Finding the right lead market

In the quest to make Europe a leader in innovation, it should be remembered that not all innovations are created equal. Former users of BTX terminals in Germany or Minitel in France may recall the millions of euros worth of subsidies poured into developing those technologies, only to have them rendered obsolete by the internet. On the other hand, European mobile phone technology has beaten out competitors to become the world standard.

Predicting which technology will succeed involves understanding that some markets have the edge in deployment of new technology in a certain sector. Those markets are termed ‘lead markets’ and the concept of the lead market is taking hold in discussions about innovation policy. The European Commission is currently considering lead market initiatives in various sectors and a Commission communication on lead market initiatives is expected later this year.

Just as lead markets are those that are ahead of the curve in adapting new technology, those that are behind in a given sector are termed ‘lag markets’. Marian Beise, formerly a senior researcher at the Centre for European Economic Research, says:

"If the country has a lag market structure, then developing regional technologies is not really very efficient."

The development of idiosyncratic technology has been a burden not just to countries in Europe. Japan’s mobile phone standard stayed mostly confined to Japan, which made it a burden for Japanese companies to comply with the standard when they could not export the technology.

Realising that Europe is a lead market for mobile phone technology, Japanese companies more recently were among the first to buy new GSM technology. Becoming what Beise calls a "first second" and embracing standards used in lead markets abroad is one of the ways that innovators can benefit from the concept.

An age-old strategy in promoting innovation has been to fund research and development of new technology. These are traditional ‘supply-side’ efforts to encourage innovation, but demand-side innovation measures, including the consideration of lead markets, have become a focus of policy since the publication of the Aho report in January 2006, which advocated the use of public procurement in encouraging the emergence of new technology. Luke Georgiou, a member of the four-person panel chaired by former Finnish prime minister Esko Aho that produced the report for the EU, says that as far as convincing officials that demand-side measures are needed "the battle is won".

The idea is gaining momentum. A working group on public procurement in research last year put forward the idea of "pre-commercial procurement", a strategy that would treat public sectors as a "technologically-demanding first buyer".

Buying technologies that have yet to be developed falls within World Trade Organization rules, and is used extensively in the US with defence contractors. It is also now a priority for the UK government in the healthcare sector.

Governments also influence demand for innovation through regulation and setting standards. The ‘lead market’ concept is being used in environmental regulation, as it addresses the need both for the development and the diffusion of new environmental technologies. Germany’s ministry for the environment held a conference last autumn on innovation and "lead markets of the future".

"Environmental innovations are most often dependent on regulation," says Klaus Jacob at the Free University of Berlin, adding that for new environmental technology, "lead markets also have the image of being the pioneer in environmental policy". California has benefited from that image, with car-makers in Japan and Europe orienting to fuel efficiency standards set there. "The lesson is to be ambitious", says Jacob, adding that the EU is the most important regulator in terms of environmental policy.

Knowing where lead markets are is a matter of considering problems, not sectors, says Beise. Policymakers should not be asking, "What is a lead market for nanotechnology?" but rather, "What is a lead market for this problem?" - taking into account demographic trends, increased mobility, health spending and so on.

Beise says that the lead market concept has a lot of potential, but warns there is "much danger in using concepts in superficial ways". Governments and business can succeed by adapting innovations to market contexts, developing technologies to flank sectors in which a country has a lead market advantage. But lead markets cannot be created out of thin air, lest they resemble France’s lead market for Minitel technology.

In the quest to make Europe a leader in innovation, it should be remembered that not all innovations are created equal. Former users of BTX terminals in Germany or Minitel in France may recall the millions of euros worth of subsidies poured into developing those technologies, only to have them rendered obsolete by the internet. On the other hand, European mobile phone technology has beaten out competitors to become the world standard.

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