Best Practice Report


3. Innovation policy

Government investment in green research and development (R&D) and demonstration projects, and support for scale up through procurement can enable development and commercialization of breakthrough green technologies, as well as distributed and localized innovation on green technologies to reflect local conditions and needs.

Technological innovation is crucial for decoupling economic growth from environmental and natural resource depletion (UNEP, 2011). Development of more resource efficient production practices and technologies, new business and financial models, and new institutional arrangements contribute to the establishment of new markets, and support the creation of new green jobs and growth (OECD, 2011). Green innovation policies are therefore a critical area of green growth policy making. This is also discussed in Chapter 7: Public-private collaboration.

Green innovation policies face many of the same challenges and opportunities as traditional innovation policies. However, two special features of green innovation are highlighted in the literature: the positive externalities and social gains of green innovation are higher, strengthening the case for government intervention to achieve socially desirable levels of investment in green innovation; and the need to adapt the innovations to local environmental and social conditions is often greater (Dutz and Sharma, 2012).

In response to the challenges of green innovation an increased focus on open, social and financial innovation is emerging to complement the focus on technological innovation. This places a more explicit emphasis on the role of changes in institutional structures and systems for green transformation (Weber and Rohracher, 2012).

Green innovation policy generally targets the following goals (Dutz and Sharma, 2012):

•  The development and commercialization of new ‘breakthrough’ technologies.
•  Promoting ‘catch-up’ innovation by facilitating access to new-to-the-firm knowledge and to stimulate technology absorption and adaptation.
•  Enhancing the absorptive capacity of entrepreneurs, firms and workers through additional measures such as promotion of knowledge accumulation and skill development.

As highlighted in the previous section, clear and stable green fiscal and pricing-based policies are key to establish market signals that reflect the real value of environmental and natural resource use. Together with regulatory policies they are powerful drivers of innovation, but are generally not sufficient to bring about the level of investments required for longer-term innovation resulting in for example ‘breakthrough’ green technologies. Government investment is needed and experience indicates that it pays off.

Government investment in green research and development (R&D) successfully translates into development and commercialization of break-through green technologies that put social and human well-being goals at the center of R&D. To illustrate, between 2000 and 2005, 60% of all green patents registered worldwide originated in just three countries: Japan, USA and Germany. All three countries are characterized by high levels of government spending on innovation, including R&D (Dutz and Sharma, 2012).

Norway’s green innovation policy is an illustrative example of an approach that emphasizes goals of social and human well-being (Case 1). Norway promotes open innovation, stimulated by an engaged public sector, and with participation of actors at multiple levels with goal of establishing a creative society.

Public leadership via procurement and government demonstration of emerging green technologies and practices is critical. A recent comparative analysis of the green innovation approaches taken in Scandinavia (Nordic Innovation, 2012) finds that compared to Norway, Sweden has a more traditional research-driven approach to innovation, emphasizing public research carried out through universities and colleges to support in particular break-through innovation. In contrast, Danish innovation policies, while prioritizing public R&D in technology and science, also embraced elements of open innovation and focus on incentivizing the private sector through price signals. User involvement, public-private partnership and support through public procurement are key parts of the approach (Nordic Innovation, 2012). Green procurement by the public sector is becoming a driving force for innovation not only in Norway and Denmark but also in Iceland, where ecological procurement plays a central role in public sector engagement in innovation. These Nordic examples highlight the importance of public leadership via procurement and government demonstration of emerging green technologies and practices.

It is too early to evaluate the results and efficiency of these particular policies. However, the governments of the Nordic countries, like other countries with high government spending on innovation, have the ability to understand and use innovative technologies and practices and adapt these to the specificities of their national contexts. Empirically, the correlation between high government spending on R&D and development of breakthrough innovation technologies and business models is confirmed (Dutz and Sharma, 2012).

In low-income countries it is critical to support distributed and localized innovation on green technologies and practices by SMEs and community groups that reflect local resource conditions and development needs and are integrated into current cultural practices. In low-income countries, the formal private sector often has limited ability to meet local innovation and technology needs, so the engagement of local players, sometimes from the informal economy, can make a real difference. Fostering entrepreneurship and facilitating community-level innovation is equally important, particularly for cost-effective management of natural resources and small-scale technology deployment (Dutz and Sharma, 2012; OECD, 2013b; OECD, 2011; and OECD, 2010).

To date, ‘base-of-pyramid’ green innovation to meet the needs of low-income households in developing countries has been relatively limited (Dutz and Sharma, 2012). However, there are successful examples. The Manila Water Company created an innovative business model that brings affordable water to the urban poor using a combination of physical pipeline and sewage infrastructure, natural resources conservation, and community programs; in India, Jain Irrigation provides drip irrigation systems designed for smallholder farmers; and the Brazilian cosmetics company Natura works in co-operation with local communities to use their knowledge on how to extract natural resources sustainably (WEF, 2011).

The provincial government of Gauteng in South Africa has developed a comprehensive innovation strategy which aims to stimulate SME involvement and local community engagement. The strategy targets innovation to advance social inclusion, including by young people and women, (see Case 2).

Case 1: Green innovation policy in Norway

The Norwegian government frames its innovation policy as a process of building a creative society which puts human wellbeing and sustainability at the center (Norway Ministry of Trade and Industry, 2012). Support for innovation is focused on six sectors: energy and environment, oil and gas, healthcare, agriculture, marine, maritime, and tourism. This includes a USD 80 million program supporting enterprises to initiate green research, a strategy council for environmental technology, and a national strategy for environmental technology. The innovation approach builds on engaging users in the innovation process; has a focus on public sector led innovation; and public procurement is designed to actively reward innovation (Nordic Innovation, 2012).

Case 2: Green innovation policy in Gauteng, South Africa

Gauteng has a dual position as the innovation hub of South Africa, accounting for 52.2% of the total national R&D expenditure in 2008-09, and as the host of the largest concentration of informal settlement in South Africa. The government’s innovation policy therefore targets employment creation, and sustainable social and economic development (Department of Economic Development, 2010). The strategy has a number of interesting open innovation features. It focuses on community-led innovation to identify alternative economic value chains and community developed innovation solutions and fosters those solutions through replication and incubation particularly in the townships. Proposed strategic interventions include the development of networks to exchange information and knowledge, based on open innovation systems; and promotion of high speed Information and Communication Technology (ICT) access at a household level as a means of fast-tracking innovation (Department of Economic Development, 2010).