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ELSEVIER Research Policy 25 (1997) 1161-1188
pohcy

A catalytic and evolutionary approach to horizontal technology

policies (HTPs)
M o r r i s T e u b a l 1, 2
Industrial Development Policy Group (IDPG), The Jerusalem Institute For Israel Studies, Jerusalem, Israel
Final version received February 1996

Abstract

This paper presents an evolutionary framework for horizontal technology policies (HTPs) especially market-friendly ones
involving project-based incentives (e.g. R & D project based grants rather than tax-based incentives to yearly expenditures on
R&D). HTPs are a category of technological policies whose objective is to promote technological development per se, and
associated management and organizational routines, irrespective of industrial branch or technological area. They are being
increasingly adopted by both advanced countries and newly industrialized countries in response to the new opportunities and
threats opened up by the technological revolution and by the processes of liberalization and globalization; and they
complement the more specific and well-known selective and vertical policies aimed at individual sectors and technologies.
The analysis is conducted within a learning-to-innovate framework with emphasis on collective, organizational learning;
search; and market-building. The outcome is a technology policy cycle with distinct infant, growth, and mature phases.
Proactive 'generation" of a critical mass of projects for efficient learning and diffusion of innovation routines becomes the
aim of the infant phase; while the mature phase of the policy should focus on policy restructuring including drastic
reductions in the support of routine projects and enhanced support of more complex types of innovation. The paper also
emphasizes the importance of a neutrality component in incentives in the infant phase of increasing selectivity; and of
building policy capabilities for efficient policy design and implementation.

1. The need for and context surrounding the
p r o p o s e d policy f r a m e w o r k
The current technological revolution (including
the emergence and gradual penetration of the new
flexible manufacturing and information technology
This is a new version of the paper "The catalytic promotion
of socially desirable activities (SDAS): a capabilities approach to
industrial and technological policies." I appreciate the comments
of two referees and the continued interactionwith N. Ben-Aharon,
R. Galli, M. Justman, D. Kaufmann, S. Radosevic, K. Smith, E.
Steinmueller, B. Toren, and E. Zuscovitch, which has consider-
ably improved this draft.
2 Also at STEP Group, Storgaten 1, N-0155 Oslo, Norway.
paradigm (Piore and Sabel, 1984; Freeman, 1987;
Freeman and Perez, 1988; Willinger and Zuscovitch,
1988) and the redefinition o f the role o f the state in
the economy) is bound to induce profound changes
in the institutional and policy framework associated
with the promotion of technology and innovation.
The technological revolution is accompanied by a
process o f globalization, which enormously increases
the extent and scope both of variety (with respect to
technologies, organizational forms, products, and op-
portunities) and of the competitive pressures facing
enterprises. Partly in response to this, search activi-
ties are becoming increasingly crucial for the growth
and survival of enterprises. The search for 'technol-

0048-7333/97/$17.00 Copyright © 1997 Elsevier Science B.V. All rights reserved.

PII S0048-7333(96)00886-4
1162 M. Teubal / Research Policy 25 (1997) 1161-1188
ogy' includes: locating and identifying opportunities,
including potential opportunities for investment in
new technology; initial screening to assemble a sub-
set of reasonably good technological alternatives;
and other activities that precede actual choice. As
compared to the previous mass-production paradigm,
its enhanced importance is not only absolute, but
also relative to 'choice' (see Lane, 1993a, Lane,
1993b; David and Foray, 1994; Teubal and Zuscov-
itch, 1994). 3 Moreover, since competition is increas-
ingly based on technology, and enterprises must
continually restructure their activities in conditions
that frequently resemble those of fundamental uncer-
tainty, there seems to be less and less scope for the
neoclassical assumptions of maximizing behavior.
Adaptive behavior rather then maximization, and the
related need to adopt new routines associated with
search and continual technological innovation would
seem to fit better with the reality facing enterprises
and other organizations today. 4
Such an evolutionary perspective (see Nelson and
Winter, 1982) should also affect policy that promotes
economic change, particularly technological policy
(Metcalfe, 1993 and, to some extent, Justman and
Teubal, 1986, 1995). The influence on policy also
derives from three other considerations. First, the
ongoing restructuring needs of firms and other orga-
nizations would enhance the desirability of a struc-
turalist perspective on economic growth and devel-
opment (Justman and Teubal, 1990 Justman and
Teubal, 1991; Guerrieri, 1992), which could help
give a structural-change content to growth-evolu-
tionary processes. For example, the restructuring of
small/medium-sized enterprises (SMEs) might in-
volve the continued introduction of new niche prod-
ucts, tailored to the specific needs of well-defined
market segments (rather than of mass markets) and
involving a much larger component of design, R &D,
3 While the concept partially overlaps the notions of transaction
costs and absorption capabilities (Cohen and Levinthal, 1990) it is
important, in the context of this paper, to refer to it specifically
and separately.
4 The increased importance of search independently reduces the
scope of the principle of optimization or maximization in the
behavior of economic agents. It also brings to the fore issues of
codification of information, for example, Foray (1993) emphasizes
the implications of information codification on the feasibility of
rapidly focusing the search and development efforts of firms.
and marketing. Identifying, producing, and market-
ing these products would require access to a wide set
of technological, management, and other capabilities,
only some of which will be available in-house. Thus
the infrastructure and networks supporting SMEs,
and not only direct support of innovation or firm-
based capabilities, may frequently assume important
roles in the overall focus of technological policies.
Moreover, in accordance with the evolutionary view
of the firm as a collection of routines, the adoption
by firms of an ongoing, continual technological
change/innovation effort requires the adoption of
appropriate management and organizational routines.
A second influence on technology policies is the
increased market orientation of economies, both ad-
vanced and developing capitalist economies and
economies previously belonging to the Socialist Bloc.
This would call for adoption of more market-friendly
policies. In this paper I will use the term catalytic to
describe a market-friendly approach to a class of
such policies (see also Teubal, 1996). Finally, the
enhanced role of technology and of non-market coor-
dination (Teece, 1992; Foray, 1993), driven by global
competition, among other factors, creates the need
both for the restructuring of existing institutions and
for the creation of new ones. 5 While this consider-
ably widens the scope of technology policy by re-
quiring a shift from a simple market-failure perspec-
tive, it also creates the need for a technology policy
framework (Smith and Teubal, 1994). Such a frame-
work would incorporate basic principles of evolu-
tionary theory (the respective roles of both market-
based and non-market technology selection mecha-
nisms; and co-evolution of institutions and technol-
ogy) and give concrete content to technology (and
industrial) policy formulation and implementation.
More specifically, the framework is supposed to give
concrete content to what may be termed the bureau-
cratic (policy) selection mechanism, which would
supplement the market selection mechanism in allo-
5 For example, a successful technological infrastructure policy
(TIP) requires the development of cooperation routines among
firms in the area of precompetitive research and development (at
least as far as advanced TI is concerned). These non-formal
behavioral traits may have to be supported by more formal
institutional adaptations, e.g. legal mechanisms for arbitrating
conflicts among partners.
 M. Teubal / Research Policy 25 (1997) 1161-1188
cating resources to technology and innovation. How
does the centrality of search, learning, and adoption
of new routines translate into the approach followed
by government agencies involved in technology pol-
icy?
This paper presents an evolutionary framework
for horizontal technology policies (HTPs), especially
market-friendly ones involving project-based incen-
tives. HTPs are a category of technology policies
whose objective is to promote technological develop-
ment per se, irrespective of industrial branch or even
technological area. While these policies, which could
be visualized as being the intangible complements
(and even the successors) to the more conventional
universal incentives to investment, have increasingly
been adopted by advanced and developed countries,
they have not yet been subjected to careful economic
analysis. 6 They also complement more specific, ver-
tical or even selective policies aimed at specific
industrial branches and technological areas. Their
importance derives from being central components
of government inducement of technology-based
structural change in a wide variety of conditions (for
newly industrialized countries (NICs), see Teubal,
1996), including situations with scant preexisting
capacity to identify strategic economic branches or
strategic technologies.
The paper begins with an analysis of the limita-
tions of simplistic market-failure analysis for tech-
nology policy design and implementation. We next
introduce the notion of socially desirable technologi-
cal activities (SDTAs) and of the objectives and
targets of HTPs aimed at promoting them (or the
associated routines). Section 3 is a partial analysis of
some of the conceptual building blocks for HTPs
(for example, the importance of search and market-
building) followed, in Section 4, by the concept and
analysis of the technology policy cycle with its
infant, growth, and mature phases. The concluding
6 Despite studies of the economic impact of tax exemptions on
R&D (see Metealfe's review in his 1993 survey Metcalfe (1993)),
there has been scant recognition and no analytical discussions of
horizontal technological policies from an evolutionary perspective.
A discussion Israel's largely neutral, grants-based support for
industrial R&D can be found in Teubal (1983), Teubal (1993).
1163
section summarizes the policy implications of the
analysis and, more specifically, the evolutionary na-
ture of the mechanisms of policy-making underlying
'good' HTPs.
2. The nature, focus, and objectives of HTPs
2.1. The limitations of simplistic market-failure anal-
ysis
The accepted conceptual framework underlying
technological policy is based on Arrow's seminal
paper, which sets the basis for what may be termed
the 'pure' market-failure approach to justifying gov-
ernment intervention in promoting technical change
(see Arrow, 1962). Many economists have further
developed and refined this approach, and there is a
broad consensus that it represents an intellectual
basis for such policy. In our context, market failure
should indicate an "imperfection of market forces
in supplying SDTAs whether or not markets exist."
Thus market failure may exist even when certain
forms of a market exist, for example, in the context
of a set of relatively isolated yet interacting bilateral
transactions. It is certainly not only a result of a total
absence of markets.
There is a more fundamental sense in which the
absence of markets is not necessarily indicative of
market failure, because other, non-market mecha-
nisms of resource allocation or systems of gover-
nance could be more appropriate for a particular type
of technology-development activity (Nelson, 1987).
These could include networks, bureaucratic/profes-
sional mechanisms, and hierarchies. In fact, the fun-
damental critique of simplistic market-failure analy-
sis is its implicit assumption that the market has an
advantage over all other selection mechanisms when
it comes to allocating resources to innovation/tech-
nology development. Despite this critique, a realistic
evolutionary perspective must recognize that today
market mechanism should play a crucial, although
not necessarily exclusive, role for at least certain
types of technological development activities; e.g.
technology transfer and absorption, firm-based R & D,
etc. Hence this paper focuses both on market-failure
1164 M. Teubal / Research Policy 25 (1997) 1161-1188
analysis (though not one that requires the neoclassi-
cal notions of equilibrium and maximizing behavior)
and on other institutional and bureaucratic mecha-
nisms that complement the market mechanism in the
promotion of technological development.
There is less awareness that an analysis of market
failure is only one step in the design of policies for
supporting technological innovation (Nelson, 1983). 7
Market-failure analysis, even when properly embed-
ded in a dynamic context, does not provide a suffi-
cient framework for policy, for at least two reasons.
First, it should be combined with an analysis of the
institutional framework within which market forces
operate. A major reason why market forces fail to
provide the socially optimum amount or an inade-
quate structure of innovation may lie in constraints
due to an inappropriate protection of intellectual
property rights, antitrust laws that block the free
cooperation of competing firms in developing prec-
ompetitive technological capabilities, 8 rules at uni-
versities and government laboratories that limit the
extent to which researchers may profitably engage in
proprietary technological development with business
firms, etc. 9 Not surprisingly, countries have tried to
7 Nelson (1983) points out that "'simple market failure cannot
explain industry distribution of support" (in the United States)
and that it is necessary to make a distinction between 'diagnoses'
(where it may have a role) and 'prescription,' which should take
into account both the existence of capabilities for finding high
priority projects and political factors. In his work he has also
pointed out a more specific objection even for diagnostic purposes
- the possible pervasiveness of externalities. This issue is ad-
dressed here.
s For a brief discussion of anti-trust constraints on such activi-
ties and changes in legislation in the United States during the
1980s, see Tassey (1991).
9An excellent example from a NIC country is Argentina,
where, until the second half of the 1980s, almost no university
researcher or researcher in the agriculture or industrial network of
laboratories could have incentives to perform work for industrial
firms (such work could not receive a financial reward and its
results could be withheld from publication). The gradual creation
of linking units to interface between the various institutions and
the private sector, starting with that of the National Institute of
Agriculture Technological (1NTA) followed by that of Buenos
Aires University (UBA), and their regulation by special legislation
(Ley 23177, 1992) may gradually enable enterprises to undertake
socially desirable, joint R&D projects with such institutions.
adjust their institutional frameworks to enable mar-
ket forces to operate better in generating technologi-
cal innovation. 10
Another reason why simple market-failure analy-
sis cannot by itself provide the framework for effec-
tive technological policy is the need to generate an
evolutionary (rather than a neoclassical) policy
framework (Metcalfe, 1993). Such a framework,
which must combine R & D with learning and adop-
tion of routines, should be used to analyze the evolu-
tion over time of externalities, policy capabilities,
and the policies themselves. Only then can one
justify and understand the policy restructuring that
frequently takes place (and more frequently should
take place), in terms, for example, of the elimination
of some externalities, the appearance of others, and
,L
knowledge about these processes.
Neither the framework generated by Arrow nor
the formal models of technological innovation in the
neoclassical tradition (see Stoneman, 1983, and dis-
cussions of policy within that tradition, e.g. some
contributions within Dasgupta and Stoneman, 1987)
are particularly helpful as underpinnings for the re-
~0 One implication of an institution-less market-failure analysis
is that policy prescriptions are formulated in terms of subsidies
(or, more generally, incentives) rather than in terms of new
institutions, etc. Within such a framework of analysis there is no
discussion of the trade-offs between changes in institutions and
the scope of subsidization. For example, in connection with the
restructuring and 'privatization' of defense industries, different
organizational configurations of the defense organizations will
lead to different levels of government subsidization. For example:
the creation of independent technological infrastructure organiza-
tions, by introducing the market mechanism into the diffusion of
technology, may reduce the level of subsidies that have to be
channeled into the new, restructured sector.
l~ The partial restructuring of Israel's traditional subsidy to
R&D through the effective implementation of a royalty scheme
has reduced the subsidy to incremental product and process
improvements by large firms to below the traditional level of
50%. This common-sense development follows the presumed
reduction or elimination of market failure within the above cate-
gory of finns and innovations. Formally speaking, the policy has
thus become somewhat less neutral (Teubal, 1993). Another ex-
ample of policy restructuring concerns precompetitive, coopera-
tive technological development programs in Europe. They have
apparently become more selective and specific through time. (!
would like to thank Dan Kanfmann for this comment. See also
Kaufrnann and Yinnon, 1995.)
 M. Teubal / Research Policy 25 (1997) 1161-1188
quired evolutionary policy framework. The descrip-
tive, formal models of technical change used are
based on simplistic views both of the economy and
of government. Their essentially static nature neces-
sarily ignores the critical learning processes associ-
ated with R&D, the nature and evolution of the
institutional framework governing the activities of
market forces, and the critical roles played by capa-
bilities both in the private sector and in
government, t2 The effect is an overemphasis on
financial incentives instead of institutions and capa-
bilities for policy formulation and implementation,
and a total ignoring of the ongoing need to restruc-
ture policy in parallel with the restructuring of eco-
nomic activities.
The simple market-failure conceptual framework
is not helpful in understanding the dynamics of
actual policy experience of the 1980s in Europe and
the United States and in the successful countries of
Asia. This includes both the restructuring of existing
policies and the emergence of new policy areas, such
as the stimulation of cooperative, generic R&D,
policies for linking firms to academic institutions,
etc. t3 While it is true that the gap between actual
policies and the underlying conceptual and policy
framework reflects the fact that the strength, configu-
ration, and loci of market failures change over time
(in part due to endogenous factors set in motion by
earlier policies, including adaptations of institutions),
it is also a result of the fundamental uncertainty
associated with new technological policy initiatives.
Actual configurations of new policies should be un-
derstood in terms of an evolutionary process of
finding 'reasonable' matches between resources and
objectives rather than simply 'maximizing' a well-
defined objective function. Alternatively, we may
say that policy in its early stages should be largely
regarded as a succession of experiments which the
responsible government agency undertakes in order
12 The static nature of formal models of technical change does
not extend to the class of diffusion models that are inherently
more dynamic. Translation of the latter models into policy terms,
however, is still far from complete.
~3 For a survey of the evolution of technology policies in
Europe, see Dodgeson and Rothwell (1992).
1165
to eventually configure a menu of policy choices that
more closely reflects 'needs,' i.e. that reflects the
structure of the recipient population, its routines, and
the implications thereof for meeting policy objec-
tives. ~4 The upshot is a third evolutionary character-
istic of our policy framework, namely, that policy
has a cycle, just as any radical product innovation
has one.
2.2. The focus of HTPs: promoting socially desirably
technological activities (SDTAs)
Despite significant recent advances in conceptual-
izing evolutionary technological policy (see, for ex-
ample, Metcalfe's survey), there still remain areas of
confusion, especially with respect to the nature and
role of horizontal technological policies (HTPs). The
objective of these policies is the functional promo-
tion of socially desirable technological activities
(SDTAs) and associated management and organiza-
tional routines within business enterprises. For our
purposes, SDTAs include firm-based R & D (or, more
generally, innovation), technology transfer, adoption,
and diffusion, and technological infrastructure - both
its basic and advanced components (Justman and
Teubal, 1995). The term 'horizontal' refers to the
basic fact that the policy objectives are not focused
on a particular economic sector, industrial branch, or
technological area. Instead, they are universal, as
opposed to these traditional ways of classifying eco-
nomic activity (or technology). Alternatively, their
focus is functional rather than sectorial, that is, the
promotion of R & D as a function rather than of
technology within a sector.
The term SDTA should be further clarified by
noting that it refers to technological development
activities that (1) have a strategic value to the
economy and (2) are loci of market failures. I would
extend the term 'strategic' to include certain SDTAs
for countries at particular nodes or phases in their
~4 This view is certainly consistent with Metcaife's characteriza-
tion of 'evolutionary' technological policies (for a discussion of
more specific links between my analysis and Metcalfe's, see the
concluding section of this paper).
1166 M. T e u b a l / R e s e a r c h Policy 25 (1997) 1 1 6 1 - 1 1 8 8
development. For example, widespread diffusion of
firm-based R & D (and probably other SDTAs as
well) may be of economy-wide strategic importance
for NICs undergoing rapid foreign-trade liberaliza-
tion, since it may be a prerequisite for strengthening
industrial capabilities and making the structural
changes needed to compete in a global economy. In
other, probably more advanced-country contexts, an
SDTA involves advanced technological infrastruc-
ture rather than finn based R&D/innovation (which
has already been routinized in the economy). In such
contexts, the objective of HTPs is to promote the
adoption of collaborative routines for undertaking
technological infrastructure (TI) projects: this has
been viewed as such in Europe since the first flame-
work program. Finally, in an intermediate economy
like Israel, relevant SDTAs might include both fur-
ther diffusion of R&D/innovation routines within
the mid/low-tech sector of the economy and the
promotion of TI and associated collaborative rou-
tines throughout the business sector (hi-tech consor-
tia as well as the collective supply of technological
and other sophisticated services to other sectors). ~5
This paper presents a policy framework that is
quite general, inasmuch as it should be relevant to
stimulate any SDTA within the class mentioned
above. It emphasizes intangible accumulation and
learning not only at the level of the firm but also at
the level of government; and it is consistent with a
market-oriented approach to industrial and techno-
logical policy, one that requires significant caution in
the extension of permanent subsidies to business
15 Absorption and diffusion of technology should be the main
SDTA supported by HTP during the catch-up phase of economic
development. Note that including a 'national strategic' dimension
in the definition of SDTAs naturally leads to views about priori-
ties - not sectorial or technological, but associated with SDTAs.
In general, priorities depend on both external and internal factors.
For example, during a technological revolution it is critical to
develop TI, perhaps in collaboration; however, these (at least
so-called 'advanced TI') may require prior routinization and expe-
rience in firm-based R&D. Advanced countries, which already
possess this experience, will find the former to be of strategic
importance. There seems to be no strictly linear sequence of
SDTAs for a particular country.
firms (Justman and Teubal, 1990; Brodet et al.,
1990). While recognizing the importance of provid-
ing significant economic incentives to induce firms
to undertake SDTAs, the ultimate target of evolu-
tionary policy is to promote enterprise endogeniza-
tion of the process, i.e. to get enterprises, after a
period of intense collective learning (and associated
institutional change), to undertake an important
share of these activities without or with very little
government support.
One example of SDTA-endogenization concerns
'basic' technological infrastructure policy (TIP) di-
rected, for example, at SMEs in the mid- and iow-tech
sectors. Early catalytic support of initial cooperative
projects of this kind (which may or may not involve
the creation of new intermediate institutions such as
sectorial technological centers) may enormously en-
hance awareness about the need for such projects
and reduce uncertainty about their feasibility and
profitability for firms in a particular industrial sector.
It may also clarify the critical role that interfirm
cooperation plays in generating this kind of service-
providing infrastructure and the means for making
this cooperation effective. Industry associations may
then undertake a large share of such SDTAs with
little or no government support (Justman and Teubal,
1995). Similarly, in connection with the promotion
of R & D within firms, early catalytic support will
eventually lead to the emergence of routine projects
whose existence does not depend so heavily on
continued government support. Government support
should then be restructured in the direction of more
complex projects (associated with clear, multidimen-
sional market failure) and other types of SDTAs
(Teubal, 1996).
The proposed framework may contribute to the
design of a more efficient sequence of SDTA-sup-
port policies, for example, by linking support for
firm-based R &D with support of cooperative, generic
R & D. Effecting a successful transition from a policy
emphasizing firm-based R & D to one emphasizing
cooperative, generic R & D requires considering si-
multaneously the infant stage of support of the latter
together with mature restructuring (and even partial
phase-out) of the former. In fact, for both substantive
and political/ideological reasons, the restructuring
and partial phase-out of the support for firm-based
R & D may be critical for effective implementation of
 M. Teubal / Research Policy 25 (1997) 1161-1188
a new scheme supporting cooperative, generic R&
D. ]6
2.2.1. Promoting SDTAs versus targeting
Before we go any further, it is important to realize
that support for SDTAs should not be confused with
the traditional policy of sectorial targeting followed
by countries like Japan, Korea, and Taiwan during
subperiods after World War Two. 17 The two types
of policy should be viewed as complementary, within
the overall national systems of innovation. Support-
ing an SDTA is a 'horizontal' technology policy,
whereas 'targeting' would be an instance of vertical
I & T (industrial and technological) policies. In the
case of Japan, it is clear that both were simultane-
ously adopted. It may be that successful targeting, as
it occurred in these economies, did so precisely
because it rested on broader policies that encouraged
SDTAs in these economies. 18
Targeting is justified because of indivisibilities
and static and dynamic increasing returns, in connec-
tion with a sector or a cluster (the cluster would
involve the sector, its upstream suppliers, a n d / o r
downstream users). HTPs are justified by dynamic
increasing returns within a functional SDTA cate-
gory and across sectors. They are inherently less
selective than traditional targeting. Both justifica-
tions for government intervention may coexist during
the catch-up phase of NICs and may reinforce each
other. By frequently associating industrial and tech-
nological policies with targeting while ignoring the
role and importance of HTPs, many researchers and
policy makers have assumed that I & T policies must
t6 Countries' experiences differ in this respect. In some, like
Israel, the shift from supporting finn-based R&D to supporting TI
(or other programs) was until recently effected without a restruc-
turing of the former, in other countries, like Argentina, the
initiation of its first HTP for promoting firm-based technological
development has (until March 1995) been limited by a combina-
tion of macroeconomic constrainst and lack of awareness of the
catalytic nature of such programs (namely, that they need not be
just one more program providing 'eternal' subsidies to business
enterprises).
J7 For Japan's targeting, during the 1950s and 1960s, see Komiya
et al. (1988). For Korea and Taiwan, see Kim (1993) and Hou and
Gee (1993).
is1 would like to thank a referee for raising this interesting
possibility.
1167
be selective, that is, they must involve an unaccept-
able measure of government intervention. 19 Let it be
stated here that such policies have no direct implica-
tions favoring one sector over others (although sup-
port of R&D, for example, may indirectly relatively
favor high-tech industry), since the focus is on sup-
porting functions rather than sectors. Thus in sup-
porting SDTAs there is no inherent reason for not
adopting a more neutral approach to policy (see
Section 4 below). 20
2.3. Objectives of HTPs
It is useful to state the objectives of promoting
SDTAs in terms of three categories of effects or
impacts:
• Direct functional impacts in creating the SDTA;
• Creating a framework and the enabling conditions
for endogenous generation of SDTAs within the
economy; and
• Economic impacts.
This distinction is fundamental, since for a variety
of reasons it is not appropriate to focus exclusively
on economic impacts (and not only in the short
term). First, economic impacts are a consequence of
a variety of policies followed by governments, not
only of policies that support SDTAs. Thus a low
measured economic impact may result from the ab-
~9 The World Bank, in its study of the successful growth
experience of countries in Asia, suggested that the less successful
alternative industrial policy approach to (what the report terms)
the 'neoclassical' approach is fundamentally characterized by
extreme targeting or 'selectivity.' In my opinion this is a biased
and extreme view of the nature of growth-promoting I&T policies
and of actual policies followed by successful countries of the area.
More specifically, it excludes HTPs, which, as we will see,
involve an important neutrality and market-friendly component to
incentives.
20 Horizontal support of SDTAs should not be confounded with
other areas of I&T policy, such as privatization, deregulation of
specific sectors, and antitrust policies. All of these are important
areas that have received their due attention from experts in
industrial organization, students of the postwar development of the
economically successful Far Eastern countries, and more recently
by observers of the transition of Eastern European countries to
market economies. I would like to suggest that far less systematic
attention has been given to the HTPs supporting sophisticated
SDTAs. Presumably this omission is due to a basic lack of
understanding of the nature and importance of these policies.
 1168 M. Teubal / Research Policy 25 (1997) 1161-1188
sence of complementary policies; for example, a
successful policy of promoting firm-based R & D may
fail to promote growth because of inadequate com-
plementary training and human-resource develop-
ment policies that would enable widespread applica-
tion of results to production and exports. Failure to
promote growth in this case may be the result of a
lack of coordination among policies, rather than of a
failure in the SDTA promotion scheme per se. A
second reason is the long lag between SDTA promo-
tion and economic growth (the promotion of ad-
vanced technological infrastructure would be a good
example of this). The upshot is that it is doubly
imperative to set intermediate targets and criteria for
evaluating program efficiency. The quality and quan-
tity of SDTAs and the generation of the framework
or enabling conditions for endogenous SDTA accu-
mulation are two relevant categories of such objec-
tives.
The impact of the promotion scheme on the quan-
tity and quality of SDTAs is a relevant objective,
almost by definition, once it is clear that policy-
makers have (1) identified the SDTA being pro-
moted as of critical importance for the national
economy and (2) realized that market forces by
themselves will not lead to the required investments,
or at least will not initiate the process of (mainly
intangible) accumulation associated with SDTAs. 21
The second category of targets, namely, those
actions that help the private sector endogenously and
steadily to invest in the relevant SDTA, follows from
the desired catalytic nature of policy. This involves:
Stimulating firm-based learning on how to under-
take SDTAs;
• Diffusing new routines within firms, including
search routines and other routines associated with
the generation of SDTAs; 22
2~ If the SDTA-promoting policy is justified, then a "strategic
gap' in the activity exists (see Fig. l(a)). It follows that the direct
impact of HTP on the relevant SDTA is one of the objectives of
policy and a measure of its success. The relevance of this direct
impact target is more problematic in cases where both the timing
and the configuration of the SDTA-promotion scheme are inap-
propriate.
22 The need for US firms to systematically undertake external
search has been voiced, among others, by Reich (1990).
Reducing transactions costs and adapting the in-
stitutional framework;
• Integrating the national production/innovation
system (for example, creating new university-in-
dustry interfaces, new committees and mecha-
nisms within government, a pool of consultants,
and possibly technological centers);
• Stimulating links between local firms and foreign
partners, and stimulating integration of the re-
gion/country with other regions and, more gener-
ally, with the global economy;
• Market-building, either in connection with the
SDTA itself or with the services supporting the
activity, which would largely remain a firm-based
activity.
We can illustrate the above by referring to techno-
logical infrastructure policy (TIP). This should ini-
tially focus on creating new industry-relevant capa-
bilities on a wide front, and on generating the associ-
ated routines and enabling or facilitating factors. It
could be very successful in this regard, as in Japan,
where precompetitive, cooperative technological de-
velopment among Japanese firms in information
technology areas seems to have been reinforced after
implementation of the well-known Ministry of Inter-
national Trade and Industry (MITI)-sponsored Very
Large Scale Integration (VLSI) program (Sigurdson,
1986). This is also acknowledged to be the result of
European programs in information technology. 23
It is worth noting the links among the various
actions strengthening SDTA endogenization. Institu-
tional change (such as changes in antitrust law) may
have a direct effect in inducing firms to invest in TI,
but also an indirect effect in reducing transactions
costs - for example, a reduced need for legal advice
associated with a consortium-creation agreement.
This in turn further stimulates TI. Moreover, both
23 Thus, the Esprit program could be considered a partial suc-
cess, despite its failure to counteract the relative decline of Europe
vis-h-vis the United States and Japan in the information technol-
ogy industry (Krieger-Mytelka, 1992). The economic or strategic
failure would be due to other factors and policies and not neces-
sarily to TIP itself, although insufficient coordination between
TIP and such policies may have been a significant contributory
factor. Moreover, the stated objectives of Espirit may have been
exaggerated.
 M. Teubal/ Research Policy25 (1997) 1161-1188
institutional change and reduced transactions costs
are fundamental factors in market-building, as is also
the case with learning (see Section 3 below).
The relevance of SDTA endogenization also re-
lates to the requirements for success in a global
economy. In the case of TIP, this would imply, inter
alia, stimulating the creation of new capabilities that
could transform domestic firms into potential part-
ners of foreign firms. These new capabilities, stimu-
lated by SDTA promotion, could be complementary
to those of potential foreign partners - a major factor
in alliances (Teece, 1992 and surveys of EEC coop-
erative programs), or could reflect the distinctive
advantages or competencies of the region, which
would help firms integrate into global innovation and
production networks (see Gordon, 1994). 24
2.3.1. Summary
Success in policies for promoting SDTAs should
in general not be measured exclusively in terms of
their direct economic impact (exports, output, or
employment). Moreover, it is extremely important to
distinguish between the final objective of policy
(which should, with due reservations (see above),
24 An interesting related example is that of Vitro - a major
Mexican conglomerate in the glass, containers, and domestic
appliances area. In the early 1990s it entered into a joint venture
with Whirlpool, a world leader in white goods. The agreement
occurred after Vitro purchased a publicly owned and publicly
funded technological center in the metalworking area. While this
may not have been the critical factor in the alliance, it probably
played a contributory role. This example illustrates how TIP (an
example of SDTA-support policy) may be directed to stimulate
joint ventures with foreign companies, a factor that indirectly
helps endogenize domestic SDTA accumulation (by enhancing
access to world technology). A related example is an important
Israeli firm in the metalworking area, which attempted to diversify
from its traditional military markets by penetrating the world
aircraft-components market. Prior defense procurement policies
that required significant investments in testing, analysis, and
materials-characterization capabilities facilitated its receiving au-
thorized supplier status from Boeing. Thus a prior policy support-
ing technologicalinfrastracture facilitated the linkage with foreign
firms. It illustrates how a civilian-oriented SDTA-promotionpol-
icy could be explicitly orienlexl to stimulate the forging of al-
liances with foreign firms. The resulting success in world markets
would also help endogenize SDTA accumulation (while increas-
ing domestic firms" access to the capabilities of foreign partners).
1169
have an important growth-promoting component) and
the yearly target of such a policy, especially in the
early stage of policy implementation. An excellent
example is TIP. It might be that in the promotion of
other, innovation-related SDTAs (e.g. firm-based R
&D), direct economic impact should play a larger
role, both in evaluating program success and in
guiding and assessing year-to-year performance.
Even in these cases, however, it would be wrong to
focus exclusively on such an impact. The impact of
policy on the quantity and quality of the SDTA, on
learning and acquisition of new routines, and on
other facilitating factors is of no less importance,
especially in the initial, experimental stage of a
policy.
3. Conceptual building blocks: learning, search,
and market-building
Further conceptual clarification is required prior
to a detailed discussion of the technological policy
cycle, particularly of catalytic policies that should be
undertaken during the initial, infant phase of the
SDTA-promotion policy. Here I focus on the impli-
cations of the dynamics of learning, on the nature of
search and implications for policy, and on market-
building. Informal institutions, formal institutions,
and non-enterprise organizations (e.g. technology
centers) will also be referred to (particularly in Sec-
tion 3.3.2.
3.1. Collective learning and the dynamics of external
effects
The basic idea is that successful penetration and
diffusion of an SDTA in the economy or region is a
process involving extensive collective learning
('learning by doing and by others doing'), multidis-
ciplinary learning (technological, techno-economic,
and managerial/organizational), and learning that is
cumulative over time. This is especially so during an
early ('infant') phase of the diffusion of this process
throughout the economy. Collective learning follows
from the centrality of managerial/organizational
learning during this early phase and from the associ-
1170 M. Teubal / Research Policy 25 (1997) 1161-1188
ated pervasive externalities that flow from SDTA
projects. 25 For a specialized foundry in a developing
country, managerial learning about innovation and
the incorporation of new routines involved aspects
such as: knowledge about conducting systematic ex-
periments with new combinations of casting materi-
als; routines for effective utilization of external con-
sultants and for searching for externally available
technology; experience in creating a team for devel-
opment and experimentation, including the required
qualities of team leadership; etc. In the infant Israeli
biomedical electronic instrumentation sector, early
collective 'innovation management' and 'project se-
lection' learning involved a greater capacity to eval-
uate the marketing requirements of new products,
particularly of very innovative products (most of
which failed due to market reasons - see Teubal et
al., 1976; Spiller and Teubal, 1977). The importance
of these non-technological aspects of leaming also
implies that SDTA diffusion is (potentially)~subject
to dynamic increasing returns to scale (Teubal, 1996).
The basic presumption is that a successful HTP
(in part due to a successful collective learning pro-
cess) will lead to significant endogenization of the
process of executing the SDTAs, at least for an
increasing group of important projects. We may call
this a 'routine' category of 'improvement' SDTA
projects. Underlying this is a gradual increase in the
private profitability (or expected utility) of investing
in such projects and a reduction in the gap between
private and social profitability. The outcome is a
reduction in the share of total SDTA investments
In the initial phase of SDTA diffusion, everyone potentially
learns from everyone else - if not from a 'technological knowl-
edge' point of view, then certainly from a 'management of
innovation' perspective. Correspondingly, the wider notion of
'externalities' makes this phenomenon a potentially pervasive one,
at least initially (see Teubal, 1996). Note that the collective
learning potential of the aggregate of individual experience with
new SDTAs derives also from the fact that much of the above-
mentioned management knowledge is not proprietary. The emerg-
ing group of entrepreneurs may quite willingly share it among
themselves, whereas the government agency responsible for the
policy should take steps both to codify and to diffuse this knowl-
edge.
whose implementation requires govemmental sup-
port. 26
The same learning process that generates infant-
stage pervasive externalities is also responsible for
the subsequent partial elimination of market failure
in connection with certain classes of projects. This
has at least three major dimensions. First, there is an
overall reduction in the uncertainty facing en-
trepreneurs, in particular the transformation of un-
certainty into risk for certain classes of projects
within the SDTA category being considered, espe-
cially those where experience has been intense. Thus
many entrepreneurs who were not previously in-
volved in SDTAs will be interested, after a period of
collective learning, in investing in those activities.
Second, there is an increase in independent techno-
economic capabilities associated with the identifica-
tion, screening, evaluation, and selection of SDTA
projects, particularly in connection with R & D and
innovation. This enhances the ability of the capital
markets to finance certain classes of SDTAs without
government intervention. It also leads to the provi-
sion of external advisory and consultancy services to
entrepreneurs who perform SDTA projects in-house
(see below on the effect of market-building) and
increases the capacity to generate new SDTA pro-
jects.
The third factor is 'exhaustion' of learning poten-
tial. A great deal of the general knowledge about
SDTA initiation and execution (i.e. knowledge rele-
vant to all or broad categories of projects) is gener-
ated by early projects or is their spill-over; it eventu-
ally becomes common knowledge. Thus an impor-
tant component of collective learning will be ex-
hausted at that point, there being very little left to
spill over.
The upshot is that, to a larger extent than previ-
ously, the new knowledge and experience subse-
quently generated by SDTAs is largely specific to
individual projects or is proprietary knowledge with
limited usefulness elsewhere (except for proprietary
technological knowledge, which might be useful to
26 The stage is set for formalizing these statements, in particular
showing how a different outcome may result from a non-success-
ful HTP (see below). Unfortunately this task goes beyond the
scope of this paper.
 M. Teubal / Research Policy 25 (1997) 1161-1188 1171

~)

x = SDTA Profitability
(S : Social, P : Private) I SDTA (t.)
t. = Ideal initiation time for HTP I
u = Beggining of maturity phase I
of HTP l

la: A Strategic GAPin the STDA (at to)

7t
t;)

Routine Complex
SDTA SDTA
\r r

~ n n*,(t:)

%(t:)

lb: Limited Market Failure

"Routine" Projects (at I2) lc: Extensive Market Failure for
"Complex" Projects (at tz)

* The schedules assume abscence of incentives.

Fig. 1. Dynamics of market failures in a SDTA (the schedules assume absence of incentives). This figure is a neoclassical representation of
a complex evolutionary phenomenon and therefore is imperfect and even misleading. It implicitly assumes a fixed set of potential projects; it
ignores search and assumes the absence of fundamental uncertainty. It is supposed to represent the effects of learning between tO and t2 on
the configuration of market failure present for both 'routine' and 'complex' projects.

competitors). A likely o u t c o m e is a f a r l o w e r ten- priability on average will increase, largely because

dency to spill o v e r than in the p r e v i o u s situation
(firms will also n o w m a k e specific efforts at appro-
priation). 27 Thus, one likely scenario is that appro-
27 Their success will depend on the extent to which the institu-
tional framework has been adapted to enhance appropriability.
This of course also depends on the industry and types of innova-
tion (see Teece, 1988).
o f the nature and increased quantitative importance
o f ' r o u t i n e projects.'
Fig. 1 presents a s c h e m a t i c and i n c o m p l e t e repre-
sentation o f the effects o f the d y n a m i c changes
described above.
3.1.1. Generating a project taxonomy
T h e reduction in externalities (pecuniary, techno-
logical, and organizational) has b e e n assumed to be
1172 M. Teubal / Research Policy 25 (1997) 1161 - 1188
particularly strong in certain classes of projects that
we will term routine. This project category emerges
from experience with the relevant SDTA and is part
of a potentially wider learning process in govern-
ment, one that leads to the generation of a policy-
relevant project taxonomy. Such an outcome requires
a capacity for conceptualization within government,
fed by the actual experience of the agency responsi-
ble for the policy.
Part of the above involves the emergence of a
new category of feasible and socially desirable SDTA
projects, more complex than 'routine' projects,
probably associated with newer technology (at least
from the point of view of firms and other organiza-
tions concerned). Some of these will be character-
ized by weak appropriability - either strong Arrow-
type, template externalities, or due to low access to
complementary assets (Teece, 1988).
This category emerges as a result of the dynamics
of finn-based (and collective) learning associated
with the SDTA. Due to the capabilities generated by
and in the wake of early 'simple' projects, the
aforementioned set of 'complex' projects may be-
come feasible. Thus, a category of projects involving
significant additions to knowledge and substantially
less appropriability will also be created in the move-
ment towards the mature stage of the SDTA diffu-
sion process (and, ideally, of the associated policy).
We may summarize by stating that the diffusion
path of SDTAs is associated with the emergence of
three categories of projects:
• A routine set of SDTA projects with high appro-
priability, whose implementation has been sub-
stantially endogenized;
• An emerging group of 'complex' projects involv-
ing significant additions to technical and techno-
economic knowledge (and therefore high poten-
tial for externalities - see Teubal, 1996); 28
2 s Our analysis framework emphasizes the relationship between
experience with certain categories of SDTA projects and private
approriability of social benefits. This contrasts with the emphasis
on technological area/industrial branch fround in the literature
(Levin et al., 1987; Teece, 1988). In fact, the taxonomy that will
emerge with the diffusion of SDTAs will be linked to both factors
affecting appropriability: experience and technological area/in-
dustrial branch. Subsequent policies might therefore be less neu-
tral but will still be horizontal (see Section 4, growth phase).
A group of strategic SDTA projects that govern-
ment, due to the learning associated with the
above, can coordinate and orchestrate.
As far as government support of SDTA projects is
concerned, the resulting pattern may involve a reduc-
tion in average support, including discontinuation of
support for routine SDTA projects. However, there
may still be combinations of projects and firms that
deserve significant and even enhanced support. Thus
a reduced government share in total SDTA invest-
ments may be consistent with a decline or increase in
absolute financial support, depending on the follow-
ing:
The dynamics of the technological revolution (de-
termining the potential for new 'complex' SDTA
projects);
The development of capabilities within firms and
other actors or agents (e.g. technology centers),
which will determine the scope of new and com-
plex, but also socially desirable and feasible,
SDTA projects;
Capabilities within government to identify, coor-
dinate, and orchestrate strategic SDTA projects.
3.2. Implications of the increased importance of
' search'
I have already pointed out the increasing impor-
tance of the search function relative to what
economists would term 'choice' - and this applies to
technology at both the business and the policy levels.
The trend is a consequence of the enormous increase
in technological options and associated business op-
portunities, which results from the technological rev-
olution and from the process of globalization. An
important routine of firms today, even more so of
R&D-intensive firms, is the search for technological
inputs from external sources. 29 The new digital
technologies are also enhancing the capabilities for
29 A high official of Ansaido, an Italian conglomerate active in
areas such as power-generation equipment and mass-transit sys-
tems, mentioned that the new opportunities for external sourcing
of technology have induced the firm to systemically search to an
unprecedented extent before deciding on in-house R&D projects.
The techniques for efficient search have also become an important
source of competitive advantage for the firm (personal communi-
cation). See also David and Foray (1994).
 M. Teubal / Research Policy 25 (1997) 1161-1188
economically accessing and retrieving useful knowl-
edge and the possibilities for knowledge codification
(David and Foray, 1994). This increased search effi-
ciency enables both greater breadth and faster focus-
ing into a 'choice set.'
In my opinion, these trends further enhance the
relevance of the evolutionary framework for technol-
ogy policy relative to the equilibrium or neoclassical
framework (Metcalfe, 1993) - and not just because
of the reduced relevance of equilibrium analysis and
optimizing behavior. This is because efficient search,
including what could be termed 'post-search project
generation', is an important mechanism for generat-
ing variety, itself a major aspect of economic evolu-
tion. Aspects associated with 'search' must, there-
fore, play an important role in technology policy,
including HTP connected with the introduction and
diffusion of SDTAs.
3.2.1. Stimulating SDTA project generation (proac-
tire policy)
The central point emerging from the above is that
policy formulation and implementation (infant stage)
will be information-intensive and that 'search' will
play a paramount role, even relative to the actual
disbursement of material incentives. More specifi-
cally, a central focus of policy should help the
private sector not only to search, in general, but
also, and more specifically, to generate good pro-
jects in the SDTA area being promoted - whether
R&D, cooperative TI, or technology transfer and
absorption.
With regard to advanced technological infrastruc-
ture, governments should explicitly promofe or di-
rectly undertake a search for 'good' g~neric re-
search (or technological capability de?)elopment)
projects that could be undertaken by a consortium or
group of firms. 30 This would involve mapping exer-
cises of various kinds: for example, identification of
capabilities within the country and of 'needs' that
such capabilities should satisfy, etc. The search func-
tion also encompasses aspects of organization and
management, for example, procedures to efficiently
30 The following points rely extensively on conversations with
D. Kaufmann and on Kaufmann and Yinnon (1995).
1173
arrive at a research agenda agreed upon by all con-
sortium members, the configuration of a standard
contract (whenever this is desirable), efficient pro-
cedures and guidelines for the use of intellectual
property within the consortium and beyond; etc. 3~
The proactive role of government also follows
from the observation that the effective bottleneck to
policy implementation ('infant stage') is likely to be
the absence of good projects rather than budget
constraints. Since, by definition, an SDTA that is
being promoted should be one where undertaking
projects has not yet become routine, there is likely to
be a dearth of such projects. For the same reason, the
methodology of generating such projects is relatively
unknown in the economy; or, alternatively, the capa-
bility of generating such projects is, at this stage,
relatively underdeveloped. Thus the infant stage will
be characterized by high (but declining) SDTA pro-
ject-generation costs. 32
The upshot is that HTPs may have to promote
entrepreneurial-type functions directly; the govern-
ment agency itself may have to be an entrepreneur of
sorts, rather than being simply a funding source and
provider of incentives to existing projects. 'Project
generation" should be a target of H'I'Ps (infant
31 More generally, stimulating with project generation involves
financing background studies and mappings, initiatives to bring
firms together, modifications of the institutional framework (e.g.
antitrust laws), creating forums for exchange of ideas among firms
and between them and academic instutitions, coordination among
government departments interested in particular projects, and even,
in some cases, explicit action to generate a specific project with
strategic value for the economy as a whole (e.g. microelectronics).
Creating functional committees representing loci of 'need-technol-
ogy' coupling capabilities could be a very important aspect of the
proaetive role of goverment. For examples in the biotechnology
area in the United Kingdom, see Sharp (1995).
32 The proactive function of government also means supporting
learning to search and the incorporation of appropriate search
routines within firms. For enterprise R&D, it includes learning to
screen and identify possible projects, generate a project choice set,
evaluate a n d / o r rank them, and make a choice. As mentioned in
the introuduction to this paper, these functions partially overlap
activities included in 'transition costs,' so the implied learning
will also lead to a reduction in these costs. Project-generation
costs include the transaction costs of consortium formation but go
beyond these costs.
1174 M. Teubal/ Research Policy25 (1997) 1161-1188
stage); its scope is one of the indicators of policy
effectiveness and efficiency at this stage,
3.2.2. Other HT policy implications
t. The institutional structure and the infrastructure
that supports information-sharing and learning
shouM also be the focus of government policy.
It is clear that the proactive policy mentioned
above should not limit itself exclusively to activi-
ties that directly promote project generation, but
should also deal with other institutional and in-
frastructural elements whose function is to over-
come market failures by reducing strategic uncer-
tainties and information gaps. This entails taking
account o f the grey area between government and
firms, or what could be termed non-market mech-
anisms for market articulation, 33 which consists
o f business associations, bridging institutions like
innovation centers, semipublic or semiprivate in-
stitutions such as technology centers, innovation
networks, etc. A major effort should be made to
stimulate the development and promote the use of
databases and information-supplying firms and
consultants. Strong initial support may eventually
lead to bona-fide agents that operate in a market
or business environment (see market-building be-
low).
2. Policy experimentation and search are important
for correctly specifying or configuring the appro-
priate SDTA-promotion policy tools. These should
eventually produce a good match between a menu
of policy tools and a taxonomy of firm and
project types.
3. There is an important distinction between selec-
tivity in search vs. selectivity in incentives.
For search to be efficient it must be focused. This
imparts a measure of selectivity in policy, even at
the infant stage where incentives may largely be
neutral (see Section 4.2. 34 Overall selectivity in
33 1 would like to thank a referee for pointing out this aspect of
HTP.
34 This feature is due to the nature of the search process rather
than to a bias in incentives. Hence selectivity in 'search' may
coexist with neutrality in incentives ( = "choice').
HTP depends, however, on selectivity both in
search and in incentives.
3.3. Market-building
Successful implementation of HTPs not only re-
quires diffusion of S D T A s but also some market-
building, that is, the appearance of a group o f spe-
cialized suppliers either for an S D T A itself or for
services or intangibles linked to an SDTA. Such
market-building may become an important element
in the SDTA endogenization process. It may be
useful to distinguish among a number o f instances:
• The building o f markets for certain S D T A sup-
port services, for example, advisory, financial,
and technological services that support firm-based
R & D or innovation;
• The (inevitably imperfect) building o f markets for
certain types of S D T A , for example, certain types
of product or process technological development
in the chemical process area; 35
• The generation o f markets for certain 'outputs'
flowing from SDTAs, like novel technological
services such as new measurement and material-
characterization services generated by basic TI.
Learning, reductions in transactions costs, and
institutional adaptations that favorably affect the dif-
fusion of S D T A s will also help in building markets
(even though there are some SDTAs or SDTA-re-
lated services and intangibles for which there are no
feasible markets - for example, generic research)
(see Justman and Teubal, 1995).
In what follows I will more specifically analyze
35 Both Freeman (1982) and Teece (1988) indicated this area as
one where independentR&D organizations have historically played
an important role in innovation (e.g. that of United Oil Products
(UOP) in developing the catalytic cracking process during the
1930s). The last decade has seen the emergence of a fair number
of independent specialized finns or laboratories providing technol-
ogy to 'users' (in our context, producers of goods) in the electron-
ics and biotechnology areas. Although 1 am not aware of any
analysis of their partners of interaction with users; it is likely that
key elements typical of a 'market' already exist. For a description
of the increasingly important supply side of the 'R&D market' in
the United Kingdom, see Kenward (1995).
 M. Teubal/ Research Policy25 (1997) 1161-1188
the first and third instances and then look at some of
the implications for HTP.
3.3.1. Markets for services that support enterprise
R & D / innovation
When an HTP program is implemented, the SDTA
promoted (e.g. R & D ) is presumably not widely dif-
fused. Moreover, there is bound to be a generalized
absence of capabilities associated with search, gener-
ation, and implementation of such projects. It is
likely that both a low 'demand' for R & D and an
even lower 'supply' of R & D by independent con-
tract R & D organizations characterizes the situation
(in some cases there may be a supply of R & D by
public laboratories, but we may assume that this is
not yet coupled to local market needs). There will
also be a low level of supply of R&D/innovation
support services by independent advisors, financial
institutions (like venture capitalists), consultancies,
and technical-support laboratories.
In this situation, most of the services needed are
provided in-house by enterprises that undertake R&
D, although some may be provided independently in
the form of isolated bilateral transactions that, be-
cause of their small number and heterogeneity, can-
not be considered to be taking place within 'a mar-
ket.' We should emphasize that the absence of a
market for such services means both a low level of
(independent) supply and a relatively low level of
demand.
An absence of R & D may coexist with a strong
need for this activity and, indirectly, for R & D sup-
port services. There may be no demand because most
'users' have not yet translated their strategic objec-
tives into R & D terms; alternatively, firms have not
or do not have the capability for articulating their
'need for R & D . ' Such a situation may characterize
NICs undergoing import liberalization, whose enter-
prises are not aware yet of the need to make an
in-house technological effort alongside the purchase
of the most modern capital equipment. It may also
characterize situations of scant diffusion of R&
D/innovation-relevant management and organiza-
tional routines. Moreover, firms may not yet have
sufficient experience in managing innovation, so their
effectiveness in this activity (and thereby their 'de-
mand') will be low.
Learning generates an increase in the demand and
1175
supply for R & D and for the associated support
services. At some point a market may appear - a
collection of well-defined suppliers and demanders
with sufficient interaction within and across individ-
ual transactions, and with sufficient account taken in
any one transaction of the conditions pertaining in
other transactions. 36 These 'Marshallian' externali-
ties will further reinforce R & D activity and con-
tribute to its endogenization.
3.3.1.1. A critical mass of SDTA projects. However,
a self-sustained interlinked process of SDTA diffu-
sion, endogenization, and market-building may re-
quire achieving some minimum level of the SDTA to
assure effective learning and capability building.
This may be conceived in terms of the requirements
for network creation (Teubal et al., 1991) or as a
means of overcoming dynamic learning disec-
onomies of small scale.
The greater the number of R & D performers at the
early stage of industrial R & D , the greater is the
amount of learning that takes place within the sys-
tem. At this stage the phenomenon of 'network
externalities' (which has been noted in connection
with the use of certain new technologies (such as
telecommunications and computers), - or the similar
phenomenon of 'collective learning' in user-pro-
ducer networks) is applicable to the set of R & D
performers in the economy. Almost everyone learns
from everyone else, even when R & D projects are
different. In certain conditions it may become un-
profitable for a small number of R & D performers to
operate in isolation, even when the social and private
profitability of jointly operating within a network is
positive. The system may remain stuck at a 'low-level
equilibrium trap' with little or no R & D being under-
taken.
In these conditions the role of policy is to support
the activity in such a way that the bottleneck is
cleared. This may mean assuring the minimum set of
'users' required for creating a collective learning
36Lundvall's notion of an 'organized market,' with i m b e d d e d
user-producer relationships, s e e m s to be a relevant concept for
describing the nature of markets for R&D-support services (see
Lundvall, 1985).
1176 M. Teubal/Research Policy 25 (1997) 1161-1188
network. 37 This in turn requires strong and flexible
incentives at the experimental stage of the policy as
a condition for initiating a virtuous learning
market-building cycle. 3s
3.3.2. Building markets for technological services for
SMEs
3.3.2.1. General nature and context of the HTP.
SMEs are undergoing profound processes of restruc-
turing in response to changes in the environment
(globalization, the new techno-economic paradigm,
liberalization, etc.). These involve reorientation to
new markets, incorporation of new management rou-
tines, a modified product mix, testing and quality-
control systems, etc. An important component under-
lying such restructuring is the incorporation of new
technologies, such as new and more precise measure-
ment and testing procedures and services, which
assure a high-quality product for stringent export
markets.
Continued adoption by and diffusion of new tech-
nological services to SMEs may require that these
firms establish routines for accessing technology
centers, for employing outside consultants, and, more
generally, for utilizing novel technological services
37 The government agency may have to play an entrepreneurial
role in creating this network during the infant phase of the R&D
diffusion process (see Section 4.2).
3s In at least one Latin American country, such massive public
support for R&D and technological development was not possible
initially, due to a general aversion to extending subsidies directly
to business finns - the result of a history of heavy government
intervention in the economy. A better understanding of the evolu-
tionary nature of the policy proposed here would a great part of
problem, since 'massive' initial support is only a means for finns
to eventually perform SDTAs without government support. Thus,
the direct provision by government of financial and even techno-
economic services associated with R&D may, in certain circum-
stances, be the best way to trigger the eventual provision of these
services by the private sector (i.e. contribute to market-building).
The eventual spin-off of personnel employed in government agen-
cies may also help 'privatize' the provision of these services. An
example is Ed Mlavsky, who engineered the Binational Industrial
R&D (BIRD) Fund in Israel, which supports joint projects by
Israeli and US finns. After successfully managing the fund for
several years he joined a private venture-capital fund operating in
the country.
flowing from 'basic TI.' 39 It is well known that, for
a variety of reasons (lack of awareness, pressure on
management time, cost), these routines frequently do
not exist within broad segments of such firms in
mid- and low-tech industry. A successful catalytic
policy towards this type of technological activity
may require the following:
• Changes in institutions and in intermediate or
bridging organizations;
• Investment in new service-provision capabilities
within these organizations; and
Adoption of a technological service market-build-
ing policy.
The HTP will possess general components (all
technological services) and specific components for
each individual service or service type. Both compo-
nents will possess infant and mature stages and may
serve firms belonging to several industries; the as-
sumption is that the collective learning process linked
to the generation of new technological service rou-
tines within SMEs encompasses firms from all sec-
tors of the middle- and low-tech segments of indus-
try. 40 The mature stage for a particular service will
arrive once a full market develops for that particular
service, with private consultants becoming the sup-
ply agents. The technology centers will be active as
supply- and market-building (including demand)
agents during the early catalytic phase of transfer
from abroad and introduction of the new service into
the economy or region.
At this 'mature' stage of the generic policy, ser-
vice-acquisition routines within enterprises are suffi-
ciently disseminated that the introduction of a new
service is quickly endogenized - the infant phase of
the service-specific policy is shorter and the required
catalytic incentives (and complementary policies) are
39 Following Justman and Teubal (1995) "basic (opposed to
'advanced') TI" involves service-provision capabilities whose
availability in the economy depends on the transfer and adoption
of technology available. Advanced TI usually involves the cre-
ation of consortia to execute a commonly agreed generic research
program. It has been pointed out that technology centers may be a
major player in the transfer and diffusion of technology to SMEs
(see Braunling, 1993; Goldman, 1994; and other works).
40 There might, however, be policy components for specific
industries that involve different sectorial technological centers.
 M. Teubal / Research Policy 25 (1997) 1161-1188
weaker. Eventually HTP will lead to the continued
adoption and diffusion of new technological services.
3.3.2.2. Initial SME conditions and level of demand.
The situation facing SMEs vis-h-vis new technology
can be visualized as involving facts such as the
following:
• Needs are widespread, but there is scant articula-
tion of these needs in terms of the new technol-
ogy (this adds to the absence of the technological
capabilities themselves);
• Demand articulation ('need determination through
interactive learning') is a collective learning pro-
cess of users (the SMEs);
• Due to economies of scale, the supply of such
technology requires a collective effort of invest-
ment in new capabilities;
• Effective capabilities are not only 'technological'
but also 'technoeconomic,' that is, capabilities to
apply various configurations of the technology to
different types of SMEs. Technoeconomic capa-
bilities are learned by doing, that is, by effec-
tively providing the technological service or
transferring the technology to users and by link-
ing particular configurations of services with spe-
cific bundles of user characteristics.
3.3.2.3. Roles of government. Government has the
following roles to play:
1. Creating the institutional framework for the col-
lective supply of such capabilities and technolo-
gies; for example, antitrust legislation, or a frame-
work similar to Romer's legislation for imposing
a levy on firms of a sector to finance training and
generic research (see Romer, 1993). In our case,
such a framework would set the legal basis for the
collective absorption of new service-providing
technological capabilities;
2. Stimulating the emergence of formal intermediate
organizations like innovation centers (involved in
soft activities such as diagnosis and referral to
experts) and technological centers (with both soft
and hard functions);
3. Catalytic support of initial capability generation
through incentives to finance transfer of the tech-
nology to, and its absorption by, the intermediate
organization and underwriting 'initial diffusion.'
In our context, initial diffusion means initial,
1177
experimental implementation of the service-provi-
sion or technology-transfer activities. These add
'technoeconomic' capabilities to the intangible
fund of the organization and assure a more auto-
matic and demand-driven diffusion of technology
at a later stage.
3.3.2.4. Specific aspects of the HTP. The nature of
the support is not supply-push but rather a combina-
tion of supply-push with demand-pull. In fact, the
catalytic support focuses no less on articulating the
needs of an initial class of users than on creating
technological capabilities per se. There is an assump-
tion of success in the collective process (undertaken
by industry associations and government agent, for
example) of identifying SME-relevant capabilities
(this may not be so difficult, because of foreign
success in utilization of such technologies). The
outcome of (3) above will be the triggering of an
automatic, demand-driven diffusion of the recently
absorbed technologies among the wider universe of
SMEs. Government support, in line with the catalytic
approach, may thereafter decline through time.
There are internal organizational aspects of the
intermediate organizations and of their interactions
with outside experts or consultants. For example,
generalists at innovation centers will refer firms to
specific-area consultants who will in turn perform
the focused search activity that leads to a successful
incorporation of the technology. 41 There are signifi-
cant experience-codification roles to be played by
the intermediary organization; for example, to enable
a better matching of experts and type of services, on
the one hand, and of types of firms/products/prob-
lems, on the other. A critical element in the success
of the policy (i.e. of diffusion) is the generation of
techno-economic (coupling) capabilities, and this re-
quires systematic codification of such experience.
Summary. Successful HTP associated with the
provision of novel technological services to SMEs
may involve two clearly defined stages - an initial,
multipronged, catalytic support stage and a mature
stage with relatively well-functioning markets for
4~ I would like to thank R. Galli for pointing out this, and also
for the distinction between innovation centers and technological
centers.
1178 M. Teubal/Research Policy 25 (1997) 1161-1188
these services. Catalytic support may have to involve
both creating an appropriate institutional framework
for establishing an intermediate or bridging organiza-
tion and stimulating investment in initial technologi-
cal capabilities and in experience-based learning
about SME need articulation. Success at this stage
will lead to market-building associated with these
services and the possibility of significantly reduced
government involvement in the future.
Implication. A successful HTP associated with
novel technological services will contribute to a suc-
cessful HTP in support of basic TI (the SDTA) from
which novel technological services flow. Industry
associations and other collective organizations will
increasingly develop routines for investing in such
SDTA and in the associated experience-based learn-
ing.
3.3.3. Institutional adaptation and transactions costs
It is important to note that market-building
(whether in connection with R & D or R&D-support
services, or in connection with other SDTA and
related services) is also affected by institutional
change and by the institutional mechanisms that lead
to reductions in transaction costs. The enhanced
stimulus for unaided implementation of such SDTAs
(or related activities) that is triggered by a more
adapted institutional structure may also promote
market-building. One mechanism involves a reduc-
tion in the (high initial) transaction costs that help
block the spontaneous emergence of some types of
SDTA. 4:
With regard to technological infrastructure, neo-
classical contract law would seem to be the most
suited of the various 'systems of governance' sug-
gested by Williamson (1985) for dealing with the
initial formation and operation of consortia with
regard to generic, cooperative R & D . This institu-
tional framework is adapted both to 'incomplete
42 Both appropriability and transaction-cost considerations may
limit the scope of 'a market for R&D.' At best it will be restricted
to ~wecificsegments of technologicaldevelopment. The condition
of low transaction costs in connection with R&D contracts (a
condition for the appearance of 'a market') has been linked by
Teece to the relative non-requirement of specific complementary
assets for purchasers 0demand agents') to implement purchased
R&D results (see Teece, 1988).
contracts,' when not all contingencies can be antici-
pated (such as the future behavior of partners), and
even more to situations where consortium benefits
require specific, complementary investments (Teece,
1988). The formation of consortia is thus open to
opportunistic behavior, such as the refusal by a
partner that has already benefited from technology
transfer to fully share with others the technology it
has developed. The effectiveness of this institutional
framework does not depend exclusively on the for-
mal features of the law (contrary to 'classical con-
tract law': see Williamson, 1985), but also on the
existence of mechanisms that ensure flexibility in
implementation and on the emergence of a settle-
ment machinery. The framework could be said to
function when potential partners feel confident in
such a machinery, whose objective includes the pre-
dominance of arbitration over litigation in order to
assure continuity in implementation rather than the
dissolution of an agreement.
The above mechanism takes time to develop. In
the meantime, the enormous uncertainties associated
with the first consortium imposes enormous transac-
tions costs on participants. These decline as the
various elements of the institutional framework are
established in response to the increasing number of
consortia (actual and expected) established.
4. The technology policy cycle
4.1. An overview
The evolutionary approach to HTP adopted here
parallels that used in the economics of innovation
and in business schools to describe the evolution of a
new product, from inception, through consolidation
of a standardized basic design, to maturity. The term
technology policy cycle is meant to convey a sense
of evolution in the policy itself, similar to that
conveyed by the product or innovation cycle vis-h-vis
the product or innovation.
The basic statement concerns the existence of
stages or phases in policy implementation. 43 Thus it
43 It also involves a significant overlap between a policy de-
sign/formulation stage and the initial phase of policy implementa-
tion.
 M. Teubal/Research Policy 25 (1997) 1161-1188
Table 1
Advanced TIP cycle: characteristics of the infant phase
Stage Objective
Infant stage Promote routines of cooperation and facilitate
creation of consortia for TI generation
Promote a learning process in generating TI
( ~ achieving critical mass of projects)
Nail down the specifics of TIP
Develop TIP capabilities
is critical to understand the existence of an early
phase which is infant or experimental, with objec-
tives, targets, procedures, and so on that may differ
radically from a later, mature phase of the policy.
Analogous to the early phase of the product cycle
(which is characterized by intense interaction be-
tween users and producers, target uncertainty, and
significant product changes) the early phase is essen-
tially an experimental phase with a clear predomi-
nance of various kinds of search activities, devoted
to both enhanced understanding and generation of
good SDTA projects. This search includes intensive
interaction between policy-makers and the firms that
are being promoted. This interaction and learning
lead to a reduction in the 'target uncertainty' facing
policy-makers, that is, to a clarification of the effec-
tive targets of policy. This is also accompanied by
clarification of the effective means for achieving
these targets.
With regard to Israel's HTP for advanced TI, the
responsible government committee (the Magnet
Committee) discovered that generating cooperative,
precompetitive R & D projects and associated consor-
tia was extremely difficult; firms were unlikely to
succeed in the required activities without proactive
government support. As a result, when HTP support
for advanced TI began in 1992, it immediately com-
missioned background studies and even partially un-
derwrote real transaction costs associated with the
formation of consortia. This experience also shows
that for learning to result in lower transaction costs
1179
Constraints Policy approach
Pervasive market failures Massive, flexible,
and consistent support
Absence of a tradition of cooperation Important component of
neutrality in incentives
High transaction costs Active support of project
generation (proactive
policies)
(Partially) inadequate institutional framework Adoption of a learning
(e.g. antitrust laws) approach to policy
Ignorance of the required policy approach and lnsitutional adaptation
absence of required policy capabilities
( ~ ) Lack of (good) projects Intensive staff work and
training of policy analysts
there must be a critical mass of projects (see Section
3.3.1 above). It also shows that it pays to understand
the process of 'advanced TI project generation,'
since it accelerates the drive to maturity and dimin-
ishes the scope of government support required in
the future.
More specifically, the above understanding may
contribute to: a reformulation of targets in the infant
phase of an HTP, with the reinforcement of project
generation in mind; a reduction of bureaucratic pro-
cedures; amplification of the menu of promotion
choices (e.g. making the set of accepted consortium
configurations more flexible); and further stimulation
of project generation through a systematic effort to
create functional committees. In the mature stage,
the main challenge is restructuring policy to reduce
government support. 44 The result will be a less
universal (and probably somewhat less neutral) pat-
tem of project support. The projects supported in this
stage will tend to be complex and highly uncertain -
probably involving cutting-edge technologies, entail-
ing international cooperation in generic research,
requiring ministerial coordination, and so on. I be-
lieve that governments should start generating this
44 We mentioned that in relation to TI we could predict that
many sectorial activities (basic technological infrastructure) would
be undertaken in the future directly by industry associations, with
much less goverment support than that required in the infant phase
of the policy.
1180 M. Teubal/Research Policy 25 (1997) 1161-1188
policy-restructuring capability already in the infant
stage of policy implementation.
4.2. The infant stage: a 'learning" policy approach
A summary of the nature and functions of the
infant phase of advanced TIP can be found in Table
1. It parallels a similar structure for the infant stage
of support of enterprise R & D presented in Teubal
(1996). Most of the items have been discussed and
analyzed above. I will now proceed to discuss an
aspect of the learning approach to be followed by the
government agency in this phase-creation of an N4
network (the policy experience network). Then I will
briefly discuss policy formulation. 45
4.2.1. The policy experience network
The main objective of the N4 network is to
transform the aggregation of individual learning about
the SDTA being promoted (and about the effective-
ness of the policy tools used) into a body of collec-
tive learning serving both the actual and potential
enterprises and organizations involved in such activi-
ties. This will take place through active switching of
information and experience and the referral functions
performed by the government agency responsible for
the policy, and by more generalized diffusion and
codification of individual experiences. In addition,
an objective of N4 is to help determine the 'final'
configuration of the instruments and tools of promo-
tion.
While the network configuration of interactions
has obvious advantages, it is not obvious that it will
appear spontaneously. Hence the task of the govern-
ment agency is to contribute to network creation and
development and to act as its central node (the
Private Branch Exchange (PBX)) or network en-
trepreneur function - see Teubal et al., 1991). The
learning advantages of a networked process of col-
45 Following Teubal et al. (1991) and Galli and Teubal (1995),
we represent the various kinds of networks with the letter N
followed by a digit. Thus N I and N2 are the component-assem-
bler and user-producer networks, respectively; N3 is the technol-
ogy-services network (technology center-SMEs); and N4 is the
'incentives' recipients-goverment agency network associated with
HTP. We call the last a policy experience rather than a policy
network.
lective learning over a non-networked one directly
influence both the rate of diffusion of the SDTA
(and associated routines) and market-building.
4.2.2. Policy formulation
We still must deal with policy formulation as a
phase distinct from policy implementation. A linear
view of reality would tend to state that policy formu-
lation is a necessary stage prior to policy implemen-
tation, one that culminates in implementation. This is
not true. Although aspects of policy formulation
precede implementation (we may call this policy
design), the formulation stage of policy necessarily
overlaps with the infant//experimental stage of pol-
icy implementation. Policy formulation is a gradual
process requiring actual experience in implementa-
tion (learning by doing), As with innovation, its
optimum characteristics cannot be planned initially
but must be learned, in part, through interaction with
the real world. It is not clear when policy formula-
tion 'ends,' given that it is aimed at a moving target
(policy itself is continuously changing the nature of
the economic units aimed at, and this in turn entails
further changes in policy). However, we may say
that the successful consolidation of the first round of
policy formulation is largely completed by the end of
a successful infant implementation phase. 46
4.2.3. Indicators of infant phase performance
The performance indicators I propose below
should also be related to the time elapsed since the
start of implementation. These indicators include the
following:
• The scope of SDTA activity in general and, more
specifically, of project generation (in particular
whether the critical mass of projects for effective
learning has already been assembled);
• The degree of success in creating an N4 network,
and, associated with this (a separate although
related indicator), the extent to which a good set
of policy instruments has been consolidated;
46 This is because of the intense learning, interaction, and search
processes that take place during this stage. There is an analogy
with the overlap of policy formulation with implementation con-
cerns 'phase overlapping' in the innovation processes of firms.
See Imai et al. (1988).
 M. Teubal / Research Policy 25 (1997) 1161-1188
The relative extent of diffusion of SDTA (and
associated routines) in the universe of potential
policy beneficiaries. Thus a HTP that involves
few resources but achieves relatively limited dif-
fusion should be considered a failure. This is
because, by definition, our HTP has been imple-
mented to redress a strategic deficiency in the
SDTA supported;
• The extent of development of policy capabilities.
4.3. The growth stage
Previous work has considered a two-phase HTP
cycle with infant and mature phases (Teubal, 1996).
The usefulness of an intermediate 'SDTA-growth
phase' derives from a distinction between steady
SDTA growth, given the appropriate set of instru-
ments at roughly infant-phase levels of support, and
full SDTA endogenization (i.e. steady growth with
drastically reduced incentives for routine projects). I
propose that the growth phase starts (i.e. the infant
phase ends) with the take-off of SDTAs at infant-
stage support levels ( t l ) and ends when continued
growth of SDTAs is fully endogenous, that is, when
a significant routine group of projects emerges that
would be undertaken even without (or with drasti-
cally reduced) government support (t2).
The definition of tl assumes that project genera-
tion has become endogenous, which means that
learning (and learning to search) has gone far enough,
as has the introduction of search routines within
firms. Moreover, the search process itself has been
facilitated by new SDTA project opportunities spun
off from the mass of projects already executed. At
the beginning of the growth stage there is still a
widespread need for incentives, due, for example, to
externalities in innovation management or even to
project search/generation. The definition of t2 im-
plies that significant collective learning (and associ-
ated externalities) has been exhausted, at least for
routine projects. (Note that tl < t2, since endoge-
nization of SDTA with incentives should precede
self-sustained growth without incentives.)
A good fit between tools and needs should have
been achieved by tl; in the extreme case where
successful learning depends on a very precise policy
configuration, tl might not have been reached other-
wise. A new disequilibrium emerges towards the end
1181
of the phase, however, since the previously adequate
set of instruments loses efficiency due to endogenous
changes in firms or projects that the policy itself has
generated.
4.3.1. Efficient selection and steady growth
A successful infant phase of an SDTA-support
HTP allows a market-based ('natural') process of
selection of firms or SDTA projects to take place - a
process that indicates areas of potential competitive
advantage. This could be the basis for steady growth
starting at tl and for endogenization at t2. The
requirements for HTP success can be understood in
terms of generating enough variety during the infant
phase and enabling an efficient process of market
selection during this and the subsequent phase. The
outcome should be steady growth and significant
endogenization of SDTA.
Note that the selection process in itself need not
call for selective policies to support these areas,
because they would also be recognized by (and
involve incentives to) market agents. However, ma-
terialization of the above advantages may be subject
to static and dynamic scale economies, both at the
firm and the sector or technology level. Thus a
greater measure of selectivity and coordination in
HTP may have to be applied later (during the growth
and mature stages). 47
4.4. The mature phase
Full SDTA endogenization (routine projects) and
new possibilities for more complex SDTA projects
or for new SDTA areas, such as a shift from firm-
based R & D to cooperative technological infrastruc-
ture, call for substantial restructuring of policy. This
can be visualized as a second round of policy formu-
lation, one that should involve both fixing new
strategic objectives and undertaking explicit
market-failure analysis.
This analysis would have to assess which types of
projects could be undertaken without support (thereby
47 Given the importance and interactive nature of policy and,
eventually, of selectivity, it may be more precise to characterize
the selection mechanisms taking place as mixed, i.e. involving
both market and non-market mechanisms.
1182 M. Teubal/Research Policy 25 (1997) 1161-1188

SDTA

/ " ~ G )

• t
Infant Growth h Mature
Phase tl Phase Phase

* The figure focuses on "routine" projects, i.e. it excludes situations involving emergence of new
important categories of complex projects and new types of SDTA. For other configurations see
Teubal (1995).
Fig. 2. Growth of a SDTA and of government support (G): a simple and ideal case. The figure focuses on 'routine' projects, i.e. it excludes
situations involving emergence of new important categories of complex projects and new types of SDTA. For other configurations see
Teubai (1996).

contradicting the necessary additionality criterion) 48
and which categories w o u l d continue to require sup-
port and e v e n n e w configurations o f policy i n v o l v i n g
stronger support. A learning process within g o v e r n -
ment, which by t2 has h o m e d o n t o a relevant pro-
j e c t / f i r m typology, c o u l d significantly assist in the
market-failure assessment.
Unfortunately, policy restructuring has not always
taken place, either because o f a lack o f capabilities
Numerous sets of circumstances could lead to non-additional-
ity in SDTA promotion; for example, when projects are critical to
a firm's gaining access to funds, or in association with 'routine'
projects where learning has largely been exhausted, or for large
chunks of the innovative activities of larger firms, especially those
with access to international capital markets. The last is the case
today for one or two dozen Israeli hi-toch firms that were still
small in the 1970s, when their innovative activity was extensively
characterized by 'market failure.' For an empirical study of policy
additionality in the context of German support of the R&D
personnel of SMEs, see Meyer-Krahmer (1987).
within government (including an absence of the re-
quired awareness of the need to change) or because
of political factors. There exists less-than-ideal ma-
ture stages in HTP, for example, when the govern-
ment a g e n c y seeks to add n e w p r o g r a m s without
reductions in existing ones. 49
T o s u m m a r i z e , an adequate pattern o f restructur-
ing requires the following:
• O b j e c t i v e e v a l u a t i o n routines within g o v e r n m e n t
(to identify the shifting loci of m a r k e t and other
failure);
• P o l i c y capabilities within g o v e r n m e n t (to partici-
pate in or e f f e c t i v e l y c o m m i s s i o n the a b o v e - m e n -
49 Israeli promotion of firrn-base~l R&D is an example of incom-
plete restructuring in two senses: (1) partial and presumably
insufficient reduction of support for routine projects; (2) delayed
introduction (and insufficient scope) of TIP. This contrasts with its
clear success in the early, infant phase of the R&D policy (see
Teubal, 1993).
 M. Teubal/ Research Policy 25 (1997) 1161-1188 1183

Table 2 cases, and countries that energetically initiated R & D

Share of business enterprise R&D financed by government a (%) promotion during that decade (such as Spain), a
1981 1985 1989 continuous reduction in this share is evident. The
Australia 8.4 6.9 3.0 industrial histories of Japan, Korea, Taiwan, and
Austria 7.4 7.9 8.0 Israel also support this trend (see, for example, Nel-
Belgium 8.3 8.4 6.0 son, 1993, Chapters 11, 12, and to some extent, 13),
Canada 10.7 12.0 10.2
Denmark 12.4 9.9 11.7 which is consistent with the ideal/simple case shown
Finland 4.2 3.2 3.1 in Fig. 2. The conceptual framework of this paper is,
France 24.6 23.4 19.3 however, also consistent with other time profiles, for
Germany 16.9 15.3 11.0 example, with rising absolute levels of government
Greece 4.6 14.7 9.5 support (Teubal, 1996). Here I will not essay a full
Iceland 38.3 15.8 10.9
Ireland 13.7 12.4 6.9 empirical test. The main point is that, in the ideal
Italy 8.8 16.9 16.3 policy configuration described in this paper, a major
Japan 1.9 1.6 1.2 force explaining the profile o f government incentives
Netherlands 7.5 12.6 10.6 over time is the gradual routinization of SDTA,
New Zealand 16.4 n/a 6.7 brought about by collective learning, institutional
Norway 25.3 18.8 19.6
Portugal 1.6 2.9 2.5 change, and market-building. 50
Spain 4.1 7.7 11.8
Sweden 13.6 11.6 11.5
Switzerland 1.3 1.8 0.8 5. Summary, conclusions and outstanding issues
Turkey n/a n/a n/a
United Kingdom 30.0 23.0 17.2
United States 31.6 32.3 30.9 5.1. Summary

a See OECD (1993). Horizontal technology policies (HTPs) are aimed

Source: OECD, STIID database, July 1992.
tioned strategic prioritization and market-failure
analyses and to implement the restructuring);
• The political power to shut down programs.
Fig. 2 presents a quantitative summary of the
pattern of the HTP for a particular SDTA and of the
corresponding pattern of support for an ideal and
simple case that focuses on routine projects. Between
tl and t2 there can be continued growth in the
activity even though the average rate of incentives
declines. The schedules are consistent with the 'state
of market failure' descriptions of Fig. l(a) and (b).
Beyond t2, continued growth is possible, albeit at a
reduced rate, with even more drastic reductions in
(or elimination of) incentives. The time may be ripe
for initiating an HTP for a more complex SDTA (not
shown in figure), although this depends on the eco-
nomic situation facing the country. Table 2 presents
data on the share of government-financed business-
sector R & D in OECD countries in the 1980s. With
the exception of the Netherlands, some ambiguous
at supporting various classes of socially desirable
technological activities (SDTAs), such as firm-based
R & D and innovation, technological infrastructure
(both 'basic' and 'advanced'), the transfer and adop-
tion of new technologies, and so on. They are not
specific to a particular sector or technological area
(such policies would be 'vertical technological poli-
cies'); instead, they promote SDTAs across sectors
and technologies. They also differ significantly from
the traditional 'targeting' type of industrial policy.
This paper has focused on HTPs that provide incen-
tives to SDTA projects rather than to aggregate
enterprise R & D (as with tax incentive schemes) or
to R & D personnel (Meyer-Krahmer et al., 1983;
Meyer-Krahmer, 1987).
The justification of HTPs is based on a collective
5°A true empirical test would consider a set of independent
variables including features of HTPs and SDTAs, for example, the
extent to which they involve mature phase restructuring. Note that
the dependent variables should also include the rate of growth of
SDTA (over and beyond G or G/SDTA).
 1184 M. Teubal / Research Policy 25 (1997) 1161-1188
learning process that cuts across conventionally de-
fined sectors and technologies and involves not only
technology and marketing externalities but also ex-
ternalities derived from experience with project gen-
eration, management, and organization. The collec-
tive learning process is not automatic, though; it
should be promoted explicitly by government policy.
Beyond financial incentives, this requires adoption of
an explicit learning approach of the infant phase of
policy. 5~ The objective of these policies is to widely
diffuse SDTA in the economy or within a particular
segment or region thereof, to trigger what may even-
tually become a self-sustained learning (and, when-
ever possible, market-building) process; and to even-
tually endogenize the implementation of significant
portions of the particular type of SDTA being pro-
moted. Thus the eventual introduction and diffusion
of appropriate management and organizational rou-
tines within enterprises and other organizations is an
important target of HTP. 52 These and other charac-
teristics of HTP, for example, the important (though
not exclusive) role played by neutral incentives,
permits their inclusion within the market-friendly
category of industrial and technological policies. 53
Successful HTPs require imaginative, consistent,
and massive initial government support for projects
in the specified SDTA area. They must stimulate the
SDTA and also, as mentioned above, pave the way
for the later implementation of an increasing portion
of these activities ('routine projects') by unaided
market forces, thereby permitting a reduction in gov-
ernment support (at least for that particular SDTA
segmen0. Policy restructuring in the mature stage
should also involve the promotion of new types of
51 The non-automatic nature of learning could also imply that
infant industry policies providing strong incentives and support to
the acquisition of technological capabilities (e.g. in Korea: see
Westphal et al., 1985) are more effective that those that provide
general support to an industry or its output.
52 HTPs should therefore be considered to be diffusion policies,
although of a special kind. Rather than promoting diffusion of a
technology or technique, they promote diffusion of SDTA rou-
tines.
53 HTPs are more market-friendly than traditional infant-in-
dustry targetting, since the latter policy is inherently selective (see
Pack and Westphal, 1986).
projects - either complex projects within the given
SDTA area or projects in a new SDTA area. 54
A number of countries have followed this policy.
In Israel, in connection with firm-based R&D, the
mature phase has taken the form of a somewhat less
universal approach to subsidizing R&D (with a
moderate bias towards incentives favoring small firms
and start-ups while retaining formal neutrality) and
levying royalties on revenues from government-sup-
ported projects (Teubal, 1993). Other countries and
the E C / E U have explicitly or implicitly effected a
shift in emphasis towards other SDTAs; for example,
from firm-based R&D support to the support of
cooperative, generic R&D and TI, or from empha-
sizing investment in targeted industries to functional
support of R&D. 55 Presumable the reduction in
targeting policies by several successful Asian coun-
tries has been accompanied by increased emphasis
on technological policies, including HTP (Patrick,
1986).
5.2. Are the policy implications new?
Given that even neoclassical economists would
find the conclusions of this paper quite congenial,
what real contribution is made by the evolutionary
conceptual framework for HTP adopted in this pa-
per? This is a legitimate question and deserves a
considered answer. 56
54 The learning and policy restructuring processes associated
with our type of HTP do not extend automatically to incentive
mechanisms that are not project-based. An advantage of a
project-based mechanism is that the policy unit of reference (a
"project') can be made to roughly correspond with that used by
enterprises and other organizations involved in SDTA. Thus,
learning about project identification and management can be more
effective and more collective when incentives are based on such a
unit. On the other hand, the implementation of such policies
requires much stronger capabilities and learning within govern-
ment than does implementing a conventional taxed-based support
program, for example. This view is consistent with (and further
develops) that found in OECD (1993, p. 108) (based on Meyer-
Krahmer, 1987), which lists the advantages and disadvantages of
various mechanisms for supporting R&D and innovation.
5s See Dodgeson and Rothwell (1992) for trends in Europe (until
the second half of the 1980s) and Patrick (1986) for trends in
Japan.
56 1 would like to thank a referee for raising this question.
 M. Teubal/ ResearchPolicy25 (1997)1161-1188
To begin with, note that I have not abandoned
'market-failure analysis,' although it is set in a wider
context that is dynamic and includes other critical
elements, such as institutional change and market-
building. The outcome is a framework that is quite
different from the usual neoclassical framework; its
conclusions, though in principle acceptable to neo-
classical economists, are also very different from the
usual neoclassical prescriptions or those that directly
follow from standard 'market-failure analysis.' For
example, the targets of the infant policy stage are
formulated in terms of learning and acquisition of
new routines rather than productivity growth, while
policy instruments go considerably beyond the sim-
ple provision of monetary incentives. In addition, the
analysis provides the foundation for market-friendly
technological policies that are a third alternative,
lying between the obsolete interventionist mode of
the past and the complete laissez-faire approach that
many countries tend to adopt, often in the wake of
severe macroeconomic problems. I believe this paper
may help legitimize such policies by conceptualizing
both the need and the means for effective, 'lean,'
and market-friendly government intervention in the
technology area.
5.3. A policy framework as part of evolutionary
technology policy
Although it possesses 'evolutionary components,'
the overall framework is not simply an application of
evolutionary theory; rather, it takes explicit account
of the context in which the policies are being applied
and of the requirements for success, including some
conditions within government. It explicitly attempts
to specify the actions that should be undertaken
throughout implementation, as well as capability-de-
velopment issues.
I believe that the above points to the importance
of incorporating systemic 'policy framework' con-
siderations when translating evolutionary theory into
policy terms. Nelson's statements (since 1967) that
market-failure analysis represents an incomplete ba-
sis for policy can be extended and applied in connec-
tion with evolutionary theory as well. More specifi-
cally, while it is important to emphasize the implica-
tions of variety, learning, institutions, and alternative
selection mechanisms for policy, this is an incom-
1185
plete basis for what could be termed an integrated
'evolutionary technology policy.' Moreover, a tech-
nology policy framework is becoming more and
more important, because of the increasingly systemic
nature of national innovation systems and the corre-
sponding increased dependence of the impacts of any
one policy on the nature and scope of other
policies. 57
An evolutionary technology policy framework
should have a coordinated view of the set of policies
to be designed and implemented, their evolution and
concatenation and relative weights over time, their
horizontality or verticality and relative importance,
policy approaches (e.g. catalytic or not, neutral or
selective), policy capabilities, and institutional un-
derpinnings (Smith and Teubal, 1994). The notion of
a technology policy framework probably cannot ex-
ist in the neoclassical tradition. It should, in my
opinion, become an essential part of the evolutionary
economics tradition, since it bears on a central insti-
tutional and organizational aspect of national sys-
tems of innovation.
5.4. Three evolutionary aspects of the HTP frame-
work
1. The policy framework proposed is based on the
existence of differences between firms (and firm
/SDTA project combinations). Moreover, policy
implementation generates such differences. More
specifically:
• The effective constraint on successful imple-
mentation in the infant phase of the policy is
the existence or availability of good SDTA
projects; the target is achievement of a critical
mass of such projects. This implies an inherent
difference among the enterprises or organiza-
tions potentially benefiting from the policy -
between those that have and those that have
not generated such projects.
• Learning by government is in fact learning
57Although Metcalfe's analysis provides the general principles
of evolutionary technology policy (Metcalfe, 1993), this paper
suggests that additional elements are required to generate a com-
prehensiveframework for such policy (one that might support
actual policydesign in a numberof contexts).
1186 M. Teubal/Research Policy 25 (1997) 1161-1188
how to cope with p r o j e c t / u s e r differences by
setting up a reasonable menu of alternative
tools. 58
• The selection process in the early phases,
driven by a relatively neutral policy, results in
the emergence of f i r m / S D T A project combi-
nations with a 'competitive advantage.' It is
thus itself a mechanism for the endogenous
creation of differences among firms.
2. The framework is evolutionary, even though 1
have not dispensed with 'market-failure analysis.'
This is because:
• The discrepancy between the private and so-
cial profitability of S D T A arises within a non-
equilibrium, non-optimizing framework, and
its nature changes in response to collective
learning.
• It is explicitly recognized that a well-function-
ing market mechanism requires both an appro-
priate institutional framework and, frequently,
a successful process of market-building (that
is, a particular kind of institutional develop-
ment).
• The need for policy that is much more than a
financial instrument, and especially the in-
creased role of selective incentives through
time, is in itself a recognition of the impor-
tance of non-market selection. This is espe-
cially s o if one recognizes the importance of
generating the proper criteria for selection
through a process of interactive learning that
involves both program producers ('government
agency') and program users ('enterprises').
3. Neutrality in horizontal technology policy (infant
phase) is compatible with both the need to diffuse
innovation and technology routines within the
economy (as opposed to the diffusion of specific
technologies) and the need to generate variety (an
aspect of differences among firms).
Neutrality in the support o f R & D / i n n o v a t i o n is a
policy approach supportive of variety and of a
more efficient market selection mechanism. The
former was apparently missing in Sweden, which
58 This includes a capacity to characterize the new reality cre-
ated in the business sector in response to the policy-induced,
collective learning process.
is characterized by high R & D expenditures but
few exports of high-tech products. 59 Neutrality
was supposed to enable a 'natural selection'
mechanism of both products and e n t r e p r e n e u r s /
firms, with regard to innovation and R & D . Con-
sistent, massive, and neutral government support
could favor the positive selection effects of the
market mechanism.
The issue that arises is whether neutrality is
enough to support new technology or new types of
innovation. The answer is probably no, 60 given
that incumbent activities need not suffer from
dynamic and static diseconomies of small-scale or
of non-materialized learning. Thus formal neutral-
ity may not be enough, but it still is an essential
part of the whole picture. This is despite the fact
that some measure of prioritization of preferential
support may frequently be required to stimulate
socially desirable emerging technologies, new
s e c t o r s , r e g i o n s , and new t e c h n o l o g i c a l
activities. 61
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