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economy lab

Kevin Van Paassen

The word "innovation" has elbowed its way into public policy debates, but it's still not clear what is meant by that term, nor have I come across a clear description of what an "innovation policy" would look like. Put bluntly, the term "innovation" runs the risk of becoming a meaningless buzzword, playing the same role that the word "excellence" did a generation ago.

The theory of economic growth includes roles for such well-defined concepts as investment, human capital, research and development, productivity, and technical progress. I don't know where innovation fits into this. My guess would have been that innovation is another name for R&D, but apparently there's an ineffable distinction between innovation and R&D.

There are well-known policy instruments at the government's disposal for increasing investment in human and physical capital and for increasing R&D activities. (Their relative effectiveness is another question.) But so far, the only proposals I've seen for an innovation policy consist of programs in which governments give money to deserving firms. This is problematic on a couple fronts.

Firstly, there are already many -- too many -- 'economic development' programs whose purpose is to channel public money to companies that enjoy the favour of the government. It's hard to believe we need more of them.

Secondly, the criteria are alarmingly vague: distributing taxpayers' money on the basis of "innovation" is about as transparent as doing so on the basis of "excellence." This sort of policy just sets the stage for an opaque game in which firms and their consultants try to guess what the government might consider to be innovative enough to get public funding.

Clearly, it is a good thing to have an economy in which innovation -- and/or entrepreneurship and/or R&D -- is encouraged and in which those who produce new and popular products are rewarded. But the best way to bring this about is to enhance competition, improve access to markets and make sure that the tax structure doesn't introduce growth-reducing incentives -- in other words, the standard pro-growth policy mix.