UCL Institute for Innovation and Public Purpose


Thinking About Technology Policy: ‘Market Failures’ versus ‘Innovation systems’

Thinking about technology policy market failures versus innovation systems

25 October 2017

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UCL Institute for Innovation and Public Purpose (IIPP) Working Paper Series: IIPP WP 2017-02


  • Richard R. Nelson | George Blumenthal Professor of International and Public Affairs, Business, and Law, Emeritus, Columbia University, New York


Nelson, R. (2017). Thinking About Technology Policy: ‘Market Failures’ versus ‘Innovation systems’. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2017-02). Available at: https://www.ucl.ac.uk/bartlett/public-purpose/wp2017-02


This paper compares two different theoretical frameworks in economics for orienting analysis of issues in technology policy. One is a neoclassical framework that sees appropriate policies as dealing with “market failures”. The other framework is provided by an evolutionary and institutional approach to economic analysis that sees appropriate policies as building or maintaining an effective “innovation system”. The paper lays out the key general differences between the two broad theoretical frameworks, and how they lead to different perspectives on technology policy. The paper then focuses technology policy regarding pharmaceuticals as a case study illustrating the different approaches. The conclusion comments on the general role of economic theories in framing policy analysis.

This working paper is a reprint from an article that Richard Nelson published in 2009. We have reprinted it, with his permission through his collaboration with us on the mission oriented framework, to remind students and practitioners of this important piece of work that delineates the limitations of market failure theory and the need for an evolutionary-institutional framework with markets understood as outcomes of complex social, political and institutional forces.