Innovation in the Public Sector


I. Introduction

For the last 30 years, relentless technological innovation has seemingly conquered most, if not all, corners of the world. While in its early stages, the focus was on infrastructure and social networks, the latest phase has set its eyes on core productive and financial processes that will undoubtedly have profound socio-economic and environmental impact across the board. Rapidly adapting to the emerging global context is the clarion call for most countries if they want to remain relevant and competitive at the global level.

Many developing countries find themselves in a unique situation. For starters, most innovations and technologies hold a foreign passport and thus need to first travel and then be adopted and adapted to the national context. Having local capacities  – human, financial and institutional – to achieve such a goal is a tacit requirement that many of the poorer nations lack off hand.

Also, given relatively scarce fiscal and human resources, this group of nations must prioritize investments on innovation and technology that can accelerate the achievement of established national and international development goals and targets. Finally, developing countries should also strengthen national innovation systems (NIS) that, in the medium-run, could help create much-needed capacities not only to absorb external innovations and technologies but also to incubate and develop local ones that could end up having global relevance and application.

In this equation, governments can play both a critical and catalytic role. First, governments should develop and put into action relevant policies that foster science, technology and innovation (STI) and the ubiquitous deployment of digital technologies, as suggested by SDG 9. Second, governments should ensure that the provision of public goods and services, directly under their purview, scales up and reaches the whole of the population. And third, governments should facilitate the provision of private goods and services by promoting the development and operation of the private sector.

The last two are part of SDG 16 that openly acknowledges that governments in the Global South face myriad institutional gaps that impede the agile adoption or development of innovations and technologies and, by implication, the achievement of core development targets. That many also have limited fiscal capacity and are facing prolonged periods of slow growth adds insult to injury – not to forget that many are still struggling to cover adequately all geographical points within their national boundaries.

In this context, institutional capacity has two different hats. It is a means to harness and foster innovations and technology. On the other hand, it is also a development goal as adequate levels should be in place to wear the first hat properly. Developing countries must find the right balance between the two to ensure institutional capacity is in the running from the onset. Just like technology and innovation, institutional capacity is dynamic, a moving target jogging together along with several others.

Indeed, most developing countries are no strangers to the deployment of innovative digital technologies. In fact, several could be seen as pioneers within the full cohort of countries. Many have endorsed policies on and launched a plethora of initiatives related to ICTs, Digital Government and innovation.

Progress, however, has been slower than expected. The provision of public goods is still in its infancy, thanks to a weak state and institutional capacity. The age of fiscal austerity complicated matters. Being that as it may, the core challenge in most if not all technology and innovation policies and initiatives is the failure to link the areas to state capacity and institutional development. Many innovation guides that have popped up all over the place in the last five years assume a level playing field in this regard. In this view, institutional capacity is perceived as an exogenous factor and one that technology and innovation cannot seem to impact.

II. Framework

Innovation, Technology and Change

In principle, technological innovation is a subset of overall innovation. That means that not all innovation occurs thanks to technological change. While this might have been the case until the end of the last century, the global and cross-sectoral pervasiveness of new digital technologies is changing such a perspective.

Digital technologies are usually part of most innovation processes in three ways: 1. As infrastructure via digital networks and cloud computing, for example. 2. As a means of information, communication and data sharing via social media, big data, and data analytics, thanks in part to mobile technologies. And 3. As a digital platform or application such as mobile apps, blockchain technology and Artificial Intelligence. The latter is best known as digital innovation. Nowadays, most innovations use digital technologies in one or more of the three ways described above.

In this note, innovation is defined accordingly and is thus almost always linked to new digital technologies.

In the standard innovation approach, governments have two distinct roles in the innovation process. First, they should lead in innovation processes within the public sector to augment efficiency, effectiveness, responsiveness and transparency. On the other hand, governments should create an adequate policy environment to promote private sector-led innovation and let the market drive the overall process. While the two are seemingly connected, the mainstream view argues that the latter is the prime mover in the whole process. Governments should only intervene in the case of so-called “market failures.”

However, recent research strongly suggests the issue is not so clear cut as government innovation policies can also target specific sectors or priority areas, as discussed below.

State Capacity and Political Regimes

History shows that epochs of rapid technological innovation and change are accompanied by critical structural changes at the institutional and organizational levels in both the public and private sectors. Technology innovation is usually running well ahead of institutional development that is almost always playing catch up. At the same time, the same evidence pinpoints that accelerated technical change can initially the population in the short-term. It thus demands special attention to tackle emerging or resurgent socio-economic and political gaps.

State capacity is thus an essential component. While no consensus exists on a single definition, for the purposes of this note state capacity comprises three interrelated pillars:

  1. Institutional capacity. Capacity to design and implement policies and programs to deliver public goods, the legal capacity to sustain the rule of law, and the existence of a professional and capable civil service.
  2. Fiscal capacity. Capacity to capture and manage financial resources sustainably via taxation and alternative sources, including external ones (FDI, ODI). Administrative capacity is a key feature here.
  3. Infrastructural capacity. The capacity to undertake institutional and fiscal activities throughout the territories under state control, including the protection of all citizens.

From an institutional and governance perspective, distinguishing between state capacity and political regimes is essential. Strong states are frequently perceived as proxies for authoritarian or non-democratic regimes. However, most Western democracies have developed high-capacity states, a process that has taken over 100 years. On the other hand, many non-democratic regimes have to juggle with low-capacity states and use force as the primary and only means to sustain social cohesion. Table 1 below depicts the relationship between state capacity and political regimes.

Table 1: State Capacity and Political Regimes

Differentiating state capacity from political regimes is thus critical. 

Policy and Administrative Capacity, and Institutional Design

In terms of innovation processes and technology adoption throughout, policy capacity takes center stage. Policy capacity boils down to making informed policy choices from a variety of options. These choices hopefully will end up promoting sustainable development while facilitating the strategic deployment of new technologies. This process should not be limited to the public sector alone, by default. Instead, it can also explore choices that involve public-private interactions and specific mission-oriented ventures that could also enhance or accelerate overall human development.

Policy capacity is inextricably linked to administrative capacity, the latter being the capacity to capture, manage and efficiently disburse the necessary fiscal and financial resources to support any given set of policy choices. Administrative capacity can be a wake-up call for policy agendas if the options made by decision-makers are exceedingly ambitious in terms of financial resources and existing capacities. On the other hand, making policy decisions that are not tightly linked to fiscal capacity will either delay or stop implementation altogether. Policymakers should always tightly link policy and administrative capacities. Many developing countries exhibit a wide rift between these two sets of interrelated capacities – when available.

Both policy and administrative capacities will have an impact on the shape institutional development will take and, thus, on overall state capacity. On the one hand, a given level of institutional development can limit the implementation of chosen policy agendas. On the other hand, policy agendas can also opt for a particular type of institutional development, centralized or decentralized. In all cases, policy agendas within a given set of administrative capacities will have an impact on public sector institutions, which will then evolve over time accordingly.

III. Innovation and State Capacity


Innovations within the public sector are linked to digital transformation and public sector reform efforts aimed at changing and modernizing public institutions and their internal organizational structure. Here, the process starts with the development of relevant innovation policies that can then trigger institutional innovation and sustain it in the long-run. These two components are thus closely associated.

Two models that explain how innovation occurs in the public sector are available. The first one highlights the existence of an efficient and knowledgeable bureaucracy that operates with relative autonomy and has links to the private sector. In this model, centralized institutions are critical and enable public sector innovators to access funds, human resources and key policymakers.

The second model centers on entrepreneurship and charismatic individuals that can easily open doors and thus get similar access to resources and key decision-makers. In this model, a decentralized organization is the primary driver of public sector innovation. This model is also the one regularly used to distill innovation processes in the private sector, a model that usually emphasized the role of the individual.

Nevertheless, note that both models assume that a given level of institutional capacity is already in place and thus provides fertile ground to kick-start innovation processes. That is undoubtedly a strong assumption in many developing countries where such capacity is still incipient. Furthermore, neither model directly links innovation to the enhancement of institutional capacity and thus have little to say in terms of state capacity and its components. Again, that is a critical link that developing countries need to factor to embrace comprehensive innovation policies that can increase in one way or another institutional capacity – which in turn pushes forward the achievement of fundamental development goals.

Innovation Paths

In many developing countries, strengthening policy and administrative capacity, and institutional organization is necessary to ensure innovation and technology policy agendas are effectively implemented. Losing sight of these close interconnections during the policy-making process tends to create insurmountable challenges that cannot be by-passed otherwise.

Recent research has identified two generic paths adopted by developing countries to promote innovation and technology adoption processes to foster inclusive economic growth. Table 2 below summarizes these findings.

Table 2: Innovation Development Paths

Policy agenda Domestic centered, building national capacities Foreign focus, attracting foreign resources to build national capabilities
Administrative/ Financial focus  Domestic savings as core source, strong incentives to local private sector FDI as key source, competition as trickle-down mechanism
Institutional organization Centralized bureaucracies with high expertise and close links to the business community Specialized autonomous entities working independently following a private sector model

The domestic route was the path taken in the 1980s by East Asian countries such as Singapore, South Korea and Taiwan. The national state was the prime mover of the process and used innovation and technology to drive change. That led to the emergence of the concept of the developmental state, where public sector-led policy innovations have a pervasive impact throughout the economy. Contrary to standard policy recommendations by IFIs at the time, these countries found a new way to promote inclusive growth and enhance human development. Nowadays, these countries are core players in the world economy and have by now transferred out of the developing country global team.

After the events of 1989, most Eastern European countries opted for the foreign-led path and had an unbounded commitment to the potential benefits of globalization, financial services included. While a few are performing relatively well, most are now facing increased inequality, while institutional development seems to have stagnated. In any event, none of these countries has been as successful as any of the so-called Asian Tigers.

The opening shot in the path selection process is decisive and offers a stark choice between foreign and domestic options. Countries facing stagnant economic growth, low levels of domestic savings and high corruption will undoubtedly have less liberty to select an optimal path. In any event, the initial path selection of the overall policy agenda will have a profound impact on administrative and financial arrangements and shape institutional organization and overall state capacity development accordingly.

Nevertheless, nothing is stopping developing countries from starting with the foreign-led path in the short-term and then switch to the domestic route in the medium or long-term. That, in fact, seems the path China has taken. However, such a switch will demand the investment of additional financial resources, a certain level of policy and administrative capacity and a sophisticated institutional organization structure to sustain the effort.

Innovation and the State

As mentioned before, the traditional approach argues that governments and the state, in general, play a passive role in innovation processes limited to setting policies and promoting the business sector. The historical evidence strongly suggests the picture is much more complicated.

In the late 1950s, the U.S. government created the Advanced Research Projects Agency (ARPA) in response to the surprise launch of Sputnik by the Soviets. ARPA’s was conceived as an independent R&D agency in charge of leading the country in technology research, mostly focus on global military superiority. ARPA, renamed to DARPA in 1972 (D standing for defense), brought together government, academia and the private sector to foster innovation and develop leading-edge technologies. Perhaps one of the most known outcomes of ARPA was ARPANet, the precursor of today’s Internet. The protocols that sustain the global network of networks were developed under the auspices of ARPA/DARPA.

As ARPANet grew over the years, the academic and non-military components of the network were ceded to the National Science Foundation (NSF) in 1990. NSF is yet another example of a state-funded R&D agency searching for leading-edge technologies and solutions. Not surprisingly, research funded by the NSF supported the creation of the various technologies that allowed Apple to integrate them under the concept of the iPhone, for example. Not surprisingly, the UK has recently announced it will be creating its own ARPA-like entity.

The developmental state of the East Asian countries furnishes another example, but this time within the context of development. This set of countries created independent entities staffed with top of the line talent, expertise and knowledge that drove policy choices while keeping the private sector full on board. The core idea was to develop domestic capacities at all levels to compete with industrialized countries in the global market. The evidence today shows that they were indeed successful – acknowledging that geopolitics at the time played a crucial role.

Note that both examples also showcase the relevance of the domestic-center innovation path. In any case, governments have a role to play in fostering innovation processes to tackle their core developmental challenges, such as the SDGs. They must be willing to take risks while working together with the private sector and the universities. Institutionally, driving innovation within government and across all of society demands the creation of new independent entities agile enough to explore and prototype innovations. This should be complemented by having sufficient institutional capacity to implement innovations at scale while securing the required financing.

Cheers, Raúl


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