IMPROVING INNOVATION POLICY: THE SEARCH FOR
KNOWLEDGE ABOUT ITS EFFECTIVENESS
Marco van Hengel, Niek Nahuis (Ministry of Finance of the Netherlands)Paper completed: 20051. Introduction^1
Productivity growth appears high on the international policy agenda. For instance, in 2000 the European
council stressed the importance of productivity by formulating the goal “to become the most competitive
and dynamic knowledge-based economy in the world...”. In addition, the European council in 2002 in
Barcelona formulated a R&D ambition that in 2010 European R&D-expenditure should approach 3%
GDP, of which two-thirds by the private sector. The Lisbon goal suggests that productivity growth is an
important policy goal, whereas the Barcelona ambition points to R&D-policy as an important instrument
to achieve this goal.
How can the quality of public finance be improved with regard to R&D. In the first paragraph of this
paper we first like to make a few qualifications in this respect. In particular within Europe, labour market
participation is at least as urgent as productivity growth to achieve GDP growth. In addition, productivity
growth differences between countries and sectors as such are not meaningful comparisons, because
specialisation occurs on the basis of comparative advantages; which implies that some countries have a
higher productivity growth than others. Relative higher productivity growth in a specific country doesn’t
entirely lead to more welfare growth, because it may partly leak away to other countries through changes
in the terms of trade.
Nevertheless, certainly at the global level, productivity growth remains an important determinant for
economic growth. Paragraph 2 looks at the theoretical rationale for innovation policy. The economic
literature indeed points to external effects of R&D-investments and thus for a role of government policy.
On the other hand, the risk of government failure in the field of innovation policy is also present because
of information problems about private and social returns, future technological developments and the
changes of comparative advantages.
In paragraph 3 we look at the innovative position of the Netherlands and conclude that in international
perspective we take an average position in a group of internationally comparable countries. The design
and impact of innovation policy in the Netherlands is then described in paragraph 4. We argue that the
design of the instruments is related to the perceived market failures. However, at the same time we
observe that our state of knowledge of the effectiveness of innovation policy is limited at this time. This
leads us to the conclusion in paragraph 5 that in particular for specific policy the risks of government
failure are higher and a careful assessment should be made if the potential benefits outweigh these costs
of government failure. Our current information restrictions imply that it is more difficult to design a
(^1) This is a discussion paper prepared on personal basis and does not necessarily reflect official government policy.