Governments: The Next Heroes
of Innovation
As the world’s biggest buyers of goods and services,
governments can play a starring role in the pursuit of knowledge-economy
reforms.
The
word “innovation” tends to conjure up images of eager start-up entrepreneurs
or, alternatively, that of global corporations endowed with R&D
budgets the size of small national economies.
Less vivid in our imaginations, but often just as active, governments seek to
harness innovation as a means to enhance their country’s position in the new
knowledge economy.
Government-driven
innovation is not, of course, a new concept. Take France. In the 1960s and 1970s,
it pushed for the TGV, the high-speed train that was then a radical idea.
Around the same time, the French and British governments absorbed the
development costs of the Concorde supersonic airliner. In 1978, France’s
national postal and telecommunications services started designing Minitel,
one of the world’s most successful pre-World Wide Web online services.
In
2015, a survey by
the OECD found that 80 percent of its member countries took measures to support
innovation procurement, with initiatives in sectors as diverse as telemedicine,
lighting, traffic management and energy. Of course, innovation itself is on the
radar of many more states. With its Smart Nation initiative, Singapore shines
brightest among Asian countries on the 2017 Global Innovation Index (GII).
In the MENA region, the United Arab Emirates defined innovation as one of
the pillars of
its transformation from an oil-based economy to a knowledge-based one. Case in
point, in October 2017 the UAE appointed the
world’s very first Minister for Artificial Intelligence.
Pushing
innovation in smaller, domestic firms
The
Gulf States are using their sizable oil & gas revenues to develop
innovative sectors such as aerospace, semi-conductors and renewable energy,
anchored around high-profile foreign investments. In our working paper, “The Role of
Demand on Innovation: Evidence from a Resource Rich Economy”,
Elif Bascavusoglu-Moreau and I look at the particular case of Abu Dhabi and
show that the Emirate could leverage public procurement to further spur
innovation, especially among smaller, domestic firms.
We
examined the data from the 2012 Abu Dhabi Innovation Survey (ADIS), a measure
of innovation performance based on international standards. A total of 480
firms indicated whether they had introduced any new or significantly improved
goods, services and/or processes in the four years prior. They were also asked
about their knowledge flows and whether their innovations had been borne out of
private (B2B or B2C) or public demand (i.e. government contracts and tenders).
Amid
other findings, our data showed that the smaller the company, the higher the
impact of public demand on innovation. This suggests that public
procurement has a role to play in stimulating innovation among small and medium
enterprises, which comprise 88 percent of the Emirate’s home-grown firms.
Larger firms are capable of generating their own innovation systems and are
less influenced by related policies. However, public demand does uplift
innovative local start-ups.
Government
contracts as a carrot for innovation
In
2016, Abu Dhabi government spent around US$6.5 billion on goods and services
alone, according to IMF data. Other non-specified expenditures on development
projects amounted to around US$40 billion. An innovation-oriented public
procurement policy could leverage these monies and enable the Emirate to
transition into a knowledge-based economy more quickly.
Such
a public procurement policy could be two-pronged. First, it could make it
mandatory for any service or product provider to locally source whatever exists
locally, a concept known as “local content”. Norway is often cited as a model
case study: When its offshore industry picked up in the 1970s, it developed a
formidable indigenous energy service industry by requiring that government and
international oil companies give preference to
Norwegian goods and services (provided these were competitive based on
predefined criteria).
Second,
government could push innovation by setting high technological specifications
for its projects. By doing so, it would create a “carrot” for local or even
international players to develop new technologies, as this would be key to
secure lucrative government contracts. Firms on the fence about investing in
R&D, especially smaller ones, could be pulled in the right direction.
Currently, Abu Dhabi’s procurement standards do not have any innovation-driving
component. This means that for the most part, providers only need to bid lower
to secure a contract. This is a wasted opportunity.
A
clear partnership
However,
researchers from Austria and
the Netherlands have
shown that it’s not enough for a government to just exercise its procurement
power to drive innovation. The government must also be quite specific in its
demands and articulate exactly what it wants. For example, it could require
that a power utility use a technology emitting zero CO2 (instead of merely
asking it to be “highly efficient”). Specific requirements should set actual
targets and leave no room for ambiguity.
At
the end of the day, the government is the main partner for private sector
innovation. The business of doing business with government needs to be better
understood but, for the most part, business schools haven’t really taken
interest in it. A notable exception, INSEAD has introduced public policy within
in its “Business in Society” core course, part of its new MBA
curriculum.
Governments have traditionally
sought to foster the right conditions for the private sector to supply
innovation. As the world transitions to a knowledge economy, it may now be time
for more of them to step up their game by playing a starring role on the demand
side of the equation
Sami Mahroum, INSEAD Senior Lecturer | November 7, 2017
Read more at
https://knowledge.insead.edu/economics-finance/governments-the-next-heroes-of-innovation-7621?utm_source=INSEAD+Knowledge&utm_campaign=16752658c3-EMAIL_CAMPAIGN_2017_11_09&utm_medium=email&utm_term=0_e079141ebb-16752658c3-249840429#w9WHlb2oR4110J5f.99
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