National policies for science, technology and innovation can be key to a country's development. But what elements must be in place for such policies to succeed — and also to evolve as the country progresses?


National policies for science, technology and innovation (ST&I) are now widely recognised as having an important impact on a country's growth and development prospects. These policies are particularly relevant in the developing world. Developing countries often lack significant ST&I capacity, yet all face the challenge of catching up with more advanced economies if they are to compete effectively in an increasingly globalised marketplace, to overcome their relative underdevelopment, and thus eventually to eliminate poverty within their societies.

ST&I policies have many different components. They include measures to promote research and technological progress directly, whether in regions, industrial sectors or national economies. But the relevant policies also embrace the institutional, organisational and politico-administrative measures needed to strengthen national systems of innovation,[1] as well as to integrate such systems into a country's wider policy framework.

This policy brief starts from the premise that although the operation of the market and the development of the private sector are necessary for the emergence of an effective system of innovation, they are not enough on their own. Government action is also required. And it is from this 'governance' perspective that the paper addresses the challenges faced by developing countries when drawing up rules and public policies covering ST&I activities.

In particular, the brief focuses on the role and responsibilities of governments in supporting science, technology and innovation, on the principles that should guide their policies in these fields, and on the importance of building effective governance structures to put such policies into practice.

The role of policy in innovation systems

Over the past two decades, it has become increasingly clear that an effective national system of innovation is required if a country is to harness the potential offered by modern science and technology to its social and economic needs. This awareness has replaced an earlier belief that heavy investment in scientific and technological research, and the purchase of technology from abroad, were sufficient to achieve these goals.

Yet, national innovation systems do not emerge automatically whenever a country industrialises; innovation and technological progress can both be hampered by market failure, in the sense that the market alone may not provide sufficient incentive to stimulate adequate investment. Furthermore, even where such systems do exist, they may not operate efficiently, as they can be undermined by institutional, organisational and network failures.

These kinds of failures can be hugely problematic. And developing countries, as well as those with economies in transition, are particularly sensitive to them.

These countries tend not only to lack developed capital markets, but also to face problems of insufficient coordination between the elements of their system of innovation, uncertainty about the risks involved in investment decisions, and inadequate guarantees of returns from investment in innovation or knowledge production.

Even worse, the formal and informal networks of individuals, research organisations and innovative firms — each an essential channel for transferring tacit technological knowledge — may simply not exist. And where they do, they may be plagued by inertia, making them unable to react flexibly to changing technological opportunities.

There may be further issues concerning laws, regulations and organisations that perform such crucial roles in a system of innovation. The key laws and regulations in this context include contract and company law, bankruptcy regulations, patent law and the protection of intellectual property rights.

More informal norms and cultural issues can also be important, such as entrepreneurial spirit, reciprocity and mutual trust in sharing information and transferring knowledge. Relevant organisations include universities, research institutes, intermediary agencies that act as information brokers, and business associations or financial organisations that supply either long-term investment or venture capital.

Many developing countries have at least some of these elements. But they may lack adequate co-ordination between them, or even not have enough elements to enable the system to operate effectively.

Such kinds of failure cannot usually be resolved by the private sector alone. The state needs to stimulate coordination between organisations in the private sector, improve the exchange of information between the private and public sectors, and strengthen institutions that foster learning processes, indigenous innovation and technological diffusion.

At the same time, there are limits on what policy makers and bureaucrats can achieve. For example, they frequently lack appropriate information about the market. They may also lack information about new technological developments, particularly since research and technological activities are usually tailored to fit specific contexts, and yield results that cannot be fully codified in written documents (and thus transmitted between organisations).

They may also be pursuing their own, relatively narrow political or bureaucratic goals. Both tendencies can undermine a government's efforts to stimulate innovation. It is therefore important to remember that the basic role of government in such circumstances is not to substitute the operation of the market, but to enhance the way it operates.

Globalisation puts additional pressures on national governments to act. The dynamic, international interdependence of the flow of goods and resources — as well as the impact of financial markets on both — gives developing countries opportunities to participate more effectively in the international division of labour.

But globalisation does not automatically mean that the gap in income levels between developing countries and more advanced nations will either shrink or widen. It is up to individual countries to ensure that they reap the benefits of globalisation (as well as minimise its less desirable effects). To do so, they need to strengthen their capability to conduct ST&I policies.

In fact, developing the capability to formulate a workable ST&I policy can be a key factor in establishing a sustainable 'catch-up' process. This is true in both an operational and strategic sense.

Developing countries usually start accumulating operational capabilities in policy-making by codifying and recording their experience of how to design and implement policies. Where successful, this can create a 'virtuous cycle' in which the policy arena and the business sector co-evolve, and operational policy capabilities continually accumulate.

As a country reaches higher stages of economic development — and as international markets change in the course of globalisation — new kinds of policy capabilities will have to be developed. This shift requires another form of policy competence: the ability to set strategic priorities, and translate these into incentive programmes and institutional changes.

Science, technology and innovation policies in developing countries

The social rate of return from investment in ST&I tends to be smaller in developing countries than in developed ones. This can result from the failures in the operation of markets, networks and institutions noted above, which undermine the working of innovation systems as a whole. Or it can be due to a lack of the technological, economic and political institutions that facilitate the creation, diffusion and application of technologies.

But the difficulties faced in creating effective national systems of innovation are not identical for all developing countries. A recent study by the RAND Corporation drew up a composite index that measures a country's capacity to carry out scientific research and foster technological progress, as well as offering pointers to policy measures that might strengthen specific national systems of innovation.[2]

RAND's S&T capacity index is based on country level data, and covers both inputs and outputs. For example, it takes into account factors such as spending on research and development as a proportion of gross national product (GNP) per capita, as well as the numbers of engineers and scientists, patents issued, articles published in science and technology journal articles, and research organisations.

According to the RAND analysts, the countries included in the index can be divided into four groups. The first, made up of 'scientifically advanced countries', include Japan, South Korea, Taiwan, Russia, Australia, Israel and developed economies from Western Europe and North America. These possess capacities in all areas of science and technology, and perform better than the international mean.

A further 24 nations, mainly 'transition' and 'emerging' economies in Asia, Latin America and Europe, belong to the so-called 'scientifically proficient countries'. These perform at, or slightly above, the international average on some science and technology activities, but do not show uniform capabilities across all S&T indicators.

Some of these countries meet world-class standards in particular subfields of science; Brazil, Poland and Spain, for example, have successfully raised their international S&T profiles in recent years. But generally, countries in this category lack important elements of a national system of innovation.

The third category, labelled 'scientifically developing countries', is made up of 24 nations whose scientific capacity is below international average. These invest substantially in science and technology, have a reasonable ability to attract international research partners, and can participate at some level in international ST&I activities. Some of them, such as Argentina, Chile and Latvia, are close to the second category, but lack an appropriate technological infrastructure.

The last group has been labelled by the RAND study as 'scientifically lagging countries'. It is the largest group made up of 80 nations that fall well below the international average in all components of the S&T index. These countries usually lack both appreciable indigenous S&T capacities, and 'enabling conditions' within their political, economic and scientific systems and infrastructure. As a result, they are currently unable to generate new knowledge, and have only a limited capacity to absorb technologies that are available in the international market.

The design of ST&I policies to support the development of capabilities is fundamental in making the transition to higher levels of technological and economic development.

Designing coherent policies

It is becoming increasingly clear that the main reason for the difficulty in building up an adequate capacity in science and technology (and moving up the scientific and technological ladder) is insufficient government capabilities and effectiveness — in other words, a lack of good governance.

To overcome any relative backwardness in economic development, developing countries need to strengthen both their ST&I policies and their national systems of innovation. And to do this, they will need an effective state apparatus for designing and implementing coherent innovation policies, establishing market institutions, and enforcing the rules of the game. 

ST&I policies in both developed and developing countries are embedded in a complex policy framework that is often subject to pressures from a range of social groups. As a result, designing national ST&I policies usually results in a policy mix that reflects diverse objectives and interests.

In order to ensure the coherence, consistence and efficiency of ST&I policies, policy makers should adhere to several principles that have emerged over the last decade as the result of analyses and increased understanding of how innovation processes and technological accumulation works. These principles include a commitment to: [3]

  • developing successful networks between the state, academic organisations and industry, to increase the efficiency of the innovation system;
  • fostering flexible research organisations that can adapt and meet changes in research objectives over the course of national economic development;
  • self-sustainability, with an emphasis on temporary rather than permanent government support;
  • competition among the organisations that form the innovation system, requiring a transparent (and predictable) market-oriented regulatory and legal framework;
  • a lack of bureaucratic rigidity in research organisations;
  • continuous evaluation;
  • techniques for risk analysis and risk management;
  • ensuring subsidiarity, in other words, that ST&I issues should be handled by the lowest competent level – so decisions on diffusion activities, for example, can be taken at the regional level.  The role of central government will be restricted to mission-oriented policies — which focus on the development selected technologies considered to be strategic for a country — and to create a 'level playing field'.

The extent to which a country adheres to these principles — as well as their significance for that country — depends on the stage of development that it has reached, and the capacity of its governance structures.

Developing efficient governance

ST&I policies are only effective and sustainable when a government can formulate and implement them effectively. The basics for this capacity are a stable macroeconomic framework, open markets and secure private property rights. Also important is a secure politico-institutional foundation for formulating and implementing policy and enforcing regulations. All these requirements translate into the need to create a market-enhancing governance structure (MEGS).

Governance, capacity building and ST&I policy

Governance concerns the capacity of a country's institutions — including both the formal and informal rules by which it operates — to implement and enforce market-oriented public policies and to improve coordination of activities in the private sector.

Effective governance structures are based on four key principles: accountability, participation, predictability and transparency. These are required for the sound management of public resources. They are also essential in creating an enabling environment for the private sector — as well as a productive partnership between the public and private sectors — that do not degenerate into closed circles of influence.

Capacity building in the public and private sector is a precondition for achieving these principles, as well as for designing and implementing public policies, including innovation policies.

What it entails is improving the ability of public sector organisations — possibly in cooperation with other organisations — to perform appropriate tasks. It may involve institution building (replacing less efficient rules by more efficient ones); organisational restructuring (designing organisational forms better suited to new rules); and human resource development, especially through training.

Some of these tasks focus on essential public sector functions, such as establishing a market-friendly legal and regulatory framework. Other tasks might be defined by necessity, history or specific situations within a given country. In most developing countries, capacity building is particularly needed in areas such as public sector reform, decentralisation, crafting public-private interfaces, legal reform, and enhancing the transparency of political decision-making and policy implementation.

Market-enhancing governance is a concept based on the principles that must be followed to achieve specific policy objectives, such as the exploitation and enhancement of an economy's potential for innovation, and policies that promote growth.

The key objectives of such a governance structure should be to ensure that public policies are properly implemented, that private businesses are able to thrive within a stable institutional framework, and that political and economic institutions can adjust to a changing technological, economic and international environment.

This kind of governance structure allows experimentation, trial-and-error searches for best policy solutions, and a smooth modification process for policy portfolios that fail to achieve their goals.

Ingredients of a flexible MEGS

In order to create a workable MEGS, institutional reforms are often necessary. Market-oriented tools, such as performance contracting, merit-based recruitment and promotion, as well as competitive wages in public administration, are usually required. So, too, are performance-based statutory boards, anti-corruption agencies, and proper auditing and accounting procedures.

Agencies responsible for ST&I policies may also need strengthening. One way of doing this is to create coordinating (or bridging) agencies and advisory councils, as well as institutions designed to improve the flow of information between government departments, research organisations and industry.

Concrete demands on bureaucratic capability differ substantially across sectors, as well as over time. They are also contingent on the kind of ST&I policy that is pursued by policymakers. When an economy moves toward a higher level of technological development, demands on administrative capacities will change.

New challenges require new skills and new institutional arrangements. This happens, for example, when a government stops providing public goods directly and shifts to contracting-out, limiting itself to setting terms of procurement and defining regulatory rules.

The availability of new organisational, managerial and technical skills is also important, particularly when centralised institutions that guide policymaking are replaced by decentralised arrangements. Effective public-sector governance must therefore be seen as a dynamic process in which policy makers have a responsibility to ensure that institutions match policies, and vice versa.

But an effective governance structure for ST&I policymaking needs more than a competent and relatively independent public administration. While remaining relatively autonomous, it must also be sufficiently embedded in the economy to have access to the decentralised, industry-specific and local information that it needs for policy making.

One way of doing this is by building a transparent and formal interface between government, business and research departments and organisations that involves industry representatives as well as scientists and policy researchers. Such an arrangement not only encourages the exchange of information, but can also facilitate risk sharing and enhance administrative flexibility.

Such public-private partnerships include 'co-production', as well as 'deliberation' councils — formal channels of representation for business inputs into the policy process — established successfully in South Korea, Thailand and Malaysia.

But the effectiveness of deliberation councils depends on various factors. These include, for instance, the size of the private sector and the economy's stage of development. If the private sector is too small, a deliberation council may lead to collusion and non-productive profit-seeking activities which do not enhance the economy.

Consultative processes that pool knowledge and financial resources from both the public and private sectors tend to work well in the 'catch-up' phase of economic development, for example by reducing the inefficient duplication of research. But when dealing with cutting-edge industries, the considerable uncertainties involved can benefit from multiple investigations carried out in parallel, and these are provided better by uncoordinated experimentation than by trying to coordinate all the research efforts going on.

Various other institutional arrangements can help to enhance the flexibility of the governance structure. These include:

  • 'network-thickening' activities, where public funds are used to develop local, national and international networks linking entrepreneurs, researchers, universities and policy makers (the infrastructure projects for industrial development in South Korea's Cholla region are a typical example);
  • infrastructure projects such as transportation and communication facilities, or electric utilities which are beneficial to anybody and all sectors;
  • science and technology parks, which are particularly useful during the early stages of economic development, when private investors may be unwilling to invest in high-tech projects because of factors such as long gestation periods, limited guarantees on returns from research and development activities, a lack of capital, or the high-risk investment involved (an example is Taiwan's Hsinchu Science-Based Industrial Park).
  • industrial 'clusters' or districts, which are potential alternatives to more conventional forms of industrial production such as vertically integrated, large-scale corporations;
  • private intermediaries such as trade and industry associations, chambers of commerce, service providers, financial intermediaries and information brokers, that can solve problems of coordination and information, and support innovative firms.

Governance and ST&I policy making at different stages of economic development

Based on a MEGS, market-stimulating ST&I policies may include many types of instruments. These can range from functional policies (intended to improve markets without privileging any particular sectors) to horizontal policies (which have a broad scope and provide incentives across all sectors) to vertical or specifically targeted policies. Functional and horizontal policies are generally accepted as market-conforming approaches. But this does not hold for vertical policies that seek to address issues facing specific sectors, clusters or firms.[4]

Vertical policies or selective interventions might include direct subsidies, preferential taxes or subsidised credit. They can be useful in overcoming failures of coordination, or in facilitating the acquisition of technological competence. This is particularly important when the technologies involved are highly sophisticated, or require production on a large scale in order to be economical, high set-up costs, or strong links to sources of manufactured inputs and sales to manufacturing firms.

If vertical policies are to be effective, however, the technical and administrative skills needed to implement such strategies intelligently will need to be in place. Also vital is the political ability to terminate the application of such a policy if the objectives have been achieved, or if it seems that they cannot be realised.

Among the functional and horizontal policies that can strengthen science, technological development and innovation are:

  • developing and maintaining a market-friendly policy and regulatory environment that stimulates the technological efforts of firms, and helps enhance technological capabilities;
  • promoting a trade policy that facilitates technology transfer from abroad, including the encouragement of foreign direct investment (investment in a given country by foreign companies, setting up production facilities, for instance), licensing arrangements (granting a firm, through payment, the use of a patent or trademark), 'turn-key' projects (industrial projects in which a contracted company is responsible for the overall management of the investment project and the client only for the operation) and technical assistance;
  • helping to provide an appropriate technological infrastructure, including an education system that is responsive to business needs, and effective public research organisations.

The suitability of particular policy tools and strategies, however, depends on the stage of technological and economic development a country has reached. In countries viewed as scientifically lagging or scientifically developing (see section on 'Science, technology and innovation policies in developing countries' above for the different categories of countries), where capabilities remain low, governments may choose to rely primarily on functional and horizontal policies.

The previous experience of East Asia countries suggest that in countries within these two categories above and by implication at the early stages of economic and technological development, policy makers should focus on improving their capabilities, boosting education and building up institutions.

At this stage of development, horizontal ST&I policies dominate, helping to identify sustainable areas of competitive advantage in the economy. In tandem with the provision of technological infrastructure, such horizontal approaches help to endow businesses with a 'learning to innovate perspective' — that is, they encourage capacity building in the private sector as a basis for home-grown innovation.

At early stages of economic and technological development, selective interventions should be limited in number. They should focus on strategic industries such as low-skill manufacturing industries, resource extraction such as mining, and agriculture, all of which can help a country accumulate the know-how and capabilities essential for pursuing more sophisticated policies.

This approach enables political authorities to improve their understanding of how to design sectoral policies, to learn what kind of incentives work under which conditions, and to develop strategic capabilities that allow them to formulate a new policy portfolio.

At a higher stage of economic development, policy making can begin to rely on activities that require specialised skills and more information. This applies to the so-called scientifically proficient countries, and even to those scientifically developing countries that have evolved a more competent bureaucracy, as well as institutions that facilitate cooperation between the government and organisations in the private sector.

At this stage, vertical policies can become key ingredients in ST&I. These are often more effective than horizontal policies; but they are also more difficult to design and put into practice.


Effective ST&I policies must pursue clear strategic objectives, identify priorities for action, and demonstrate a high level of coherence. They usually require a range of policy instruments, sustained public funding, and effective mechanisms for implementation. And they must be formally linked to private sector stakeholders who are engaged in indigenous innovation and technology transfer.

Furthermore, macroeconomic and political stability — as well as a competitive market economy based on private property — seem from experience to be essential for the success of policies supporting innovation. If they are not in place, or only exist in a restricted form, companies will face uncertain expectations and high risks, and will be discouraged from investing in technological research and long-term innovation.

Despite these guidelines, however, there is no blueprint for effective ST&I policies. The emergence of a dynamic national system of innovation is both country- and context-specific. It is the entire institutional and organisational matrix of a country's political economy that determines the effectiveness of both its ST&I policies and system of innovation.

If a country's economy is to be shifted on to a higher trajectory of development, a clear set of rules, regulations and policies is needed. Dynamic economic evolution results from systematic and continuing investments both in learning, and in applying new skills and knowledge to economic and political exchanges. This can only happen if a society is willing and able to acquire skills and knowledge in productivity-enhancing activities, to foster innovation, to act creatively and to take risks.

The emergence of such characteristics cannot be directly determined by the state. But governments can support the growth of an efficient and flexible national system of innovation by establishing an appropriate governance structure — one that makes ST&I policies more effective, enhances collaboration between public and private sectors, and enforces stable, market-friendly rules and regulations.

Finally, if combined with a credible strategy for sharing the benefits of growth — as South Korea, Taiwan and Malaysia, for example, were able to pursue between the 1960s and the 1980s — ST&I policies may help in fighting poverty sustainably, and enhance the prospects of underprivileged groups in society.


[1] A national innovation system is a set of interacting institutions (formal and informal rules and regulations), private, public, and semi-public organisations (firms, research organisations, R&D service providers and intermediaries, universities), policy-making bodies as well as their capabilities. See also The 'system of innovation' approach, and its relevance to developing countries.

[2] See Wagner et al. (2001).

[3] See Erber (1998) and the literature referred to therein.

[4] For a more detailed discussion, see Lall and Teubal (1998).

The author is Chair of International Political Economy at the European Business School, International University in Oestrich-Winkel, Germany.


Ahrens, J. (2002) Governance and the implementation of technology policy in less developed countries, Economics of Innovation and New Technology, vol. 11 (4-5), pp. 441-476.

Edquist, C. (ed.) (1997) Systems of Innovation, Technologies, Institutions and Organizations, Pinter, London-Washington.

Erber, G. (1998), Prinzipien moderner Technologiepolitik, DIW Discussion Papers No. 159. Berlin.

Lall, S. and Teubal, M. (1998), 'Market-stimulating' technology policies in developing countries: A framework with examples from East Asia, World Development, 26(8), pp. 1369-1385.

Nelson, R. R. (ed.) (1993), National Innovation Systems: A Comparative Analysis, Oxford University Press, New York, 1993.

Wagner, C. S., Brahmakulam I., Jackson, B., Wong, A., and Yoda, T.  (2001), Science and Technology Collaboration: Building Capacity in Developing Countries?, Santa Monica, CA: RAND.

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