Facilitating links to internalise spillovers

Policy analysts interested in innovation commonly talk about a “national innovation system”. This concept emphasises formal and informal networks and other links between the various players involved in knowledge creation, dissemination and use. Where these links exist and are active, spillovers occur and knowledge is more effectively disseminated and applied where it is valuable. The innovation system works better where flows are two-way with feedback loops from users to researchers and vice versa.

Government can undertake various measures to encourage networks and links. For example, it can:

• pass legislation to enable members of an industry to levy themselves for the purpose of funding joint research (the New Zealand legislation is called the Commodities Levy Act);
• fund scholarships and fellowships to facilitate the movement of researchers and research users between firms, universities and public labs and between countries; and
• encourage research consortia by part funding research programmes agreed among a number of partners including research organisations and end-users.

Subsidising the supply of “knowledge workers”

Subsidising R&D at the point of R&D expenditure is subject to two potential problems. First, there is the risk that the government will try and fail to “pick winners”. Secondly, attempts to lift levels of R&D too quickly by boosting demand for R&D may simply raise the incomes of the current fixed supply of workers with specialist R&D skills, with little rise in the actual quantity of R&D performed.

Romer (2000) argues that a good way for governments to encourage the creation and use of knowledge but avoid these two problems is to subsidise the key input to these activities namely knowledge workers. This would involve subsidies for the education and training of scientists, engineers, and mathematicians. Romer argues that it is not necessary to require the scientists or engineers to work in research. Economic gains accrue simply by having more people trained in science and the problem-solving scientific method to boost the creation, dissemination and use of knowledge.

Further options

The above options are the most common. But others are possible and have been used – some famously so. For example, the French government effectively combined the patent system with public purchase when it bought the patent rights for photography from inventor Louis Daguerre in 1839 and made them freely available. As a consequence photography spread rapidly.

Governments or private benefactors have sometimes offered large prizes to the first person to come up with a solution to a particular problem or challenge. A famous example of this was the British Admiralty’s offer in 1714 of a large prize to the first solution to the problem of determining longitude – critical for accurate marine navigation. The prize stimulated much ingenious research and building of devices and was eventually awarded to John Harrison. He worked along quite different lines to the scientific orthodoxy of the day by inventing an extremely accurate ship’s clock or chronometer. (See Dava Sobel’s popular science book “Longitude”.)

Foundation policies

In addition to specific institutions and policies around knowledge, a country’s broader “foundation” policy settings will have a very strong influence on all innovation processes: knowledge creation, absorption and application. Macroeconomic stability, financial market development, pro-competitive product and labour market regulation, international openness (particularly to FDI), and the level/volatility of the exchange rate all have an important influence on a firm’s incentives and ability to innovate. OECD research suggests that these framework conditions are at least as important for innovation as specialised institutions and policies.