Innovation policy

Concept and benefits of innovations

In the context of private sector development, “innovation is understood as the commercially successful introduction or implementation of a technical or organisational innovation.” It can be the result of the development of new products or processes, or improvements of existing ones. It also includes the adaptation and introduction of products and processes to new markets (German DC Working Group on ‘Promoting Innovation Systems’).

Innovative products and processes are crucial for increasing the competitiveness, growth and employment generation of individual enterprises and developing economies as a whole. They also have the potential to address specific needs of poor producers and consumers, such as affordable, pro-poor technologies or agricultural innovations.

The Economist’s Schumpeter blog argues that imitation is as important as innovation, as it is widespread and offers significant benefits, such as cheaper research and development and less risk of products failing market testing. Ben Ramalingam responds, though, that imitation is not always easy, and may involve innovative adapting of the original product, and that innovators are still needed in an economic eco-system for imitators to copy from.

An interesting reflection on the use of the term innovation in the donor community is offered by David Lewis on the Guardian Poverty Matters Blog: In his post “Is innovation really essential for development work?” he cautions against an excessive and undifferentiated use of the term. Using the term without a clear meaning should be avoided. Donors should also recognise that not everything can, or should be innovative, as it is a distinctive, risky and often costly activity. Further, he notes that the pressure to innovate may be inefficient and risks reinventing the wheel where effective solutions may already be in place. Innovation should never be seen as an end in itself, but as a tool.

Constraints to innovation in developing countries

Whether an entrepreneur will engage in technical innovation depends partly on the incentives provided by the size and functioning of the market. In developing countries, markets are often small, fragmented and imperfect due to lack of infrastructure, low per capita incomes, as well as misguided policies and institutional constraints, which provide little incentive for innovative activity. (Szirmai, Naudé 2011). Other major constraints to innovation include limited access to finance, a lack of market information, and skills shortages among entrepreneurs. Among smaller businesses in particular, and in some cultural contexts, there may also be only little awareness about the long-term benefits of innovation, or there may be a general lack of appreciation for innovative activities.
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Donor approaches to innovation promotion

Donor programmes follow different approaches to promote innovation in developing countries. An overarching framework for innovation policy is the innovation system. Innovation systems refer to the interaction between companies, research organisations and the state in the creation, diffusion and use of innovations (Science and Development Network). Donor support to innovation systems spans a broad range of activities, including the creation of appropriate framework conditions for innovation, and the development of innovative capacities of companies.

Donors aim to create enabling environments for innovation by advising governments on property rights, cutting red tape, improving access to finance, or tax incentives. They can also help improve the conditions for innovation by funding university facilities and equipment, or training of academic staff.

More targeted approaches may vary for different types of firms (e.g. World Bank 2004). For very small enterprises, donor support may focus on basic business advisory and support services, finance and skills development and providing access to information and communication technologies (ICTs). It may also include awareness-building about the benefits of innovation or information on the adoption and application of new technologies (UNIDO 2003).

For technologically competent enterprises, examples of donor support are the establishment of business incubators to facilitate new business start-ups, technology extension services to expose enterprises to new technologies, and technical assistance to the commercialization, licensing and patenting of products.

With growing innovative capabilities of businesses, the transfer and diffusion of new technologies from larger (often multinational) to smaller companies also becomes an important aspect of innovation policy. Common ways to promote linkages between firms are value chain and cluster approaches: Supplier and subcontracting relationships can be instrumental in helping smaller firms access markets and technology of larger enterprises; in addition, being part of a cluster can help small firms to specialise, absorb new technologies and procure their inputs.

The Basics: Innovation and Innovation Systems

Innovation and the developing world: obstacles and opportunities

Introductory resources and current thinking

Empirical studies

Innovation policy in developing countries

Useful resources

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