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Innovation theories as a model for govt policy

Updated: Apr 4

19 Oct, 2023.

Theories of innovation serve as a framework for understanding how new ideas evolve into end-user-ready products, services, or processes.

Five seminal theories seek to explain how innovation happens, or should happen: the linear flow theory, web/network-based theory, start-up theory, open innovation, and user-centred innovation.

Each paradigm conceptualises the innovation process differently, prescribing distinct roles for policymakers, researchers, business leaders and other stakeholders.

The linear flow theory is one of the earliest and simplest innovation models. It posits a unidirectional flow of innovation from basic research to applied research and eventually to commercialisation.

Web or network-based theories conceptualise innovation as a collective activity involving multiple stakeholders, including firms, governments, and research institutions. This theory argues that innovation is not a sequential or solitary act but an interactive process within an ecosystem. The Triple Helix and clustering concepts stem from this model.

The start-up theory focuses on the entrepreneurial aspect of innovation. Scholars like Schumpeter identified the entrepreneur as the central agent of innovation. In this model, startups, entrepreneurs and venture investors drive innovative activities, taking risks to bring new technologies or services to market.

Henry Chesbrough popularised the open innovation theory with challenges to the traditional, closed-door approach to innovation, where companies rely solely on internal resources for research and development.

User-centred Innovation theory represents a shift from traditional, producer-focused models of innovation towards models that incorporate the end-user as an active participant in the innovation process

The economic theory of innovation, which focuses primarily on market structures, incentives and returns, provides a lens through which the innovation processes that underpin these five theories can be examined and policies developed.

However economic theories will fail to achieve outcomes unless supported by a robust understanding of how ideas evolve and the pathways to adoption and implementation. An economic theory, implemented without supporting theories is bound to fail.

Australia does not have a consistent or coherent innovation policy or strategy. This can be attributed to its significant reliance on natural resources, which leads to underinvestment in knowledge-based sectors and a short-term focus, which emphasises immediate gains, resulting in a lack of cohesion and systemic focus.

This occurs at the cost of long-term innovation and research investments and innovation initiatives. These characteristics have made it very hard to build a comprehensive and consistent innovation policy for the longer term.

Under the influence of the Commonwealth Treasury, the Department of Industry (in its various incarnations), and the Productivity Commission, Australia has pursued economic theories of innovation. The foremost policy instrument, the R&D Tax Incentive (RDTI), which makes up 26 per cent of Australian Government support for R&D, is one of the most generous in the world but has failed to shift the dial on business R&D. Total government direct investment in public research as a proportion of GDP is exceptionally small by world standards and is declining.

From a science, research, and innovation policy perspective, understanding innovation theories holds critical value for multiple stakeholders, including researchers, policy analysts, business leaders, and economists.  Innovation theories offer valuable frameworks for understanding how ideas evolve into market-changing products or services. Adopting and implementing theories can drive economic growth, societal advancement, and global competitiveness.

Innovation theories can guide policymakers in crafting effective science, research, and innovation policies and guide business leaders in adopting specific innovation models to guide R&D investments, collaborations, and market strategies. The Open Innovation model, for instance, helps firms accelerate the product development cycle by leveraging internal and external capabilities

Scholars in economics, public policy, and business studies use innovation theories as foundational frameworks for empirical research, further developing the field and identifying new paradigms. Theories can also help identify how technological advancements can be effectively disseminated to benefit society. The network/web-based models emphasise the ecosystem’s role in innovation, including firms, institutions, and social systems.

Different theories may hold varying degrees of relevance depending on the geopolitical context. For instance, the startup model has proven particularly potent in Israel and Silicon Valley, contributing to their global standing as innovation hubs. The theory has been imitated extensively, with limited success, in countries and regions throughout the world.

By understanding how innovation works, entities across sectors can more effectively collaborate. The linear model might encourage academia to focus on basic research, while industry could then take the baton to commercialise viable products, following a structured pathway.

Countries can also leverage theories to gain a competitive edge. For example, Singapore’s adoption of the triple helix model has been instrumental in transforming it into a global innovation hub (Wong et al., 2007).

Policymakers face challenges in navigating the complexity and variety of innovation theories. This can be attributed to overlapping ideas and concepts, different geopolitical, economic, and cultural contexts in which they are applied, continuous theory evolution with new models and updates to existing models being proposed. Keeping abreast of these developments requires ongoing time and effort, which may be taxing for policymakers.

In addition, translating theoretical frameworks into actionable policy is complicated. The network/web-theory, and its variations, can be difficult to operationalise due to their complexity and the necessity for multi-stakeholder involvement. The triple helix model takes network/web-based theory into a theory of business, university, and government connections. The open innovation theory raises issues in IP protection.

Policymakers may also be risk-averse, preferring to stick with tried-and-true theories like the linear model, even when newer frameworks like web/network-based models might offer better outcomes. They may also operate within budgetary constraints, making it challenging to invest in multiple models simultaneously or shift resources rapidly between them.

This is largely the case in Australia, where innovation policy, such as it is, largely follows the linear model, with a mix of investments in basic research (universities and MRIs), applied research (CSIRO, Rural RDCs, CRCs), experimental development (various business programs), and research commercialisation (the RDTI, and the Trailblazer initiative).

Policy also has also incorporated some elements of the startup model (for example, Innovation Investment Funds and other tax concessions), but these have tended to be short-lived. The Commonwealth Government has not embraced web/network models except in a perfunctory way and largely ignores open innovation and user-centred models. There are numerous separate initiatives in the States/Territories, but they vary considerably in scale and scope.

The challenges for innovation policy are not insurmountable. But policymakers should seek to navigate the complexity of innovation theories to engage with a particular model or create hybrid models tailored to specific objectives and constraints.

This will assist in making well-informed resource allocation decisions and designing appropriate metrics. In this way, performance evaluation can be more targeted and transparent.

Originally published in InnovationAus, 19 Oct, 2023

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