Government intervention and innovation in industry: a policy framework

The authors build on recent studies to derive a framework for analyzing the effects of basic forms of government intervention on technological innovation. Relying on a recent Rand Corporation study of federally funded demonstration projects, the authors classify 10 projects on the basis of types of government intervention. The authors explain that the government can try to induce change in two basic ways--directly or indirectly. The direct method includes support for the development of new technology and the creation of market mechanisms to provide incentives for change. The indirect approach can range from persuasion to regulating product standards or direct government purchases. The authors set up four categories to encompass the joint effects of direct and indirect intervention, and offer tentative generalizations about the application of intervention. Direct intervention, such as R&D programs, is not likely to produce products of technological significance unless it is complemented by regulatory action. This type of joint action yields a high payoff when successful; many major post-World War II innovations such as the computer, the jet engine, and advanced semiconductor devices resulted from this mix of interventions. Conversely, regulatory measures alone entrench existing technologies and limit the payoff to incremental intervention. The emphasis in this category is on perfecting and redefining established technologies rather than innovating new ones. The findings of this study reinforce the notion that regulatory interventions play a vital role in shaping technological progress, although the process is seen as one that defies simple generalizations.