Government support for R&D in green technologies can help bring forward innovation and technology breakthroughs and reduce the costs and the risks of private sector investment in new technologies.
Mechanisms to support long-term investments in innovative technologies and business can include grant or research funding, subsidy mechanisms, innovation agreements (as outlined in Case 1), tax credits or deductions for private R&D investments and support mechanisms such as innovation facilities. Less common but increasingly used are challenge funds, prizes, and advanced market commitments.
Collaborative initiatives can also support the creation of enabling environments and networks for successful innovation through the availability of finance, support for firms and appropriate policy frameworks to create and sustain innovations that are applicable to the local context and build local capacity for local technologies. This is especially important for developing countries, where innovation and deployment are often hampered by weak institutional systems for protection of intellectual property and lack of sufficient physical infrastructure. An example of this approach are the UNFCCC-backed Climate Innovation Centers, which build local capacity, provide support for firms, facilitate finance, and advocate for enabling policies (see Case 2).
In addition to spurring innovation by creating an enabling environment, governments may need to pay special attention to building capacity of small- and medium-sized businesses to develop and deploy green technologies and systems. Small and medium-sized enterprises (SMEs) in many fields lead the way in developing new innovations (EC, 2005 and Bárcena et al., 2013). At the same time, SMEs may lack expertise to manage commercial risks or scale their businesses.
Bárcena et al., (2013) summarize innovation challenges that SMEs face in Latin America, the Caribbean and the EU. The private sector in these regions identified product and process innovation as the highest priority. While differences in emphasis by region could be observed, key areas identified for supporting innovation capacities are: training of people (to improve products and services and management skills), creating infrastructure (e.g. promoting use of information and communications technology (ICT)), and establishing stronger linkages between business and technology research centers (e.g. use of business incubators, science and technology parks) (Bárcena et al., 2013). This suggests that often the barriers are not financial.
An example of how governments can stimulate more radical innovations through non-financial, strategic support is the UK government’s Business Innovation Facility program (BIF). It provides advice and technical assistance to support businesses in tackling environmental and social challenges (see Case 3).
Based on the above examples, two factors stand out that require attention when supporting innovation in developing economies. Firstly, due to weak institutional systems to facilitate and promote innovation, there is no enabling environment in many developing countries (López-Claros and Mata, 2011 and Ulku, 2011). Secondly, until recently market demand from consumers in developing countries is not as ‘visible’ to innovators as compared to that of consumers from more affluent regions (Prahalad and Hart, 2002). Donor organizations and foundations, such as BIF, are increasingly targeting this issue through support mechanisms for business-led environmental or social innovation in developing countries. As with other donor capacity building initiatives, ensuring sustainability over time is a major challenge.
In the Netherlands, companies, research institutes, universities, and the government collaboratively drafted contracts to stimulate innovation and improve economic competitiveness. These contracts set sector-wide research agendas, commit participants to invest financial and human capital towards R&D and describe measures, plans, deals, and targets. The government has such contracts in place within nine sectors: agrifood, horticulture, high-tech, energy, logistics, the creative industry, life sciences and health, chemicals, and water (Bunzeck, 2013).
A ‘Top Consortium for Knowledge and Innovation’ develops a research agenda, establishes collaboration between participating actors, and disseminates knowledge to develop innovative products, services, and technologies. The government co-funds innovation by top consortia and invests EUR 0.25 for every euro invested by a company (Rijksoverheid, 2011). This approach has proven effective, although recent EU Council recommendations warn that the “focus on ‘top sectors’ should not come at the cost of fundamental research nor exclude innovative firms not in one of the ‘top sectors’” (EC, 2012).
Climate Innovation Centers (CICs) aim at supporting UNFCCC goals and providing comprehensive support to climate technology innovators from incubation, including seed financing facilities, specialized policy interventions, network linkages, technical facilities, and business training. Recognizing different countries may have different needs and gaps in their innovation systems. Each CIC needs to be tailored to the local context, involving local stakeholders in the design and implementation. The first CIC opened in Kenya in September 2012, with the aim of providing ”incubation, capacity building services and financing to Kenyan entrepreneurs and new ventures that are developing innovative solutions in energy, water and agribusiness to address climate change challenges” (CIC Kenya, 2012). The Kenyan CIC aims to create tangible impacts in its first five years, with projections of creating over 70 sustainable climate technology ventures, generating 4,600 direct and indirect jobs, mitigating 1.5m tCO2 emissions, providing 1 million people access to electricity and 440,000 people access to water and increasing the agricultural efficiency of 22,000 farms (Crawford, 2012; InfoDev, 2010; and Sagar, 2011).
Funded by the UK Department for International Development, the Business Innovation Facility (BIF) has piloted an approach to provide advice and technical assistance to business models that advance social and environmental objectives. BIF technically supports hands-on engagement with companies, drawn from a vast network of national and international experts. Over 90 projects have been implemented in Malawi, India, Zambia, Bangladesh, and Nigeria.
While the approach is resource and time intensive, and its hands-on nature relatively expensive, BIF’s impact on the businesses it supports, and other market players that might adopt or adapt similar business models, can be transformational (BIF, 2014). Key to the success of BIF is that it was tailored to developing country needs.