The conceptual framework for this evaluation is developed from theoretical literature relating to innovation processes. One strand in the literature emphasizes that the main rationale for development agencies, such as the World Bank Group, is market failures in the production of public goods, such as basic research. In the absence of countervailing institutions, particular types of market and government failures lead to the under-provision of certain types of research.6 Other market failures lead to incentive problems, uncertainties, and information asymmetry that weaken the incentives for entrepreneurs to invest in innovative activities. In such cases, the correction of market and government failures provides the justification for Bank Group institutions’ support for innovation and entrepreneurship. Government failures are quite pervasive in innovation, including the failure to promote a policy environment that promotes innovation and fosters entrepreneurship, poor STI policies, and corruption (Dahlman 2014).7 If these failures are successfully managed, then innovation and entrepreneurship are expected to increase. The implementation or commercial application of innovations will in turn promote higher productivity, competitiveness, and growth and will help reduce poverty. More recent literature developed around concepts of national innovation systems has emphasized the systemic nature of innovation processes, in which innovation policy focuses on the flow of technology and information in a system of interaction among research institutions, universities, firms, and people (Freeman 1995; Lundvall 1992; Nelson 1993; Edquist 1997). In this perspective, support for innovation and entrepreneurship includes policy response to other bottlenecks and failures that impede innovation and entrepreneurial activities.8 Four types of failures are included: capability failures, failures in institutions, network failures, and framework failures (Arnold 2004). Besides correcting market and government failures, innovation interventions also need to address aspects such as strengthening firms’ capabilities to innovate and/or make more effective use of new technology, strengthening interactions among research institutions, universities, and firms as well work on the broader enabling environment in which innovation takes place (OECD and World Bank 2009; UNCTAD 2011). Thus, innovation is not conceptualized as a linear process but as a system that integrates production of knowledge and technology, its use by firms and other actors, and the interaction between producers and users of knowledge and technology. These theoretical perspectives provide the building blocks for the conceptual framework that guides this evaluation, as shown in Figure 1.1. The inclusion of other bottlenecks or failures does not invalidate the correction of market and government failures as important policy rationale. Instead, combining policy responses to both types of failures in the conceptual
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World Bank Group Support for Innovation and Entrepreneurship