View on Private Sector: Innovation ‘spillover’ missed

Officials from the UN Conference on Trade and Development (UNCTAD) recently told SciDev.Net that they have found high-level policymakers from many nations have a poor understanding of how best to support innovation in firms.

I recently attended an UNCTAD expert meeting on fostering private sector innovation for development. There the agency announced it was launching a programme to train policymakers across the world in how to deploy policies that encourage innovation. At the meeting I met Bart Verspagen, the director of the UN University Maastricht Economic and Social Research Institute on Innovation and Technology.

Verspagen told me he thinks there is one crucial issue the UN’s capacity building programme should address: that assessments of innovation policies often fail to capture what economists call externalities — the spillover benefits for a country’s business ecosystem that occur when individual firms innovate.

For example, says Verspagen, knowledge created by a research and development (R&D) project could flow to other firms when they see how a product performs in the marketplace and imitate it. The innovation could be anything from alternative ways of packaging fruit to a new gadget or tool.

“There are all sorts of very good reasons why evaluators would want to go to this microlevel; it has a statistical power that means you can really identify specific policy effects.”

Bart Verspagen, UN University

There is a reason why policymakers overlook spillover benefits, says Verspagen. Over the past five years or so, there has been a trend for governments to develop evidence-based polices in all kinds of areas, including those related to innovation. And they believe that the most rigorous way to evaluate them is to compare one firm where a policy is in place with another where it is not.

“There are all sorts of very good reasons why evaluators would want to go to this microlevel; it has a statistical power that means you can really identify specific policy effects,” says Verspagen. But by doing so, the benefits for other business are not taken into consideration, he points out.

He offers me an example: “Let’s say you give a firm a €1 subsidy for doing R&D. Then, when you evaluate, you might find that it only spent about €0.6 on R&D. Which means it’s taking the euro, but not using it fully for research. As a policymaker, you would have hoped that the firm would spend the €1 and maybe even a bit more on research. So this would be the typical kind of result that — if externalities aren’t taken into account — would not be encouraging for a policymaker.”

Verspagen says that microlevel assessments are the latest line of thinking in innovation policy evaluations. Developing nation governments are increasingly using them, while they are already routine tools for policymakers in developed countries and Western donors who wish to assess their aid projects.

Giving policymakers from the developing world a better understanding of externalities is one crucial element that UNCTAD’s training on innovation assessment should include, according to Verspagen. He plans to work with the agency in the coming months to help develop the necessary materials.