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Economic rationales of government involvement in innovation and the supply of innovation-related services

This paper presents the economic rationales of government intervention into innovation activities and into the supply of innovation-related services as inputs in innovation processes. There are two approaches to the question of the economic rationale of government involvement in technological advance and innovation activities. One is the neo-classical of market failure and the other is the evolutionary economics or the innovation system approach of system failure. The traditional rationale for technology policy has been that of market failure. Government can intervene to provide for public goods and to mitigate for externalities, barriers to entry, information asymmetries etc. However recent research demonstrates ways in which the factors shaping technological progress call for government measures to address system failure i.e. the lack of coherence among institutions within an innovation system.Following a review of the static efficiency market failure approaches to innovation and technology policy, the paper surveys various approaches to identify and describe system failures. System failures within an evolutionary framework may create low-growth traps where the growth-generating evolutionary mechanisms themselves are impaired. Given the characteristics of the market system in an evolutionary framework, these failures in dynamic efficiency terms imply considerably enhanced challenges for the policy maker.Current trends in technology and innovation policies reflect the change in the perception of the rationale and effectiveness of government measures. 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. This repertoire has been enhanced with instruments to overcome system failures such as promoting co-operation between firms, universities and government laboratories and changing the design of institutions and incentives (Andersson, 1998).Systemic evolutionary innovation implies that policy making itself becomes an adaptive and learning-based activity. The current standpoint of the OECD is that market and system failures are not mutually exclusive but that both require attention by policy makers. Each has its limitations and pitfalls. Market failure remains the basis for technology policies in many areas. At the same time factors shaping technological progress increasingly call for strategies that can cope with system failure and achieve coherence among underlying institutions and incentive structures. Government has a role to optimise the contributions of innovation and technology diffusion for the economy as a whole (OECD, 1998).

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Paper provided by The STEP Group, Studies in technology, innovation and economic policy in its series STEP Report series with number 199908.

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Handle: RePEc:stp:stepre:1999r08
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