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Summary literature Governing Innovations 2023
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A complete summary of the literature for the TU/e masters course Governing Innovations (0EM120). Including all exam literature from lectures 1-6.
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0EM120 Governing InnovationsQ1 2023
Innovation Policy: What, Why & How
Edler & Fagerberg
What
Innovation policy is a relatively new term. However, if we define innovation policy as a policy that has
an important impact on innovation, it may have existed for centuries (as innovation is a very old
phenomenon).
In the broad sense, innovation = “the introduction of new solutions in response to problems, challenges
or opportunities that arise in the social and/or economic environment”. It happens in all types of sectors
and countries.
Schumpeter introduced the term innovation that includes novelty (not just “new to the world”, but also
incremental improvement) and implementation. Rosenberg accentuated the importance of
implementation, explaining that improvements of an invention happen throughout the entire lifetime.
Moreover, a lot of important improvements occur in the diffusion phase, through interaction with various
parties.
Innovation policy thus needs to focus not only on the creation of new solutions, but also on their
exploitation (including feedbacks between the various phases).
Three types of innovation policies are distinguished:
1. Mission-oriented policies => aimed at solving specific challenges that are on the political
agenda. Broad approach, taking all phases of the innovation int account.
2. Invention-oriented policies => focus on the R&D phase, leave exploitation and diffusion to the
market.
3. System-oriented policies => recent phenomenon, based on “national innovation system” (NIS)
approach. Focused on system-level failures (like degree of interaction)
Why
There are several rationales for innovation policies. The two main approaches and their criticisms are
explained below.
The market-failure approach
Although just after WWII it already became clear that investment in innovation came with large payoffs,
firms didn’t undertake the investments themselves. This could be explained by the fact that the economic
gains from creation of knowledge (= most important source of innovation) could not be fully
appropriated by those creating it. The reason for this is that knowledge is a public good and can be
exploited by anyone free of charge. This is regarded as a market failure and justifies policy intervention.
Three types of instruments are used to solve the underinvestment of firms:
1. Public production of knowledge in e.g., universities and research organizations
2. Subsidizing R&D in private firms (creating additionality)
3. Strengthening the (incomplete) property rights (IPR) regime
Criticism on the market-failure approach comes in threefold:
1. As a result of the vagueness of the policy advice, governments might not have the capabilities
to improve the situation. Risk of “policy failure”, worsening the situation.
, 2. Information is not the same as knowledge. Although information might be easily accessed by
external parties, not all knowledge is scientific and/or codified.
3. The strong focus on appropriability problems is not justified in literature. Also, many firms are
not concerned about these problems, because their capabilities that underpin innovative
performance are not easily copied.
The innovation-system approach
In the late 1980’s and the 1990’s, the NIS approach emerged. Advocates of this approach focused on
the environment as a resource for firm-level innovation and looked at how policy may contribute to this.
System failures (such as the lack of firm’s abilities to engage with other actors in the innovation system)
became target of policies. The state “should not limit itself to provide funding for basic knowledge …
but also identify and rectify such systemic problems”. The innovation-systems approach thus
encompasses a holistic policy perspective.
It is important for policy makers to preserve the right balance between variety-creation (which is a source
of long run-growth) and selection-processes (which is needed for efficiency).
Selection-processes might lead to path-dependency. This makes it difficult to change course in a later
stage. Example: petrol-driven cars outcompeted electric cars. Seemed a good idea at the time, but
nowadays it is harder to shift to electric cars, as the petrol-driven car almost has (had) a monopoly in
the field.
The same goes for policies. Different countries create a different knowledge infrastructure that tends to
get a national flavor. This is not necessarily a problem, until change is needed.
How: Innovation Policy in Practice
Policy instruments = techniques developed to achieve goals referred to by policies
Measuring the effects of individual policy instruments is difficult, as they often interact, and the impact
depends on the wider working of the innovation system. There are a lot of variables that influence the
impact of instruments, such as interaction with other interventions; conditions for implementation;
national capabilities; etc.
Thus, a holistic policy perspective is important; sensitivity to context is essential and transfer of policy
from one national system to another (without contextual concern) is problematic.
,As the attention for innovation policy has grown, specialized public sector organizations focused on
innovation have emerged. The structure and priorities of these organizations differ strongly for various
countries. Some agencies have considerable independence, while others are mere implementers of
policies designed at ministerial level.
Furthermore, an increasing number of different ministries have become involved in policy governance.
This is explained by the growing view that innovation policy might contribute to solutions for societal
challenges. However, this increases the difficulty of aligning interests of all different stakeholders in
innovation policy governance. It also increased involvement of non-state actors.
A final problem with policy governance is the lack of concern for the international dimension. Although
many societal challenges reach over national borders, public innovation policy is still very nationally
oriented.
Lessons
Rothwell: “innovation policy is a fusion of previous policies/instruments carried out under different
labels”. It is relatively new and the development of “systemic” innovation policy instruments has
become the center of attention only recently. There are 5 lessons for IP:
1. Since innovation is also about the exploitation of new ideas => policies should provide direction
to innovation. Politicians should be able to define problems that they want innovation to solve.
2. Since wider societal effects of R&D subsidies are not known => policy mixes should be directed
towards policies associated with the solution of societal problems (e.g., affecting demand for
innovative solutions).
3. Since the most difficult challenge lies in “the valley of death” => policy needs to emphasize the
support of experimentation, implementation, and exploitation.
4. Since innovation can be a force of change in all parts of society => responsibility for innovation
(policy) should be broadened across parts of the government, not just one ministry.
5. Since the development of such policies is a demanding task => the capabilities of policy makers
have to be increased.
Digital Sustainability and Entrepreneurship: How Digital Innovations
Are Helping Tackle Climate Change and Sustainable Development
George et. al
Two trends are observed:
1. Sustainability imperative: heightened attention to the climate emergency and the growing need
for societal actors to create environmental and social value (either voluntarily or under pressure)
2. Digital imperative: the rapid digitalization of the economy. New technologies including AI and
ML (machine learning) offer new solutions that challenge the status quo.
The combination and convergence of these imperatives, which is beginning to gain traction, can help
lead to digital sustainability.
Digital sustainability = the organizational activities that seek to advance the sustainable development
goals through creative deployment of technologies that create, use, transmit, or source electronic data.
Note: Digital sustainability is one of the ‘lenses’ that is used in the literature to investigate sustainability
and entrepreneurship.
Overview of the Literature
Two forms of sustainability problems are explained.
Planetary Boundaries
Research shows a three-pronged overshooting of planetary boundaries through sustaining life as we
know it now. This is strengthened by industrial pollution and self-reinforcing feedback loops creating
additional GHG. Moreover, the overuse of chemical fertilizers drives nitrogen and phosphorous
, pollution, and one million animal species are threatened with extinction in the next decades, due to
habitat destruction and animal consumption.
Grand Challenges
Grand Challenges = comprise specific critical barriers whose removal would significantly help solve
globally important societal and/or environmental problems, such as global warming and aging
populations.
Addressing these challenges requires far-reaching cooperation and coordination. This grand challenges
approach includes a variety of methods and actors involved in tackling the SDGs.
Three forms of entrepreneurship are explained.
Forms of Entrepreneurship
Social Entrepreneurship (SE) = Entrepreneurs aim to improve the situation of segments of the
population. Priority is given to social wealth creation, as opposed to economic wealth creation.
This is often done in a specific geographical context, limiting scalability.
Institutional entrepreneurship (IE) = recognizes organizations’ embeddedness within their various
social, economic, and political contexts. These contexts create opportunities, and at the same time
constrain and stabilize routines.
Paradox of embedded agency: the tension between notion of actors as strategic agents and large
influence of institutions on these agencies. Actors can become motivated to change the structures within
which they are embedded.
Sustainable entrepreneurship (STE) = a progression of firm orientation, moving from separate
‘responsibility departments’ to incorporation of transformative commitment into core strategies,
practices, and processes. Ambitious STE seek for net positive impacts.
Sustainable entrepreneurs are those who: “who start a business to serve both self-interests and collective
interests by addressing unmet social and environmental needs”
Managerial Problems of Mitigating Climate Change and Advancing Sustainability
Six managerial problems undercutting positive sustainability change are addressed, based on the
activity-system perspective on business models. This perspective identifies firm’s engagement of
resources (activity) to any part of the business model as a contribution to the ‘overall objective’ (system).
Includes three design elements: 1. Content, 2. Structure and 3. Governance.
Problems of Knowing
The failure to generate and disseminate information about i.e. the impacts of our behavior. When market
prices do not reflect the unsustainability costs, market participants remain unaware of their impacts.
Organizational knowledge gaps include both known unknowns and unknown unknowns.
Problems of Valuation
The quantification of socio-ecological value is a difficult challenge. Both ‘true costs’ and ‘benefits’ often
remain outside of the market valuation. Although measuring of habitat gains is increasing, firms still
struggle to determine how much value society places on the achievement of environmental goals.
Problems of Communication
Although the negative impact of many markets on the environment is growing, sustainaibility
organizations often struggle to communicate their value propositions. This is partially due to the
complexity of sustainability efforts, and strengthened by people’s bounded rationality and limited
attention. Moreover, unsustainable product producers add to this challenge by spreading counter-
narratives.
Problems of Coordination and Trust
Coordination in sustainable impact projects is often costly, due to challenges in establishing patterns of
exchange, forging agreements, and assessing and enforcing equitable distributions of value. Trust is
required to avoid opportunistic behavior by collaborators. Next to the high collaboration costs,
sustainable businesses deal with implicit ‘sacrifice’ of added value due to positive spillovers to third
parties. This leads to reliance on altruistic support (subsidies, donations).
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