for advancing, (if not maximizing), public interest (if not welfare). Incentives matter. From the point of view of making policy, the line becomes extremely unclear between Nelson and say Stiglitz, who works firmly in the neoclassical tradition, while criticizing excessively simple models of development that assume that the failures of the market, including full rationality and information, are second order. Going forward, there is no necessary aversion to formalization of economic relations in the NIS tradition and there is common value placed on market competition, incentives and what the neoclassical tradition calls.

# _Market failures:  Wrong, or just too little?_

Cimoli, Dosi, Nelson and Stiglitz (2009) suggest that it is the perceived underestimation by the mainstream of the magnitude of market failures, particularly those relating to firm learning, that drives the frequent dismissal of market failure analysis in the NIS literature, rather than disagreement on principle with that mode of analysis (see Soete 2010 for a discussion). But given the weak capabilities of LDC firms now documented, the idea that simply finding the right subsidy would generate the socially optimal level of innovation can seem a bit of Washington Consensus era Pollyannaism. That said, viewing the apparent success of widespread firm upgrading services globally and of recent random control trials demonstrating a dramatic impact on productivity through a market failure lens would prompt us to ask: “if it is so profitable for firms to upgrade and learn, why don’t firms do it themselves?”<sup>9</sup> As one response, the European Commission’s _Study of Business Support Services and Market Failure_ focused precisely on two types of market failure, both relating to information. First, adverse selection issues when SMEs lack the scale to choose among available services of assess their value or the quality of providers. This asymmetry could prevent the emergence of a support industry even if firms desired to upgrade. The second, is, consistent with biased self-evaluations found by Bloom and Van Reenen, that firms simply do not know what they do not know and hence do not perceive the value of investing in themselves.<sup>10</sup> McKenzie and Woodruff, examine several additional hypotheses

> 9 Recent work suggests that in India, firms receiving managerial consulting from Accenture gained in productivity 11% in one year, more than enough to cover the full cost of Accenture’s intervention and far more than the cost of a local firm service.  The prevalence in the advanced countries of large subsidies and programs dedicated to this upgrading (See Ezell. Atkinson 2011, Maloney 2012) suggests that they, too, believe the returns are high.

> 10 As Petar Stojic, the former Director of Business Support Policy for Britain’s Department for Business, Innovation and Skills (BIS), which oversees the Manufacturing Advisory Service, comments: The market failure we are trying to address is the information asymmetry market failure. SMEs do not always know what they do not know, and they do not know how useful business expertise can be. And even when the SME manufacturer knows it has a problem, it does not always know how to procure the right solution. After they have worked with MAS, they understand the value of lean principles and/or better innovation practices and the value of external expertise in general, so when they have to pay the full rate in the future, they now know what to look for and have greater confidence in approaching the market. p. 34. In reality, far

8