Public policy instruments can be defined as a collection of methods to foster economic change by stimulating innovation (Vedung 1998, 21). To classify the choice and design of different policy instruments, they can be divided into three categories: (1) regulatory instruments, (2) economic and financial instruments and (3) soft instruments, whereby the combination of the three instruments has been referred to as ‘carrots, sticks and sermons’.2 In the following, these central instruments outlined by Vedung (1998) and Borrás and Edquist (2013, 1515–18) are briefly explained to provide the context in which the experiments in this dissertation have been conducted.
(1) Legal tools constitute the first category, in which the institutional frameworks for the interactions between economic actors are defined through the normative authority of governments. Therefore, regulatory instruments are used to determine the overarching market
2 There are other classifications of policy instruments, as discussed for instance by Steinmueller (2010);
however, the classification used in this dissertation is broadly accepted in both the scientific literature and
conditions in which innovative activity takes place. An important characteristic of regulatory instruments is their mandatory nature and the implied sanctioning of violators. Depending on the legal tool – for example, laws, rules or directives – the sanction can differ between fines, other economic penalties or a temporary retraction of specific rights. Furthermore, this category comprises instruments such as intellectual property rights as part of patent law, the regulation of research and higher education, competition law with a focus on R&D, ethical regulations as well as regulations of the industrial sector affecting innovative activities.
Beside these immediate influences of regulatory instruments, they also can function indirectly – for example, by prohibiting a specific chemical process – which subsequently forces the respective firms to develop alternative processes or products to remain in the market.
(2) Economic and financial instruments support innovators with specific monetary and non-monetary incentives or disincentives, which makes innovating more attractive in terms of money, time and effort. In contrast to regulatory instruments, these instruments are not compulsory, which means that they neither impose nor prohibit a specific action. Therefore, innovators can decide for themselves whether to take the respective action or not. Incentives used to encourage and promote innovative activities include cash transfers and grants, subsidies, reduced interest loans, loan guarantees and competitive research funding for applied industrial as well as basic research. Among the disincentives available to regulators are taxes, charges, fees, customs duties and tariffs on particular goods and services. Moreover, financial instruments might foster technology transfer or incentivize the investment of venture and seed capital. Beside this direct support for private actors, a substantial part of public economic support is often invested directly in state-owned universities and public research organizations. Consequently, research infrastructures can be considered as an indirect financial instrument to support innovative activity.
(3) Soft instruments can be understood as a form of moral suasion by the state. They are based on the transfer of knowledge, the communication of information, persuasive reasoning and a resulting voluntary adherence of the economic actors. Soft instruments can provide advice, normative requests or ask for voluntary approval to specific policy measures, whereby examples include promoting scientific knowledge on ‘research days’, publicly accessible documentations, codes of conduct for firms and public research organizations, voluntary technical standards or stipulations. Institutional means to implement soft instruments can include technology transfer offices or cooperation in public-private partnerships sharing costs, benefits and risks for knowledge infrastructure. By using these instruments, the function of the government changes “from being a provider and regulator to being a coordinator and
facilitator” (Borrás and Edquist 2013, 1516). The application of soft instruments – and thus a different understanding of the state’s role – has developed during the past two decades.
When considering the application of these three instruments, it can be stated that the current strong role of these instruments and the prevalence of innovation and industrial policy have increased in recent years. Since the 1980s, the field of industrial policy – and thus innovation policy – had been disregarded for two distinct reasons. First, there were concerns that direct innovation policy would necessarily induce government failures due to a lack of information on the part of the government. This was assumed to lead governments to take counterproductive regulatory choices. Second, concerns about the effects of lobbying were weighed more heavily. It was assumed that strong government interventions in industrial policy would lead to rent-seeking behavior by firms and thus induce corruption, which would ultimately hamper innovation and economic growth. Therefore, it was implied that industrial policy would allocate resources worse than the market; nevertheless, instruments such as grants and tax exemptions were still used broadly (Landesmann 2015).
However, it is argued that there has been a revival of industrial policy in Europe following the international financial and economic crisis of 2008, partly due to the need to restore growth after the crisis itself and partly due to the increasing pressure of being competitive on globalized markets (Landesmann 2015). For example, the German federal government has pledged to establish a high-tech strategy, building upon the European Commission’s Horizon 2020 strategy declared in 2010, within which the European Commission determined the aim that each member state should spent three percent of its gross domestic product (GDP) for research and development (COM (2010) 2020; BMBF 2014). Germany only narrowly failed to reach this goal in 2013, for which the most current set of data is available: the share of internal expenditures for R&D was 2.85 percent of the GDP in 2013, which corresponds to about 80 billion Euros (Statistisches Bundesamt 2015, 11).
Traditionally, innovation policy in Germany is based on project funding and thus it primarily uses economic and financial instruments. They can be distinguished into specific programs such as fostering Nano-technology and programs promoting innovative activities more broadly with a less specified range. These broader programs can include almost every kind of economic instrument, with the exception of tax credits, which are not practiced in Germany. Building on this institutional tradition, of the 80 billion Euros, about 67 percent were given to the private sector, 18 percent to universities and about 15 percent was invested in state-owned or non-profit organizations (Statistisches Bundesamt 2015, 10). For firms involved in innovative processes, the relevance of public financing has grown substantially:
before the crisis, subsidies were the fifth most important source of R&D funding for German firms and were used by only eight percent of the firms between 2004 and 2006. After the crisis, public support has increased to become the second important source of funding for 2011 to 2013, being used by 21 percent of German firms (Rammer and Peters 2015, 32).
This brief overview of innovation policy, its instruments and application underlines the increased priority of governmental action in fostering innovative activity. This implicates the purpose for innovation research to analyze the different instruments in detail. As outlined before, laboratory experiments can add to the existing literature of analyzing innovation policy instruments building on their ability to create counterfactual situations in which innovators’ reactions with and without the policy instrument are tested. Therefore, this dissertation presents three laboratory experiments, in which one regulatory and two economic instruments are investigated. Furthermore, the final chapter discusses the approach of using laboratory experiments in innovation research. Before presenting the four studies in chapters two to four, they are summarized in the following.