and learning; supporting adequate financing schemes to tackle technical challenges; addressing market failures and/or guiding market signals to reflect and internalize the social returns to innovation; building an institutional (regulatory) environment to promote certain strategic innovation paths; and/or guiding the generation of opportunities and promoting interactions between the actors sharing that vision of development (OECD 1998).

Innovation policy also has a key role in creating a collective vision of what should be done and how to enhance innovation performance (Metcalfe and Ramlogan 2008, Soete, Verspagen, and Ter Weel 2010, Kline and Rosenberg 1986). Whether all or some of these aspects do or not exist affects the effectiveness of any private effort in innovation. STI policies, therefore, are a _complementary factor_ , mostly affecting firms’ _learning capabilities_ but also affecting firms’ _business opportunities_ . For example, regulatory aspects of STI instruments such as intellectual property schemes, or specific instruments such as public procurement, grants, or other monetary incentives, could improve the rewards to innovation, and therefore STI policy, thus also constituting an important _market_ complementary factor (included in the Regulation segment in figure 5).

# **_3.2. Market Context_**

While traditionally the National Innovation System literature has emphasized the systemic nature of innovation and the importance of key complementary factors and institutions in defining innovation outcomes, it has often lacked clarity on what context factors matter and are complementary to R&D. Maloney (2017) proposes where to set the boundaries of the NIS while emphasizing the often underacknowledged role of barriers to accumulation of factors of production. In the context of a knowledge production function, knowledge inputs are often affected by barriers that deter the accumulation of other factors: that is, barriers to capital investment due to uncertainty or financial market imperfections are also barriers to invest in knowledge capital. A key insight is that in addition to the knowledge context, key aspects of the traditional market context will also have an impact on the returns to investment in innovation.

# _3.2.1. Competition_

Market competition has been considered an important aspect promoting or deterring innovative behavior. There is general consensus about the simultaneous determination of market competition and innovation. The concepts of creative destruction and creative accumulation in Schumpeterian approaches are evidence of an awareness of this simultaneity. In a regime characterized by creative destruction, entrepreneurs are driven by fear of others innovating first. Therefore, the innovative base is continuously being enlarged by the entry of new innovators, increasing market competition. In a creative accumulation regime, on the other hand, it is monopoly power that encourages innovation, which in turn will be rewarded by monopoly rents, increasing market concentration.<sup>10</sup> Thus, market competition may affect both incentives to invest and opportunities to appropriate rewards from such investment, which makes it a central market complementary factor.

> 10 <mark>Many empirical studies have attempted to find economic mechanisms to explain the highly concentrated market structure of  a highly R&D-intensive sector; since Scherer (1967), the relation between market competition has been modeled in an inverted-U shape. However, because these variables are related in both directions, the methodological challenge in empirical studies has been how to account for such endogeneity: see Davies and Lyons (1996), Sutton (1998), Aghion et al. (2005).</mark>

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