Innovation and its advancement have developed into a central tenet for many, if not most, governments over the last three decades (give or take). The knowledge-driven economy as a propeller of sustainable growth is what politicians are aiming for in their policies. At the same time, however, economic policy has been reduced to the unquestioning belief in Adam Smith's "invisible hand," at least in day-to-day economic life. This philosophy is usually only deviated from when young and promising (infant) industries are concerned, or economic doom looms across the horizon. When the economy is chugging along like a reasonably well-oiled engine, governments are expected to hold their hands and interfere as little as possible as to not distort supposedly healthy market mechanisms. Only where market failure is apparent, as with the provision of public goods or the aforementioned infant industries, is the state obliged to apply a corrective. And even then, the imperative for any intervention is to apply as light a touch as possible.
This is also evident in innovation policy. The promotion of innovative activity is predominantly focused on (often means-tested) support for R&D1 endeavors, IPR2 filings, tax breaks, targeted subsidies, and the like. The second pillar of innovation policy covers what can be broadly termed "infrastructure": competition policy, funding of science education and basic research at universities, networking opportunities, cluster encouragement and establishment, the development of digital infrastructure in particular. Here, the state assumes the role that the standard lore of national innovation systems attributes to it: that of facilitator and foundation builder.
Only that this is not the whole truth. For as long as nation-states have been in existence, they have meddled in the economic affairs of their subjects, both openly and covertly. As more recent research evidenced, virtually every significant technology development was made possible through what purists might scorn as government intervention. Whether it is GPS, the internet, Nylon, Teflon, the iPhone's touch screen or any other item that makes everyday life easier and / or more efficient, it was brought about by governments taking an active role in its development. And not only through familiar channels like research grants, but by active procurement through – among others – the military, state-sponsored programs up to the nationalization of industries, and the general prioritization of government spending.
Many of these technological breakthroughs and the government involvement that made them possible were triggered by either strategic imperatives (all through the Cold War, the paramount objective was to stay ahead of the curve technologically) or external shocks (the dot-com bubble as a result of 9/11, the oil price shock, or, as we shall see, the global financial crisis).
Particularly sudden turmoil can move governments to employ tactics for the sake of keeping the economy afloat that they would most probably shun in times of relative calm. The global financial crisis forced central banks and governments to become innovative themselves. In essence, fiscal stimuli of almost unprecedented volumes were accompanied by newly developed and hitherto untested monetary instruments to address a crisis stemming from the use of innovative (if eventually harmful) financial tools.
The COVID-19 pandemic poses a similar yet different challenge. As national health systems are threatening to succumb to exponential infection growth rates and supplies of medical equipment from respiratory masks to ventilators are drying up, effective crisis management becomes paramount. Additionally, the public health measures to alleviate pressure on health systems are about to stall the economy, with not only the vital SMEs' but also the biggest employers' activities grinding to halt due to social distancing.
Governments around the world have already pledged massive sums for stimulus packages. However, the main challenge – and the biggest chance for a sustainable and forward-thinking innovation policy – will be to target these measures wisely. State governments, both federal and regional, are now in a unique position to be able to make significant and wide-ranging decisions while facing little institutional inertia.
So, with the prospect of immediate and dramatic economic contraction and long-standing if little acknowledged practices of targeted innovation policy, the COVID-19 situation presents itself as a severe danger, but also as a unique opportunity to re-evaluate the accepted paradigms of innovation policy.
As we have seen, the "hands-off" policy approach was never consistently applied. Governments have always been prepared to involve themselves in promoting and supporting industries of perceived national importance, be it space, communication, renewable energies or, for that matter, pharmaceuticals. It may be time to acknowledge the importance of taking influence beyond mere environment design.
Secondly, by assuming an active role in preventing the economy from stalling or crashing, states also assume the authority to direct and target the money they spend. Carefully designed procurement, the cutting of some red tape and the opening of communication channels between companies might just encourage the "right" (as in desperately needed) production and innovation. The security of knowing that their products will be bought already encourages companies to switch their hampered everyday production to supplies needed to fight the current crisis ore develop entirely new ways of doing things. Volkswagen preparing to produce medical equipment and Zara making scrubs for Spanish hospital workers are but frontrunners, with Dyson and Airbus waiting for governmental assent to start building ventilators. Many SMEs are adapting at the same rate, but less visibly so. And innovation does not "only" affect products and their production; business models are evolving, too. A multitude of new ways to generate cash-flow are being trialed by SMEs ranging from hospitality (take-outs, pop-ups, team-ups, community service) to service providers (re-purposing business fleets and infrastructure, communication services). These survival efforts deserve to be supported, not only because they secure jobs and national income, but because they are genuinely innovative and should reward the innovator for thinking outside the box. At the end of the day, supporting firms in pursuing their self-interest will lead to tangible benefits for the wider society through multiplier effects.
The accepted thinking is that innovation, being creative destruction, creates societal benefits by allowing the nimble to erode the dominance of the establishment. This redistributes income, reduces the waste that comes with industry concentration and consequently raises allocative efficiency across the economy. Thus, it is well worth asking at this stage whether it is not about time to re-evaluate how we treat innovative efforts as a driver of economic well-being.
This question then also addresses the current debate of whether it is acceptable to foster "national champions"; the answer being that not only SMEs drive innovation (although their inherent agility makes them more adept at it), but the bigger players drive innovation in competition with other, often international players.
COVID-19 is going to have a major negative economic impact globally in the short to medium term. Yet it also allows us to review how we as societies value and foster innovative activities, and whether we can formulate coherent, consistent and sustainable policies to foster truly knowledge-based and innovation-driven economies for the future. Rather than preserving the status quo (although imperative to soften short-term pain caused by the immediate economic contraction), governments should actively support and strengthen innovative and growth sectors through concrete economic engagement and create the infrastructure for innovation to thrive. This includes not only preaching digitalization but practicing it. Only if innovations can be protected (almost) as quickly as they are developed will the SMEs adequately deal with the balance shift between secrecy and openness that open innovation and increased collaboration necessarily entail. Not to mention that IP offices should be as responsive as the nimble innovators they are supposed to support. In times like these, it will not be enough to support the innovative effort through lip service – governments at all levels will have to step in and practice what they have been preaching all along.
Footnotes
1 R&D: Research & Development
2 IPR: Intellectual Property Right
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