Demand-Oriented Innovation Policy: A Critical Review

In modern growth theory, innovation has been acknowledged to be the engine of economic growth and prosperity. However, from a social perspective, firms might underinvest in R&D and innovation because of market failures that drive a wedge between private and social returns to R&D. Therefore, governments around the world are trying to foster innovation by supply- and demand-oriented policy measures. In the recent years, an upsurge of interest has emerged especially within Europe in demand-side approaches to innovation policy.
In this study, we summarize the existing literature on demand-oriented innovation policy. In particular, we critically examine the various justifications for such policy interventions. We also judge recent initiatives in the Europe to intensify the use of public procurement as a policy tool to stimulate innovation. Moreover, we present descriptive evidence on the size of procurement markets in Europe, China, and the USA, and illustrate various approaches to assess the amount of procurement spending that is directed toward innovative goods and services.