Innovation Policy

Correcting for market failures

• Negative environmental effects are not correctly reflected in the market price

• -> Policy can correct this market failure by providing investment or market incentives

Shaping the innovation process into the desired direction

• The innovation process is non-linear. It consists of several feedback loops.

• 3 different types of innovation policy:

  • Technology Push Policy: Increase the supply of technologies by directly fostering advances in science (e.g. R&D funding or tax-credits for firms investing in R&D)

  • Demand-Pull Policy: Stimulate demand or alter market conditions (e.g. quantity-setting market instruments such as renewable portfolio standards or investment subsidies)

  • Systemic interface improvements: Improvements of the entire innovation process and feedback mechanisms

Effectiveness of policy can depend on technology characteristics. Different technologies follow different innovation patterns (e.g. wind and solar energy)

Policy can result in premature lock-in effects (e.g. demand-pull policies have pushed only one type of solar energy, thin films (premaature technology) did not have the chance to diffuse into the market.)

Policy can have unintended effects (e.g. policies disadvantages the diffusion of batteries in Germany and California)

Policy can create strong international spillovers (e.g. in the solar industry, national policy instruments lead to stron innovative outputs outside the country)

Policies that foster interaction can play an important role (e.g. Lithium-Ion Batteries: the establishment of platforms and networks fostered innovation)

There is no one-size-fits-all solution that lasts forever.