Module 4 – Business Services for Innovators and Regulatory Aspects

 

This module stresses that innovators are first and foremost entrepreneurs and the allocation of talent towards productive activity depends on the strength of the wider innovation ecosystem. Ensuring quality control is critical, especially in developing countries, where competition often does not provide strong enough incentives for entrepreneurs to raise their standards and customers in export markets are increasingly sophisticated. A particularly pressing issue is access to finance. Because capital requirements for new firms can be very high and returns uncertain, entrepreneurs have few assets available for collateral, and good ideas may wither and perish without public intervention.  

The module briefly discusses the range of services offered wholly or partially by government that support entrepreneurship and the institutional arrangements that help maximize their impact. While public business services have value in their own right, they are sometimes poorly coordinated, resulting in a cacophony of initiatives that are difficult for entrepreneurs to locate and navigate. Incubators and science parks are support structures that provide infrastructure in addition to business services, and ensure that entrepreneurs do not function in a vacuum. Those sites promote innovation by fostering close collaboration with institutions of higher education or research institutions and emphasize the importance of proximity in successful innovative activity.  

The module then looks at the wider regulatory and institutional environment in which entrepreneurs operate. Entrepreneurs may be deterred from innovation by a thicket of land, financial and labor market frictions and barriers. Regulation is clearly necessary to correct market failures, but government can also get things wrong. In some cases, the fixed costs of setting up a supportive economic environment may not be affordable at any savings rate, but for most countries, a careful balance must be struck between under- and over- regulation. Just as important, economies must find ways to ensure that successful firms that grow repeatedly prove their competence. Otherwise, economic dynamism may become sclerotic. More competition policies can promote growth, though there are subtle and sometimes unnoticed considerations that developing countries should bear in mind. Finally, this module shows that in focusing on how to increase the supply of innovative businesses, policymakers have sometimes overlooked the importance of demand. Innovation is the creative interaction of supply and demand and traditional levers such as grants, incentives and advice can be paired with efforts to establish ‘lead markets’- demanding consumers, including the public sector, who give innovators an initial customer base from which to develop their innovations and diffuse them ahead of global competition.

By the end of this module you will:

  • Have explained and applied the financing cycle of new firms and the major principles that may assist the development of local venture capital activity
  • Have listed various business services that support entrepreneurs and their strategic relevance for innovation policy
  • Have discussed support structures and sites, such as incubators and science parks and how policy can improve their effectiveness
  • Have been exposed to real cases such as the Korean experience and Fundacion Chile, which highlight the importance of intermediary organizations in the innovation system and clarify the scope and limits of government intervention
  • Have discussed the components that contribute to a good local investment climate, and the impact of product and labour market regulation on innovation

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