Innovation market failures and state aid: developing criteria

The views expressed are those of the authors and do not necessary reflect those of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. Nothing in this publication implies or expresses a warranty of any kind. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor's own risk. Innovation market failures and state aid: developing criteria i Executive summary This report constitutes an independent analysis by Oxera on what is meant by innovation, when market failures might be expected to occur, and when, in turn, state aid might be justified. The aim of the report is to develop an economic framework for assessing state aid proposals put forward in the field of innovation, in the specific context that innovation may be sub-optimal due to market failures. The findings of the report may be used to complement the process being undertaken by the Commission, which seeks to improve the existing rules such that state aid is targeted more effectively at resolving identified innovation market failures. 1 Drawing on the lessons learned from the theoretical and empirical literature on innovation and innovation market failures, five case studies explored by Oxera and a number of further discussions with relevant market players, the report identifies relevant and measurable dimensions of innovation market failures, and develops criteria, indicators and questions that allow the ex ante identification of when: – an investment or scheme put forward by a Member State that is to be a recipient of state aid is likely to result in innovation in the economy; – such investment or scheme is a priori unlikely to take place in the absence of government intervention due to the existence of market failures. The starting point for the analysis is the Community Innovation Survey (CIS) definition of innovation (European Commission 2005e). Here, innovation in the economy is taken …