4.2 System Failure The system failure approach to industrial policy or innovation policy, in particular, stems from work on national systems of innovation. The first work in this field was by Freeman (1987), and other pioneering contributions were by Lundvall (1992), Nelson (1993) and Edquist (1997). As Lundvall (2007) has recently argued, the concept of a national innovation system can be seen simply as a useful analytical concept. But some governments have also used it as a development tool. As a result, some of the innovation policy measures based on the ‘systems’ approach are very vigorous. We shall return to this later in this section. The system failure approach to policy seeks to identify failures or weaknesses 35 in a particular innovation system, and correct these by policy interventions. As such the scope is wider than the market failure approach. Some adherents to the system failure approach to policy would say that this will displace the market failure approach because it is unambiguously better. While I would agree that the system failure approach has several important advantages, it cannot replace the market failure approach because the two have some fundamental differences. We could say that market failure is about why policy may be needed and how much (but doesn’t immediately help us with what and where), while system failure is about what policy is needed and where (but doesn’t give us so much help with how much). First let us explore the differences, 36 and then let us see why neither can displace the other. The system failure analysis of industrial and innovation policy stems from a rather different model of the innovation process than that used in neoclassical economics. An extreme account of this difference would be as follows: •
the neoclassical economics of innovation is based on the crudest ‘linear’ model of innovation – meaning that the flow of value from research to invention to innovation to wealth creation moves in one direction and operates along a single channel.
•
the ‘systems of innovation’ analysis of innovation is based on a much richer interactive model where there are many channels from invention to wealth creation and many feedback channels too, and moreover where a wide variety of institutions, actors and intermediaries play an essential role.
In reality, few neoclassical economists of today would use anything as crude as that basic ‘linear’ model, because some of the richer ideas from the ‘systems of innovation’ literature have diffused into the neoclassical tradition. Nevertheless, it is certainly true that models in the ‘systems of innovation’ are much richer and more interesting.
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Smith (2000) has argued that the word ‘weakness’ is really more suitable in this context, but the literature has ‘locked in’ to the term system failure, so we shall use that term in what follows. 36 Navarro (2003) and Nelson (2009) compare and contrast those two approaches to thinking about industrial policy. In an interesting paper, Schröter (2009) argues that the system failure approach really adds rather little over and above the market failure approach. 33