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A Practitioner's Guide to Innovation Policy

The central role that business innovation, the introduction and invention of new products, technologies, business processes, and ideas in the market, plays in economic growth is almost uncontested. Innovation drives the Schumpeterian process of creative destruction and can facilitate economic convergence for the countries farther from the frontier (Schumpeter 1942). Innovation is the critical ingredient in historical accounts of how countries achieve economic growth and prosperity. A growing body of evidence has shown that increased innovation activity has a measurable and positive impact on firms’ productivity (Mohnen and Hall 2013), which in turn improves a country’s overall competitiveness. As a result, innovation policy, implemented with the set of public policy instruments to support innovation directly or indirectly, is central for the growth strategies of developing and developed countries and is not subject to the controversies related to the use of other policies, such as industrial policy. However, and despite the policy consensus around innovation policy, the quality and composition of innovation policies differ greatly across countries. Innovation policies in Organization for Economic Co-operation and Development (OECD) countries tend to be broader in scope, more multifaceted, and more sophisticated than in developing countries, where innovation policies are often incipient and fragmented. More importantly, while many countries are trying to develop and deepen these policies, there is little clarity about what works and what doesn’t, and about what policies are most effective at different stages of development. This guide aims at filling this gap to support policy makers in developing countries in their quest to foster innovation. Improving the effectiveness of innovation policies is even more urgent in the current context of rapid technological change and digitalization, when the risks of increasing the technological divide between advanced and developing countries are high, and large opportunities for technological catch-up could be foregone if policies are not appropriate.