《技术创新管理》课程教学课件（英文）Market failure and Government Incentives for Innovation

Masters Course: Innovation SciencesMarketfailureandGovernmentIncentives forInnovationDr.MScBertSadowskiTechnischeUniversiteitTUeEindhovenUniversity of TechnologyWhereinnovationstarts

Market failure and Government Incentives for Innovation Dr. MSc Bert Sadowski Masters Course: Innovation Sciences

StructureThetensionforpublicpolicyTheoretical Perspectives on MarketFailuresMarketFailure:PublicGoodsMarket Failure:SpilloversMarket Failure:Negative ExternalitiesMarketFailure:PositiveExternalitiesHowto subsidies workSummaryTechnische UniversiteitTUEindhoveneUniversity of TechnologyPAGE19/23/2013EconomicsofInnovation2013

Structure • The tension for public policy • Theoretical Perspectives on Market Failures • Market Failure: Public Goods • Market Failure: Spillovers • Market Failure: Negative Externalities • Market Failure: Positive Externalities • How to subsidies work • Summary Economics of Innovation 2013 9/23/2013 PAGE 1

Marketfailureisadifficultconceptbecauseof differenttheoreticalassumptions (justsomeagreement across economictraditions)as it is linked to political &ideological traditions (e.g.neo-conservative)!Technische UniversiteitTUEindhoveneUniversityofTechnologyPAGE2EconomicsofInnovation20139/23/2013

Market failure is a difficult concept because of different theoretical assumptions (just some agreement across economic traditions) as it is linked to political & ideological traditions (e.g. neo-conservative)! Economics of Innovation 2013 9/23/2013 PAGE 2

The tension of public policyFramework:Framework:StateAidCompetition PolicyMarket failureGovernmentfailureEU Legislation:EULegislation:StateAid(Art107-Dominant positionof109TFEU)firms (Art102TFEU)CartelsCompatibilitytestMergerRegulations(e.g. barriers to entry,Liberalizationnumber ofcompetitors)Technische UniversiteitTUEindhoveneUniversity of Technology9/23/2013PAGE3EconomicsofInnovation2013

The tension of public policy Economics of Innovation 2013 9/23/2013 PAGE 3 Market failure Government failure Framework: Competition Policy Framework: State Aid EU Legislation: • Dominant position of firms (Art102 TFEU) • Cartels • Merger Regulations • Liberalization EU Legislation: • State Aid (Art107 – 109 TFEU) • Compatibility test (e.g. barriers to entry, number of competitors)

Recenttrends onmarket liberalizationLate1980stolate1990s:MarketswilldeliverMarketsaremostefficientwayofallocatingresourcesandproviding incentivesto companies(e.g.opening uptelecom&energy markets)Since2ooo:MarketsmightnotdeliverInvestmentincentivestolowinsomesegmentsofthemarkets(e.g.energytransmissionorlocallooptelecom).Since2009-2010:MarketswillnotdeliverNationalizationofcompaniesandactiveindustrial policy(e.gRemedyforaseriousdisturbance in theeconomyN19/2010ABN-AMROandFortis)However,neo-conservativepoliciessincethe1990shadtheeffectthatthereislessgovernmentintervention!Technische UniversiteitTUEindhovenUniversityofTechnologyPAGE4EconomicsofInnovation20139/23/2013

Recent trends on market liberalization • Late 1980s to late 1990s: Markets will deliver • Markets are most efficient way of allocating resources and providing incentives to companies (e.g. opening up telecom & energy markets) • Since 2000: Markets might not deliver • Investment incentives to low in some segments of the markets (e.g. energy transmission or local loop telecom) • Since 2009 – 2010: Markets will not deliver • Nationalization of companies and active industrial policy (e.g. Remedy for a serious disturbance in the economy N19/2010 ABN-AMRO and Fortis) Economics of Innovation 2013 9/23/2013 PAGE 4 However, neo-conservative policies since the 1990s had the effect that there is less government intervention!

Theoretical traditions on market failureTheoretical traditionMarket failureRemediesNeo-classicalPublicgoods,SeeG&R2010externalities,informationeconomicsasymmetriesSee BroadbandIndustrial organizationMarketstructures.Firmstrategies, NaturalGuidelines2009monopolyEvolutionaryeconomicsSystemfailure,MarketsSeeBachandMatt2005forknowledgeGreater extent of market failure from neo-classical to evolutionaryeconomics(includingsystemfailures)Technische UniversiteitTUEindhovenUniversity of TechnologyEconomicsofInnovation20139/23/2013PAGE5

Theoretical traditions on market failure Theoretical tradition Market failure Remedies Neo-classical economics Public goods, externalities, information asymmetries See G& R 2010 Industrial organization Market structures, Firm strategies, Natural monopoly See Broadband Guidelines 2009 Evolutionary economics System failure, Markets for knowledge See Bach and Matt 2005 Economics of Innovation 2013 9/23/2013 PAGE 5 Greater extent of market failure from neo-classical to evolutionary economics (including system failures)

MarketfailurerationalesG&R(2010)RationaleProblemSolutionsAppropriabilityPolicies affectingPublic goodssystemofintellectualpropertyrights(IPR)Spillovers(PositiveImproveinprofitsofR&DTax incentivesexternalities)other (competing)firmsDirectR&D grantsPolicies towardsHigh uncertaintyUnderinvestmentinR&Duniversitiescombined with largefixed costsCompetitionpolicyIndustry standardsettingDuplication ofGovernmentOverinvestmentinR&Dinvestmentprocurementpolicies(Greenhalgh, C., & Rogers, M. (2010): pp. 18 - 23, pp.Technische UniversiteitTUEindhovenUniversity of Technology297-328)PAGE6EconomicsofInnovation20139/23/2013

Market failure rationales G&R (2010) Economics of Innovation 2013 9/23/2013 PAGE 6 Rationale Public goods Spillovers (Positive externalities) High uncertainty combined with large fixed costs Duplication of investment Problem Appropriability Improve in profits of other (competing) firms Underinvestment in R&D Overinvestment in R&D Solutions • Policies affecting system of intellectual property rights (IPR) • R&D Tax incentives • Direct R&D grants • Policies towards universities • Competition policy • Industry standard setting • Government procurement policies (Greenhalgh, C., & Rogers, M. (2010): pp. 18 – 23, pp. 297-328)

Market failures rationales CEU (2009)RationaleProblemMarket characteristicsMarketfailureSituations where individualMarketDynamicsandas positivemarketinvestors do not invest(Dominant)StrategiesofFirmsexternalitieseven though this would beefficientfromawidereconomicperspective, e.g.dueto thepositive spill-over effectsEquityAs awayto improveaccesstoDigital Divideobjectivesan essential means ofRegionalDevelopmentcommunicationandparticipationin society as well as freedom ofexpressiontoall actorsinsociety,thereby improving socialand territorial cohesionCEU(2009)BroadbandGuidelinesTechnische UniversiteitTUEindhovenUniversity of TechnologyPAGE7EconomicsofInnovation20139/23/2013

Market failures rationales CEU (2009) Rationale Problem Market characteristics Market failure as positive externalities Situations where individual market investors do not invest, even though this would be efficient from a wider economic perspective, e.g. due to the positive spill-over effects Market Dynamics and (Dominant) Strategies of Firms Equity objectives As a way to improve access to an essential means of communication and participation in society as well as freedom of expression to all actors in society, thereby improving social and territorial cohesion Digital Divide Regional Development Economics of Innovation 2013 9/23/2013 PAGE 7 CEU (2009) Broadband Guidelines

Market failures rationales relatedtoknowledgediffusionMatt&Bach2005RationaleProblemMarketcharacteristicsPublic goods as basicInformationasymmetryChanging knowledgeresearchbasesCreating demandMissing markets asSelectionofinnovativeproductspublicprocurement(lntellectual)PropertyAppropriabilityAbsorptivecapacityrightsSpilloversCooperationInternalizingspilloversTechnischeUniversiteitTUEindhovenUniversity of Technology9/23/2013PAGE8EconomicsofInnovation2013

Market failures rationales related to knowledge diffusion Matt & Bach 2005 Rationale Problem Market characteristics Public goods as basic research Information asymmetry Changing knowledge bases Missing markets as public procurement Selection of innovative products Creating demand (Intellectual) Property rights Appropriability Absorptive capacity Spillovers Internalizing spillovers Cooperation Economics of Innovation 2013 9/23/2013 PAGE 8

SummaryImportantforaddressing marketfailureis theunderlyingeconomicmodel ofthemarketNeo-classicaleconomics:perfectmarketIndustrialorganization:imperfectmarketsEvolutionaryeconomics:imperfectmarketofinformation and knowledge distributionChoice of modelis alsoa politicaland ideologicalproblemTechnischeUniversiteitTUEindhovenUniversityofTechnologyPAGE9EconomicsofInnovation20139/23/2013

Summary • Important for addressing market failure is the underlying economic model of the market • Neo-classical economics: perfect market • Industrial organization: imperfect markets • Evolutionary economics: imperfect market of information and knowledge distribution • Choice of model is also a political and ideological problem Economics of Innovation 2013 9/23/2013 PAGE 9