock-in effects” which can lead to technological path dependencies and high entry costs (Edler, 2007). 
 
The rationale for demand-side innovation policies is linked in general terms to the need to stimulate innovation in areas where societal needs are pressing (e.g. health, environment) and where government action can complement market mechanisms with, ideally, minimal financial outlays. But specific rationales pertain to individual demand-side instruments. For example, procurement processes can help accelerate the emergence of technologies for which there is an urgent time bound societal need. Innovation-oriented public procurement can also be designed to help counter gaps in the supply of risk finance for small early stage ventures. By contrast, the rationale for government action in the area of technical standards is somewhat different, corresponding to public-good characteristics possessed by such standards. The development of standards is likely to experience some degree of market failure. By itself, the market may provide too few standards. Creating standards entails fixed costs, while the gains may not be appropriable by the individual firm.

 

Examples of demand-side policy instruments for innovation in firms.

The table below provides a set of examples of demand-side policy instruments in support of innovation in firms:

Policy instrument

Objective of the policy

Condition/Node

Rationale

Mechanism

Public procurement tenders for innovative entrepreneurs

Reduce the barriers for innovative entrepreneurs accessing public procurement

·  Public procurement for innovation (see Public procurement for innovation)

·  Innovation procurement schemes (see Innovation procurement schemes)

Institutional failure (potential biases against SMEs in public procurement)

Regulatory

Proportionate qualification levels and financial requirements

Reduce the barriers for SMEs accessing public procurement

·  Public procurement for innovation (see Public procurement for innovation)

·  Innovation procurement schemes (see Innovation procurement schemes)

Institutional failure (potential biases against SMEs in public procurement)

Regulatory

Cost-reimbursement contracts

Reduce the technological risks associated with the risks of non-completion owing to technical features of the procured good or service.

·  Public procurement for innovation (see Public procurement for innovation)

·  Innovation procurement schemes (see Innovation procurement schemes)

Market failure due to uncertainty

Regulatory

Guidance, tools and support for innovation-oriented public procurement (including examples of best practice, sample documents)

Stimulate innovation-oriented public procurement within public agencies

·  Public procurement for innovation (see Public procurement for innovation)

·  Innovation procurement schemes (see Innovation procurement schemes)

Capability failures

Service or information

Creation of incentives to stimulate private demand (e.g. through guaranteed tariffs for innovative products or services)

Develop lead markets to help innovating firms achieve

critical mass and competitiveness, bring prices down and encourage further diffusion and adoption of innovations.

Markets, Competition and Standards(see Markets, Competition and Standards)

Market failure

Regulatory

Creation of standards

Reduces risks for consumers, and foster, thereby, diffusion of innovation

·  Markets, Competition and Standards (see Markets, Competition and Standards)

·  Standards and certification (see Standards and certification)

Market failure

Regulatory

Consumer policy and education to enhance user-led innovation

Promote innovation in key innovative markets, ensure that confident consumers make informed choices, and counter inertia and scepticism towards new goods and services

Markets, Competition and Standards (see Markets, Competition and Standards)

Capability failures

Service or information


Source: OECD (2011), Demand-side Innovation Policies, OECD Publishing. doi: 10.1787/9789264098886-en 
 
Contributor: OECD
 
References
  • Edler, J. (2007), “Demand-based Innovation Policy”, Manchester Business School Working Paper, No. 529.
  • OECD (2012) “Stimulating demand for innovation”, in OECD Science, Technology and Industry Outlook 2012, OECD Publishing. doi: 10.1787/sti_outlook-2012-en
  • OECD (2011), Demand-side Innovation Policies, OECD Publishing. doi: 10.1787/9789264098886-en
  • OECD (2011), “Demand-side policies to support innovation: Trends and Challenges” in Business Innovation Policies : Selected Country Comparisons, OECD Publishing. doi : 10.1787/9789264115668-en
Printer-friendly versionPDF version
Innovation in Firms

Table of Contents

Relevant Indicators

Image description here.