Manual del Perfil de Puestos (MPP)

Policy should be an improvement on the initial market failure case, “so a policy is successful only if it creates input and/or output additionality” (Gők and Edler 2011, p. 5) 62_{. Examples of why markets may fail to reach the}

abstract condition of perfect competition include the issue of public goods (alluded to earlier); asymmetric information; and economies of scale. As discussed in Chapter 2, the latter refers to the fact that the larger producer will always be in a position to undercut the smaller producer, or the larger firm will have more resources to invest in R&D than the smaller firm (Hewitt-Dundas 2006); a role exists for government in supporting the smaller firm in this instance. The issue of asymmetric information involves situations where one party has information over another (a competitive

59 _{In addition to details provided in Chapter 2, the neoclassical approach to policy}

intervention is dominated by the view that government intervention is justified only where markets fail to allocate resources to enhance social welfare; the evolutionary approach moves beyond this linear model (Laranja et al 2008).

60 _{The neo-Marshallian approach is based on lessons learned from industrial districts that} experience success, or ‘learning regions’ (Asheim 1996).

61 _{The endogenous approach relaxes the earlier neoclassical view of perfect competition to} capture innovation as a result of learning by doing and of increasing returns to investment in R&D (Laranja et al 2008).

62 _{Where government interventions reduce uncertainty, substitute failing markets, and} devise ways to overcome inappropriability (Gők and Edler 2011).

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advantage or in some cases an inefficiency) (Swann 2009; Lambrecht and Pirnay 2005); market failure due to asymmetric information could emerge if in the context of the current research for example, some firms lack knowledge about the benefits of developing IHC as a valuable resource for innovation activity (discussed later in this chapter).

Most market failures reflect a mismatch between private and social benefits (Warwick 2013). Where such problems occur, governments might fund projects to compensate for market failure and to reduce uncertainty (Gők and Edler 2011), although it has been emphasised that “governments should intervene only when there is clear evidence that the benefits of the actions outweigh the costs” (Tokila 2011, p. 39).

According to the neoclassical view of innovation, markets coordinate information and allocate resources “for the production and distribution of new knowledge”; a failure in this function prompts government intervention (Bleda and del Río 2013, p. 1048). The fact, that “knowledge and information are not normal economic commodities but possess attributes that do not make them natural candidates for market exchange” suggests market failure as the traditional rationale for innovation policy (Metcalfe 2005, p. 54). In providing public support for innovation, governments correct for the inherent tendency of markets to produce inefficient knowledge and information (Metcalfe 2005). Interestingly, most innovation policy programmes in the UK for example, are based on market failures on the supply side, where information and other resources are constrained (Edler et al 2013). Having reviewed the literature the same could be said about policy programmes in Ireland. Interventions as a result of market failures tend to focus on allocation, diffusion and transfer of knowledge through subsidies, tax systems and the protection of intellectual property (IP) rights (Laranja et al 2008). Hence policy programmes are usually introduced to overcome the results of such market failures, which generally arise due to a lack of incentives by private firms to invest in conditions of uncertainty (riskiness of return on investments).

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Arnold (2004) has developed a neoclassical notion of market failure in the context of innovation policy that includes capability failures, failures in institutions, network failures and framework failures. These failures “justify state intervention not only through the funding of basic science, but more widely in ensuring that the innovation system performs as a whole – always provided that the state is actually capable of reducing failure” (Arnold and Boekholt 2002, p. 10). Evolutionary theory, on the other hand (as introduced in Chapter 2), is concerned with changes in market structure and Schumpeter’s notion of ‘creative destruction’ (Bleda and del Río 2013). The focus of innovation policy in the evolutionary approach is to tackle problems or failures in the management and growth of knowledge and novelty (Bleda and del Río 2013). In addition, from the evolutionary perspective, government intervention should focus on the limitations of agents’ capabilities and their capacity to generate, adopt and retain new knowledge and to increase the potential for experimental behaviour (Metcalfe 1995; Laranja et al 2008; Bleda and del Río 2013). This type of knowledge is a mixture of tacit and tangible knowledge; consequently, a dynamic approach to learning and cognitive capacity must be the focus of attention (Laranja et al 2008).

Innovation policy directed at private firms based solely on market failure misinterprets the role of competition in modern society “through its failure to realize that capitalism and equilibrium are incompatible concepts and that innovation and enterprise preclude equilibrium” (Metcalfe 2005, p. 55). Furthermore, in modern societies, markets are fast moving with short product lifecycles, and innovation depends on dynamic systems and the “generation of unquantifiable uncertainty and asymmetries in information” (Metcalfe 2005, p. 58); such conditions highlight the limits of market failure. While market failure is considered a valid rationale for government intervention, it is argued that it is insufficient justification for innovation policy in light of the non-market stakeholders involved (Bleda and del Río 2013). Therefore, in order to establish whether or not a credible rationale for public support exists for IHC, there must be an understanding of evolutionary theory, systems failure and government failure which takes

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account of the uncertainties of innovation and pursuit of competitive advantage of firms. Such an understanding is developed in the next section.