Innovation provides the foundation for new businesses, new jobs and productivity growth and is a key driver of economic growth and development. Innovation can also help address pressing social and global challenges, including demographic shifts, disease threats, resource scarcity and climate change. Innovative economies are more productive, more resilient, more adaptable to change and better able to support higher living standards. Strengthening innovation is therefore a fundamental challenge for countries in their quest for greater prosperity and better lives. This new OECD report on The Innovation Imperative – Contributing to Productivity, Growth and Well-Being provides a toolbox for governments that wish to strengthen innovation and make it more supportive of inclusive and green growth.

New sources of growth are urgently needed to help the world move to a stronger, more inclusive and sustainable growth path following the financial crisis. Innovation – which involves the creation and diffusion of new products, processes and methods – can be a critical part of the solution. While not a goal in itself, innovation provides the foundation for new businesses, new jobs and productivity growth and is thus an important driver of economic growth and development. Innovation can help address pressing social and global challenges, including demographic shifts, resource scarcity and the changing climate. Moreover, innovation can help address these challenges at the lowest cost. Innovative economies are more productive, more resilient, more adaptable to change and better able to support higher living standards.

This chapter builds on the OECD’s 2010 Innovation Strategy in exploring the contribution of innovation to economic growth. It extends that study by incorporating considerations about green and inclusive growth into the conceptual framework for innovation policy. This recognises the growing role that these objectives play in the overall policy agenda, but also in the context of innovation. The chapter also devotes attention to the various policy rationales for innovation and the overall framework for policies in this area.

Innovation is high on the agenda of both policy makers and other actors in the innovation system. But innovation itself is changing rapidly. The growing role of the Internet, investments in knowledge-based capital (KBC) and globalisation are among the major underlying supply-side forces that affect innovation. Demand-side factors, such as challenges related to the environment, to society (ageing, inequalities) and to the slowdown in economic growth are also impacting the dynamics and orientation of innovation. This chapter provides a brief overview of these recent trends and drivers.

A wide range of policies affects the various drivers of innovation. Among the most important of these policies for innovation are a skilled workforce that can generate new ideas and technologies, bring them to the market, and adapt to technological changes across society. Skilled people generate knowledge that can be used to create and implement innovations, and skills are also crucial to help absorb new innovations throughout economy and society. Human capital policy for innovation must address a wide array of skills and should help create an environment that enables individuals to choose and acquire appropriate skills and that supports the optimal use of these skills at work. This includes more incentives to institutions to improve the quality and relevance of their teaching as well as support for firm-level training. Policy makers should also assess the attractiveness of careers in academic research and improve these if necessary. Moreover, barriers to women’s participation in science and entrepreneurship need to be removed. Finally, policy should facilitate the development of linkages and networks among researchers across countries.

Policies for innovation also rely on a sound business environment that encourages investment in technology and in knowledge-based capital; that enables innovative firms to experiment with new ideas, technologies and business models; and that helps them to grow, increase their market share and reach scale. New issues and policy learnings relevant to framework conditions that have emerged from the OECD’s work on innovation relate to the appropriate framework conditions to benefit from investment in knowledge-based capital, tax policies related to innovation, the financing of innovation, as well as policies that enable experimentation and growth among young innovative firms. The work also emphasises the growing importance of global value chains (GVCs), and the implications this has for framework conditions that affect innovation, notably in regard to trade, investment and regulatory policies. Investment policies are important too, given the growing importance of investment in knowledge-based assets.

Policies for innovation also require a strong and efficient system for knowledge creation and diffusion that engages in the systematic pursuit of fundamental knowledge, and that diffuses this knowledge throughout society through a range of mechanisms. This chapter reviews policies on: the science system, including the promotion of research excellence and the role of open science in increasing the economic and social returns to public investments in scientific research, as well as the role of international co-operation in science and technology; emerging practices in commercialising publicly funded research trends; policy issues relating to the interconnected themes of ICT, “big data” and the open Internet; the evolving relationship between IPRs and innovation; and the development and functioning of knowledge networks and markets.

The fourth set of policies for innovation relate to the specific actions that encourage firms to engage in innovation and entrepreneurial activity. This includes R&D tax incentives, place-based policies, policies for high-growth firms, new approaches to industrial policy, including smart specialisation strategies, demand-side innovation policies, as well as consumer policy. In designing such policies, the appropriate mix of policies is often an important consideration for government.

This chapter explores some of the applications of the policies for innovation. The applications differ according to the national context, but may also be affected by the sector or technology concerned, and by the specific objectives of innovation. It first discusses the national agenda for innovation, and then turns to a number of specific policy challenges, namely the role of innovation for inclusive growth, health innovation and the role of innovation in the green growth agenda. Particular attention is also paid to innovation in the public sector, which is important to improve effectiveness and efficiency within the public sector, but which can also help support innovation throughout the economy.

This chapter explores a number of issues that are key to the governance and implementation of innovation policies. The first section of the chapter focuses on how to improve multi-level governance, i.e. in aligning policy actions across different ministries, agencies and stakeholders, but also across different levels of governments and across borders. The second section focuses on questions of trust in policies related to innovation, including the role of public engagement and risk management related to innovation. The final section focuses on specific questions related to the implementation and evaluation of innovation policies, including how governments can overcome challenges related to the implementation of reforms.