Within the last 50 years, the idea of changing industrial societies received growing support. Thinking further momentum is now prioritized in terms of sustainable development of businesses and communities. Innovation is considered to play an essential role in understanding the necessary changes. In particular, the contemporary ways of production and consumption should be altered in the process of long-term transformative change, which would allow preventing threats and shaping opportunities for societies. However, there is a need for comprehensive system innovations since individual or firm levels cannot ensure the required improvements (Rogge and Reichardt, 2016). This paper examines market and systemic failures to better understand how national policy mixes can be designed to assist in overcoming them.
Innovation for Sustainability: Market and Systemic Failures
The standard market failure rationale for intervention Is not sufficient to promote the creation and diffusion of new technology. In terms of the innovation systems (IS) analysis, innovation can be defined as an evolutionary process that occurs in a system of multiple socio-economic agents that are managed by both governmental and non-governmental institutions (Schot and Steinmueller, 2018). The interaction of agents largely determines the results of innovation, which clarifies that a market failure goes beyond industries and institutions. Therefore, the agents have to work with the systemic failures as well, which are caused by the behaviors and interactions in the system.
The current regulatory mechanisms support various eco-innovations, including resource efficiency, pollution control, renewable production initiatives, et cetera. Nevertheless, the experts note that stricter legislative pressure can be a better solution to overcome sustainable business archetypes barriers (Laukkanen and Patala, 2014). The regulation barrier involves the concept of scarcity that is quite relative, considering that “it is easier to use resources today than predict resource scarcity of the future” (Laukkanen and Patala, 2014, p. 9). The shortage of sanctions, prohibitions, and economic incentives for green innovations are the main problems. In addition, the prices for low-carbon solutions are higher than traditional approach to production and consumption. Along with the mentioned concerns, a lack of awareness among businesses should be emphasized as the factor that impedes the creation and implementation of sustainable innovation models.
Among the economic barriers to sustainable innovation diffusion, it is possible to consider the situation when the Individuals and actors are regarded as rational and utility-maximizing. For instance, imperfect or asymmetric information sets crucial financial risks. Taking into account that the modern economies tend to become increasingly networked, the inability to adopt a flexible approach and multidisciplinary skills lead to the failure to respond to the changing market (Considine, 2012; Knobloch and Mercure, 2016; Rogge and Reichardt, 2016). A tremendous amount of knowledge is necessary to create value and move in the direction of environmental protection.
However, an analysis of the factors highlighted above shows that, under unfavorable conditions, they can transform into inhibition factors. At the political and legal level, instability in the country, weakness and lack of professionalism of the authorities, restrictions arising from the antitrust, patent and licensing, tax and accounting legislation can be noted (Mazzucato, 2015). The adverse criminal situation not only does not contribute to the development of positive processes but also levels out all the positive conditions for innovative and sustainable development. A lack of long-term frameworks causes uncertainty and short-term investments, which cannot ensure the transformation of businesses.
Speaking of the key economic barriers, one should mention hidden costs, which can be expressed in the failure to account for additional spending. An engineering-economic analysis can misinterpret the decrease in utility or energy technology efficiency, resulting in the overestimation of the potential of such innovation (Rogge and Reichardt, 2016). The costs associated with staff training, overhead management issues, information analysis and disruption to production also compose hidden costs. Since some businesses may have limited access to capital, it is another barrier. Knobloch and Mercure (2016) point to the inhibition of innovations “by internal capital budgeting procedures, investment appraisal rules and the short-term incentives of energy management staff” (p. 43). In terms of the microeconomic perspectives, the change in costs and perceived benefits is required to handle the discussed barriers.
Organizational barriers evoke from the failure to properly establish an organizational culture and develop scale-up solutions. For example, values and attitudes can be set in a vague manner, leaving no place for employees to understand and re-purpose the business towards sustainable innovation. Structural barriers can appear in case of inappropriate information sharing, a lack of support, and highly bureaucratic and centralized organization. As rationally noted by Köhler et al. (2019), a business structure that has a transparent and decentralized nature is more likely to develop and diffuse innovations. The interaction of networks in the market is another example of organizational failure. On the one hand, excessively dense interactions pose the threat of impending novel insights. On the other hand, poor interactions or communications with the selected partners only can lead to strong dependence and inhibited learning and development (Köhler et al., 2019). The inability to adapt to the changing market requirements makes businesses remain outdated in terms of sustainable innovation agenda.
In the context of organizational barriers, coordination failure appears when the segments of the market and / or the agents miss the opportunity to connect to each other. Potts (2018) stresses that their incentives and messages are not aligned, and the market levels become disunited. In this case, efficiency defines the outcomes of the collaborative work, which makes it a viable criterion for evaluating the failure. Deep coordination rule refers to the situation when a new regulation is introduced by a company at the micro-level, yet it fails to meet the market level rules (Potts, 2018). This type of failure is related to knowledge complementarity: for example, new technology cannot be feasible if it cannot fit the associated norms of behavior and organization. At the operational level, coordination failure means the inability of agents forming the market to align transformations and transactions, which is caused by a lack of capacity adjustment (Raven & Walrave, 2018). The market participants fail to understand the importance of partnerships and how to make sustainable decisions.
In the group of organizational factors, the negative inhibition vector is also characterized by an irrational structure for monitoring innovative development or its absence. A lack of innovative and investment advice or their inefficient work along with a lack of an innovative scenario for the socio-economic development of regions prevents the transition of companies and the market as a whole. Merely selective application of individual innovative development functions, the absence of a research base, or lobbying through innovative and investment advice are also noted among the key reasons for failures (Kieft, Harmsen and Hekkert, 2017). The studies also show that the organizations that foster coordination, free choice and human resource development have more innovations (Söderholm et al., 2019; Vivanco, Kemp and van der Voet, 2016). In this case, the role of organizational support lies in offering special amount of free choice to make decisions, which allows each of the market agents to feel that their individual contribution is quite important for the common idea of diffusing sustainability.
Behavioral barriers refer to bounding rationality and mixed (non-financial) motives by the actors shaping the market. The inability to process complex information is one of the vivid examples of such barriers, when the individuals cannot manage to make proper decisions (Loorbach, Frantzeskaki and Avelino, 2017). A shortage of a properly-designed communicative structure can be noted among other reasons that lead to this type of barrier. In particular, a more transparent and simple infrastructure can provide the opportunity for joint development in the context of the same market environment. The poor search, collection and dissemination of information appear as a result of weak interpersonal relations within the organization and between companies (Loorbach, Frantzeskaki and Avelino, 2017). Trust among the market agents can be assigned a top priority since it promotes an open expression of ideas and extensive knowledge generation.
The link between the economic and behavioral failures to sustainable innovation can be traced via investments. According to Knobloch and Mercure (2016), the systemic deviation of the market agents from the normative benchmarks is one of the key barriers that are supplemented by the diversity of their perceptions. By using the distributed agent perspectives, the authors reveal that behavioral factors decreased the rate of innovation adoption from 81% to 20% in terms of normative optimization (Knobloch and Mercure, 2016). The significant role of these factors is also emphasized by Laukkanen and Patala (2014), who state that bounded rationality prevents individuals from making decisions following economic models. The constraints of time and attention are likely to neglect the potential improvement of energy and water efficiency. Although there can be sufficient information exchange and partnerships, bounded rationality is considered to be the most critical aspect.
In terms of behavioral barriers to eco-innovation diffusion, it is also possible to enumerate a lack of customer acceptance and awareness, which is especially important for socially-oriented initiatives. Laukkanen and Patala (2014) state that from generation to generation, consumers shaped their habits, and the material need is considered to be dominant in today’s society. Cheapness is valued much higher than a focus on sustainability, and the companies strive to meet customers’ expectations. The current culture of production and consumption is based on profitability as the main driving force of businesses that employ a short-term profit maximization strategy (Knobloch and Mercure, 2016). Namely, there are short-lived products and free consumption encouragement, which foster the existing way of production. Therefore, a radical change is necessary with regard to customer preferences and buying habits. The regulations that provide cost-effective solutions for customers and reduce overconsumption are needed. In general, holistic change is of paramount importance to address the identified barriers.
Overcoming Challenges: Policy Mixes
The key concern of contemporary research and innovation policies is associated with placing a great emphasis on economic growth rather than sustainable development. The evidence shows that the majority of businesses and industrial sectors focus on creating innovations per se, yet little attention is paid to transformative change (Kern, Kivimaa and Martiskainen, 2017; Rogge and Reichardt, 2016). The above authors argue that structural innovation policies should optimize innovation systems by making their knowledge generation more pronounced. In other words, technology needs to be oriented towards transformations in the industries (Ekvall et al., 2016). For example, water or energy sectors require special attention, without which it seems to be impossible to handle the challenges that are mentioned in the previous section of this paper.
At the national level, innovation sustainability initiatives should include innovative processes for the creation and sale of products and services, with a set of subjects of innovative activity. Kern and Rogge (2018) note that depending on the country, the national innovation system has a specific framework and characteristics. Resource sustainability of a region implies the presence of organizational and production mechanisms aimed at attracting, forming, using and developing both internal resources of the region and environmental resources (Kern and Rogge, 2018). It is necessary to correlate such two important concepts as the regional climate, which ensures sustainable innovation development of the territory, and individual innovative sustainability as a certain state of the socio-economic system.
The national innovation climate is to be formed under the influence of multilevel factors that determine the vector of its development (Schmidt and Sewerin, 2019). The regional macroeconomic components should include the growth rate of the gross regional product, labor productivity, the average level of wages in the region and correlation between production and non-production. The realization of progressive trends in establishing innovative sustainability is impossible without adequate actions to use information factors. A high level of elaboration of information flows and their movement directions within innovation development management are essential (Costantini, Crespi and Palma, 2017). In addition, the availability of data on the innovative development of the area, software products that allow monitoring the innovative development of the region at different stages of the innovation process and the presence of a communication network should be taken into account.
The broadening of current innovation policies in the direction of long-term integration with other policy fields and strategic orientation is the most relevant solution. The multi-level perspective and the innovation systems approach are the two key frameworks that can be used (Jenson et al., 2016). The policy mix is explored by various scholars, who focus on the objectives, interactions, and a dynamic nature of this solution to overcome the innovation sustainability diffusion failures. The policy mix concept involves several components to be considered while addressing the barriers to innovation sustainability. In particular, a strategic element, the integration of policy processes, and paying attention to policy mix characteristics. A policy strategy can be defined as a set of principal plans and policy objectives (Rogge and Reichardt, 2016). The process of determining and, implementing and revising goals should be dynamic. In turn, policy processes are composed of problem-solving attempts that are expected to result in policy learning via the analysis of emerging problems. As for the characteristics, credibility, consistency, coherence and comprehensiveness should be taken into account.
To demonstrate the ability of policy mixes, it seems to be essential to use the examples of nationally-adjusted policy mixes. The study by Reichardt and Rogge (2016) examines the influence of a policy mix on corporate innovation in the industry of offshore wind in Germany. The authors argue that the transformation of energy systems is of great importance as they are based on renewables as the core of technological change. Utilizing a qualitative company case study, it is found that the key innovation drivers are perceived credibility and consistency, as well as a feed-in tariff level. Namely, the long-term orientation of the policy mix is identified as the main factor of credibility. It should be clarified that the policy mix adopted by Reichardt and Rogge (2016) included instruments and design features as a policy strategy, while the following characteristics were studied: credibility, consistency, stability and comprehensiveness. The context factors were composed of the market features, public acceptance and technology characteristics. The Renewable Energy Sources Act (EEG), Research and Development programs and the KfW Offshore Wind Program are considered as the instrument mix components.
Speaking more precisely, the policy mix in Germany played a decisive role in determining corporate innovation activities. It is critical to state that the long-term planning and orientation of strategies were proved to be useful in research and development. In turn, the instrument mix was beneficial for the adoption of the policy mix. A high level of credibility can be evaluated as the main determining aspect of policy integration, while other characteristics limited the negative issues that were associated with the research and development area. These results are consistent with the findings of Rogge and Schleich (2018), who claim that the perceptions of companies play a key role in impending policy mixes. In the study that was also conducted in German settings, the above authors mention the positive link between consistency and credibility and innovation expenditures. The mutual interdependence of these elements should be investigated in future research to pay greater attention to the characteristics that either promote or impede innovation sustainability practices. For example, Xu and Su (2016) identify the need for exploring policy learning premises as a viable way to encourage businesses to adopt sustainable approaches.
By understanding the impact of policy mixes, it is possible to influence the pace and effectiveness of adopting innovation sustainability across industries (Falcone, Lopolito, and Sica, 2017). Since the transition to eco-innovations is the most critical challenge, a single policy approach cannot ensure the identified goal. The literature presents a range of options that can be considered by scholars and experts in their work. Edmondson, Kern, and Rogge (2019) propose the co-evolution of socio-technical systems and policy mixes, which is relevant for such areas as mobility, energy, and agriculture. It is argued that the mentioned framework enables new insights and helps in monitoring transition processes. As a result, the prevention of failures can be expected, and feedback generation is regarded as the instrument of investigating the occurred barriers (Edmondson, Kern and Rogge, 2019). The dimension of policy preferences is noted by Lindberg, Markard and Andersen (2019) as another aspect to pay attention to. The evidence also shows that policy mixes can be rather complicated, and the addition of new issues makes their coordination challenging (Kern, Kivimaa and Martiskainen, 2017).
Nevertheless, the use of a full range of instruments allows for including not only regulatory but also social, organizational and financial components to adopt policies in a balanced way. Kivimaa and Kern (2016) clarify that the use of policy mixes should be accompanied by the consideration of other national experiences to understand whether particular instruments can be applied to achieve the ultimate goal. For example, being a part of the European Union, the UK and Finland have varying policy mix strategies, while they can learn from each other’s experiences. Also, even though it is assumed that policy mixes should be dynamic, they should be stable to ensure the so-called long-terms of sustainable innovation activities. The role of network management is stressed by Söderholm et al. (2019), which is based on the assumption that “it also helps actors to better understand what can (and needs) be done to further the development by strengthening various network activities” (p. 321). Accordingly, the policy mix allows for paying attention to various agents and characteristics of the market.
To conclude, it should be emphasized that sustainable development and implementation of innovation are given great importance, considering the modern trends for overconsumption and profitability. This paper discusses the key types of the market and systemic failures to understand the ways that can be used to overcome them. The behavioral, organizational, economic, and regulatory barriers to innovation diffusion were identified and supported with examples from the literature. The policy mixes were regarded as an approach that leads to sufficient performance improvements. The analysis of the market agents, their relations and communication, coordination, network management, socio-technical systems and other issues confirms that policy mixes have great potential for encouraging businesses and governments to not only adopt but also promote sustainable innovation initiatives.
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