Demanding innovation: Lead markets, public procurement and innovation

Innovations are the product of the creative interaction of supply and demand. However, in focussing on how to increase the supply of innovative businesses, policymakers have lost sight of the importance of demand.

Imagine trying to cut a piece of paper with just one blade of a pair of scissors. It's near impossible. Yet that is what we try to do with innovation policy.

We rely on supply side measures to push technology. We neglect the critical role that demand and markets play in pulling innovation through. We need to use both blades of the scissors.

What makes this neglect all the more troubling is that this is hardly a new insight. In 1957, a pioneering study of innovation in the UK stated that a favourable market is a vital element in taking an innovation from first success to market dominance.

Market size, rate of growth, users willing to pay premium prices and first-mover advantage were all identified as success factors. The study also emphasised the critical role of government contracts or large firm sub-contracts for the success of innovative electronics and instruments firms.

It is remarkable that it has taken us half a century to lose sight of this lesson and now, finally, to return to it.

Innovations are the product of the creative interaction of supply and demand. However, in focussing on how to increase the supply of innovative businesses, policymakers have lost sight of the importance of demand.

We should not throw away the benefits of the support we give to innovation through grants, incentives and advice, but complement it with efforts to create 'lead markets' - demanding consumers (including the public sector) who give innovators an early customer base from which to develop their products or services and diffuse them ahead of global competition.

Published
February 2007

Author
Luke Georghiou

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