Market Failure Evidence and Programme Design

1. Presentation by Market Failure Evidence and Programme Design Dr Iain Jenkins

2. Structure • Market failure and its causes • How it is normally applied • How the concept can inform planning • Case study: targeting sectors and “cyber security”

3. What is market failure? “A market failure is said to exist when the market, if left to its own devices, does not lead to an economically efficient outcome. It is in those circumstances that state intervention, including state aid, has the potential to improve the market outcome in terms of prices, output and use of resources.” European Commission DG Competition “Market Failure is an imperfection in the market mechanism that prevents the achievement of economic efficiency”. HM Treasury (UK) “Green Book” “Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off.” Wikipedia

4. Causes • “Four cause” model (eg UK) • public goods: non-rival, non-excludable, free riders • externalities: positive and negative spill-overs (and others) • market power: in product or factor markets • information: deficiencies and asymmetries • Others • institutional: • bounded rationality • barriers to factor movement • government • uncertainty

5. Application • Practice varies widely: from “ignore” through “lip service” to “in- depth investigation” • But then guidance as to expectations is not clear (and never has been?) • Regardless, concept difficult to apply at “Programme level” • varying conditions in different “markets” • variations across different “priorities” • variations in appropriate interventions • Tendency to rely on simplistic observations of opportunity and/or need • Even if go beyond, tendency to confuse symptoms and causes

6. Market failures: causes or symptoms?

7. So what? • If no market failure, why intervene at all? • counterfactual • distorting competition • displacement • If support targeted at wrong market failure, unless very lucky: • mis-allocation of Programme resources • reduction in Programme efficiency and effectiveness • missed development opportunities

8. Case study: sector targeting • Common to all (?) SIF Programmes • Similar sectors across territories, most popular include: • life sciences/biotechnology • informatics and digital technology • creative and cultural industries • renewable/”green” energy • Could be valid (policy driven?) but intervention rationales and planned responses lack specificity • Justification based on “high level” statements of opportunity and/or need, and poorly evidenced

9. Case study: sector targeting • Few examine market conditions in detail and identify the specificities: “more of the same” • Failure to look more deeply can (and probably will) lead to inefficient resource allocation • Heavy reliance on project applicants to “make the case” • But, what might an ex ante evaluator reasonably expect of planning teams?

10. Case study: targeting cyber security • Growing area of policy and wider public interest: internet, mobiles, social networks, on-line transactions, infrastructure/systems dependency, etc, etc, • Trend increase in threats to the state, to commerce and to citizens: from identify theft through to infrastructure attacks • No sector is immune from cyber threats, some more exposed than others, and already imposing large costs • Demand for solutions growing at a rapid pace as sophistication of attacks increases

11. Targeting cyber security • Many agencies now recognising the sector’s potential: • large and growing market $64 billion to $120 billon between 2011 and 2017 • comprising mainly high value added goods and services • close fit with corporate innovation/knowledge economy agendas • close fit with commercialisation and KE/KT agendas • Taken at face value, good candidate for targeting, but: • what is the “market” in this context? • what are market conditions like? • what is the baseline position in Programme area? • what are the specific market failures and specific responses that are required to capitalise the opportunity?

12. Targeting cyber security • In Scotland, planning a sector strategy which levers SIF • Investigated sector conditions through bespoke research: • policy context • market definition, segmentation and trends • Scottish capacity: business, academia, public sector • evidence of market failures and detailed description • SWOT analysis, strategic response and intervention areas • Engaged wide variety of sector stakeholders: • policy makers • leading sector/technology commentators • academic and business communities • development agencies • Some “surprising” results, forcing a change in approach!

13. Targeting cyber security • No one way to define and/or segment: in Scotland applied a technology typology • Also looked at different sectoral and geographic markets • Market failures differ across technology types, markets and/or sectors: implies a need for flexible response

14. Targeting cyber security • Many of the market failures reflect the nature of the business stock: many early stage SMEs, some spin-outs • Others reflect the sector context: eg national intelligence/ defence sector sensitivities • While others reflect the immaturity of the sector: eg fragmentation, lack of leadership/representation • Much of the sector’s support needs can be addressed by existing mechanisms: access to finance, KT/KE, exporting,,,,,

15. Targeting cyber security • Major failures on the demand-side, with accompanying symptoms: • limited awareness of importance and need for action, particularly among SMEs • issues of trust regarding suppliers’ competency and reliability • lack of an accreditation authority and “industry standards” • people issues • Also, important sector-specific information failures on the supply-side as explanation for: • supplier linkages • academic-business interaction and collaboration • new market information and entry • factor availability

16. How has it changed the strategic stance? • Now targeting demand and supply side failures • Demand side priorities: • awareness raising – like Y2K though this time it’s for real • subsidised access to engaging specialists: eg “pen testers” • up-skilling staff regarding security issues – short courses • accreditation and verification scheme • Supply side priorities: • making the connections – B2B, B2A, etc • key account management for “stars” • signposting for others • developing the FDI proposition • informing/better exploiting graduate labour

17. Concluding remarks • Need for clearer guidance on expectations and some consistency of approach • Balance needed to avoid paralysis by analysis: nobody expecting comprehensive suite of detailed studies at the planning stage • But, if the claim is being made, the ex ante evaluator must assess its basis • Evidence is paramount, and that requires engaging the end beneficiaries