Technology and the Market: Demand, Users and Innovation

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The need for and provision of operational intelligence depends on a number of factors, ranging from the type of interventions , the actor landscape , the complexity of the policy problem , the decision making and implementation structures , the location and distribution of expertise , and so on.

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To make decisions on demand-side interventions, this would, for example, mean to deploy analytical and discursive methods to understand the needs of potential buyers, the barriers that hinder a better communication between suppliers and buyers, the bottlenecks that hold potential buyers back from purchasing learning costs, high price, infrastructure gaps, etc. This would allow deciding whether demand-side intervention would be justified in the first place, to choose and design interventions that could tackle the identified obstacle, and to identify scale, scope, and duration of the intervention.

Having developed our understanding of the nature of needs, demand, and demand articulation, and having introduced a three-dimensional concept output legitimacy, input legitimacy, and operational intelligence requirements to characterise policy — in particular, demand-oriented policy — we can now critically discuss the three pillars of policies. We start with demand-side innovation policy served as our point of entry and is about traditional innovation policy targeting demand for the sake of stimulating innovation as an economic activity Section 4.

Then, we focus on demand-side policy on the level of specific policy sectors e. Discussing the three pillars using the three dimensions of Section 3 highlights the specific challenges those policies face and lays the ground for drawing lessons that may help to overcome those challenges. This policy ideal type sees innovation as the result of an interplay of supply and demand, and asserts that there are a number of reasons on the demand side or between the demand and the supply side that hamper the interaction between demand and supply when it comes to the generation, acceptance, and diffusion of innovation.

Demand-side innovation policy has become, in some countries, an integral part of governmental science, technology, and innovation STI strategies Izsak and Edler ; OECD Responsibility for this kind of policy is shared between ministries of the economy or innovation and their associated agencies, and the instrumentation of demand-side innovation policy ranges from public procurement of innovation to price-based measures e. Demand-side policy as innovation policy draws its main justification from the fact that it tackles market and system failures at the demand side and, thus, supports the build-up and formation of markets Falck and Wiederhold Organised by innovation and economy ministries, the expected outcome is an increased uptake of innovation and innovation-driven competition.

Those market and system failures include information asymmetries and inefficient interactions between potential buyers and producers, both in the short and especially in the long run. Demand-side innovation policy is citizen-led in terms of supporting the articulation of existing needs for the sake of generating more innovation demand and uptake.

This has to do with the fact that the articulation of needs—or wants—into demands in the market is insufficient.

Further, users are often reluctant to pay a high entry price for an innovation and to create adoption externalities—meaning that the first users of an innovation generate learning benefits that spill over in the system and benefit subsequent users in terms of increased reliability, lowered price, better interfaces, etc. Arthur A second rationale, often driving demand-side innovation policy, is economic.

Not only will the system benefit from the use of innovation, it will also be a location for innovation generation, with strong interaction to lead users and a high potential for learning both between buyers and producers and between end producer and supply chain. Thirdly, and this is the most obvious link to the other two pillars of demand-side policies: demand-side policies are justified through the benefit generated by the use of the innovation—be it in terms of productivity in the private or public sector process technologies, ICT solutions, etc.

However, as an innovation policy, this demand dimension is often under-conceptualised and poorly underpinned by expertise and follow-up. This is the main difference to demand-side measures in sectoral policies see below , and a major drawback with regard to the input legitimacy of demand-side policies. Traditional supply-oriented innovation policy is understood as being based on an innovation and economic rationale, focusing on uplifting the system to improve innovation performance rather than giving innovation a direction and with limited inclusion of societal groups in the definition of innovation policy.

Thus, it is defined mainly between representatives of business sectors and public policy actors. It targets firms, often in conjunction with intermediaries and knowledge providers, and the innovation policy discourse is thus largely an economic one. However, the target group and the benefit claim of demand-side innovation policy have broadened to include public buyers as well as firms and end consumers as private buyers.

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The broadening poses a challenge for those institutions that traditionally deliver innovation policy. Economic ministries and innovation agencies are generally isolated from those policy actors and stakeholders that are knowledgeable about the issues in specific domains e. Thus, the established, traditional models of innovation hamper the need articulation and discourse necessary to deal with some of the very failures demand-side innovation policy are set out to tackle.

Demand-side innovation policy poses a number of operational challenges for all actors involved. One set of challenges refers to the design of policies. The operational intelligence, thus, requires an understanding of the supply side, its future capacities, and how it relates to the demand side. Our discussion has shown that demand-side innovation policy is severely challenged both in terms of input and output legitimacies.

Innovation Model Analysis

This has mainly to do with the established structures to design and deliver innovation policy. As for output legitimacy, there are challenges of defining the mode, level, and area of intervention area. This puts more pressure on input legitimacy—that is, the need to demonstrate a level of interaction with stakeholders for the definition of needs and the design and implementation of policies, which are perceived as sufficient by stakeholders. Finally, the operational intelligence requirements go beyond those for supply-side innovation policy, and are harder to fulfil by the traditional innovation policy actors.

Whereas, in traditional innovation policy demand-side measures are seen as new instruments or as having a revival, they have always been popular in a number of sectoral policies for which the diffusion of new technological solutions is perceived as a major means to meet sector goals. A recent evaluation and synthesis on demand-side innovation policies found that, by far, the greatest majority of demand-side measures are to be found in the energy sector Edler For example, energy demand-side management programmes advocated and partly moderated by the international energy agency have a long tradition, using the full range of demand-side instruments from public procurement to awareness measures and labels.

Examples in other sectors include food labels for healthy or environmentally-friendly produce that are quite common, or from the pharmaceutical industry in which safety, product quality, and efficacy criteria are tightly regulated by responsible agencies, as such directing innovation to certain directions Hill and Rang Demand-side measures in sectoral policies support market transformation and acceleration geared towards sectoral goals.

Technology convergence, open innovation, and dynamic economy

The generation of innovation or the speed up of innovation cycles, or even the economic benefits in terms of benefits on the supply side, are not the explicit rationale of sectoral policies. Sectoral demand-side policies are thus predominantly state-led—they start with a sectoral goal to push for certain solutions articulated through state policy, which may or may not align with what citizens regard as their needs.

For example, diffusion programmes for solar cells in Europe have led to increased purchases from China, as such disfavouring European solar innovators but helping to reach sectoral goals such as meeting energy-efficiency targets. In domain-based policies, the articulation of demand and the definition of intervention take place in often well-established sociopolitical actor-networks that are organised around prevalent sectoral policy goals and have been developing over decades.

The leading ministries and agencies responsible for the policies serve as focal points, often as initiator and always as addressees of lobby groups of diverse stakeholder interests. Those networks or advocacy coalitions are, thus, very often stable actor constellations around certain issues and solutions, with ample room for contestation about goals, technological alternatives, and policy interventions.

The actors are used to articulate their interest in the process of defining policy goals, of deciding on solutions, and of designing instruments. The input legitimacy depends on the perception of actors about the openness and fairness of the process of problem definition, technological solutions, and interventions, the fairness and relevance of the deliberation and negotiation process, and the soundness of the evidence underpinning decisions.

The established actor networks and discursive routines allow a targeted interaction of many interested and affected stakeholders. However, input legitimacy can be under pressure due to the abovementioned, well-established institutions and networks. Strong lobbying activities from incumbent players may drown out marginal voices.

These peripheral actors include those with less power, actors who are not recognised as a credible counterpart, or actors who are non-users of an innovation due to resistance, rejection, exclusion, or expulsion Wyatt Exclusion or marginalisation is especially important if potential contributions to policy goals are situated outside, often adjacent to the established sociotechnical systems and networks.

For example, in the political competition for different solutions to energy-efficiency gains for transportation, advocates for innovative videoconferencing are newcomers with entry barriers in the competition with traditional actors, for example, advocates of more effective traditional busses or electrical buses. Outsiders can also pose a serious threat to sectoral networks, which is the case with ride-hailing services like Uber attempting to disrupt taxi companies through suggesting changes in regulation and even sector boundaries.

Demand-side challenges in defining policy goals and directionality for solutions within a sectoral policy domain emerge from the definition of bottlenecks for the uptake, diffusion, and use of an innovation that is seen as preferential for society.

Economics of innovation

This has been described above as market and system failures on the demand side Edler ; Falck and Wiederhold At the same time, as pointed out above, it is important to understand the capability of the supply side in a specific domain to deliver a reasonable solution and to be able to compare the value of different solutions. Further, as has been shown in numerous evaluations of demand-side policies, especially in energy-efficient technologies, the design for policies to support the diffusion of technologies is very challenging in terms of the right level and timing of incentives Edler ; Kemp and Pontoglio For example, creating a protective space for electric vehicles using subsidies that induce market demand poses questions about when the electric vehicle industry has matured enough to be able to compete with dominant, conventional cars Boon and Bakker Established domain policies are, in principle, well equipped to tackle those operational challenges, as they are usually characterised by widespread specialised expertise.

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The ministries or agencies have specialised staff and support through mission-oriented research institutes and specialised public and private research institutes that provide forefront research and support in the definition of problems and interventions. In addition, there is a range of specialised intermediaries, such as regulatory or labelling committees with long histories of expertise.

Similarly, businesses and NGOs concerned with the policy have their own intelligence sources for issues in their specific domain. These well-established institutions provide the basis for solid and heterogeneous evidence production.

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However, it does not guarantee that policy is based on objective and unambiguous evidence, especially as evidence is used in the established, interest- and value-driven political negotiations and as evidence mobilisation is unequally spread. This becomes, for instance, clear in the case of interactions between pharmaceutical companies and regulatory agencies about the safety and efficacy of medicinal products Carpenter Demand-side policy is prominent in specific domains such as energy, food, and healthcare.

At the same time, domain-specific policy is not primarily geared to support innovation as such, but—first and foremost—addresses sector-specific targets. Therefore, output legitimacy is linked to the sectoral goal—not to the innovation and economic effect—leading to potential tensions with economic policy goals or a failure to realise the economic and innovation potentials of domain-based policies.

Demand-side policy measures are created and managed in the context of a wide range of actors who have a well-established role in the sector and are regarded as legitimate players in the policymaking process. Those policy actor networks, however, can have conservative effects, as they pose a challenge of high-discourse entry barriers for innovative newcomers. Finally, operational intelligence requirements are challenged with issues of policy design around form, scope, timing, and size of policy support.

The mission to get to the moon had a clear end goal, and even the ways to get to the moon were restricted to certain technological trajectories. Our point here is that the solutions—or even the solution directions—are not clear from the start and that there is an implicit impression that needs and wants, and the demand side in general, should play a role in developing these directions.

The basic rationale for challenge-oriented innovation-based policy is the societal benefit of solving an important problem. Economic literature offers a number of objections to this rationale.

Open Innovation vs. Closed Innovation

Second and related, a more heterodox view argues that, often, the claim to tackle a certain challenge is combined with considerations to prioritise local or national industries. Thus, an implicit normative orientation—to support local suppliers—then distorts the playing field and may be in conflict with the best way of tackling the challenge similar to Lember et al. Third, critics claim that even if societies define a certain challenge as important to tackle, to define the right set of policies in order to steer the market efficiently is beyond the operational intelligence of policymaking.

It postulates that: 1 the market alone would fail to identify and address a certain challenge; 2 markets on their own even contribute to making a problem bigger; or 3 that societal challenges are too urgent and too complex to leave them exclusively to the coordination of the market. Though we recognise the importance of market forces as coordination and incentive mechanisms, the idea of policy for societal challenges presupposes a positive interplay between market forces and policy intervention, whereby targeted interventions in research, innovation, and use of innovation cannot only create relevant knowledge and technologies, but also alter incentives in the market to form in directions that are likely to help tackle the challenges.