Now published as: Dodgson, M., Hughes, A., Foster, J. and Metcalfe, J.S. (2011) “Systems thinking, market failure and the development of innovation policy: the case of Australia.” Research Policy Volume 40, Issue 9, November,  Pages 1145-1156.




Innovation policy is increasingly informed from the perspective of a national innovation system (NIS), but, despite the fact that research findings emphasize the importance of national differences in the framing conditions for innovation, policy prescriptions tend to be uniform. Justifications for innovation policy by organizations such as the OECD generally relate to notions of market failure, and the USA, with its focus on the commercialization of public sector research and entrepreneurship, is commonly portrayed as the best model for international emulation. In this paper we develop a broad framework for NIS analysis, involving free market, coordination and complex‐evolutionary system approaches. We argue that empirical evidence supporting the hypothesis that the ‘free market’ can be relied upon to promote innovation is limited, even in the USA, and the global financial crisis provides us with new opportunities to consider alternatives. The case of Australia is particularly interesting: a successful economy, but one that faces continuing productivity and innovation challenges. Drawing on information and analysis collected for a major review of Australia’s NIS, and the government’s 10‐year plan in response to it, we show how the free market trajectory of policy‐making of past decades is being extended, complemented and refocused by new approaches to coordination and complex‐evolutionary system thinking. These approaches are shown to emphasize the importance of systemic connectivity, evolving institutions and organizational capabilities. Nonetheless, despite the fact that there has been much progress in this direction in the Australian debate, the predominant logic behind policy choices still remains one of addressing market failure, and the primary focus of policy attention continues to be science and research rather than demand‐led approaches. We discuss how the development and elaboration of notions of systems failure, rather than just market failure, can further improve policy‐making in the future.