Presentation by

Market Failure Evidence and Programme Design

Dr Iain Jenkins

Structure

Market failure and its causes

How the concept can inform planning

How it is normally applied

o Case study: targeting sectors and “cyber security”

“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

What is market failure?

Causes

“Four cause” model (eg UK)

o public goods: non-rival, non-excludable, free riderso externalities: positive and negative spill-overs (and others)o market power: in product or factor marketso information: deficiencies and asymmetries

Others

o institutional: o bounded rationalityo barriers to factor movemento governmento uncertainty

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”o varying conditions in different “markets”o variations across different “priorities”o 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

Market Failure

Information Failures Public Goods Market Power Externalities

Categories

Symptoms

Limited availability of investment finance for

businesses in a key target sector

Poor visual and physical amenity associated with a town centre environment

Limited access to supply chain due

to restrictive arrangements

with a dominant producer

Limited number of technology

spin-outs due to constraints on

access to research

outcomes

Market failures: causes or symptoms?

So what?

If no market failure, why intervene at all?

If support targeted at wrong market failure, unless very lucky:

o mis-allocation of Programme resources

o counterfactual

o distorting competition

o displacement

o reduction in Programme efficiency and effectiveness

o missed development opportunities

Case study: sector targeting

Common to all (?) SIF Programmes Similar sectors across territories, most popular include:

o life sciences/biotechnology o informatics and digital technologyo creative and cultural industrieso 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

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?

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

Targeting cyber security

Many agencies now recognising the sector’s potential:o large and growing market $64 billion to $120 billon between 2011 and 2017

o comprising mainly high value added goods and serviceso close fit with corporate innovation/knowledge economy agendaso close fit with commercialisation and KE/KT agendas

Taken at face value, good candidate for targeting, but:o what is the “market” in this context?o what are market conditions like?o what is the baseline position in Programme area?

o what are the specific market failures and specific responses that are required to capitalise the opportunity?

Targeting cyber security

In Scotland, planning a sector strategy which levers SIF Investigated sector conditions through bespoke research:

o policy contexto market definition, segmentation and trendso Scottish capacity: business, academia, public sector o evidence of market failures and detailed description

o SWOT analysis, strategic response and intervention areas

Engaged wide variety of sector stakeholders:o policy makerso leading sector/technology commentatorso academic and business communitieso development agencies

Some “surprising” results, forcing a change in approach!

Targeting cyber security No one way to define and/or segment: in Scotland applied a technology

typology

Anonymity & Privacy/Identity Management Formal Methods/ProofsAuthentication Malware/BotnetsBiometrics QuantumCCTV/Image Recognition CloudRisk/Intelligence Analysis and Policy Setting

Text mining/Social Network Analysis/ Natural language communication

Cryptography SteganographyDatabase Security Systems Security /Protocols/NetworkingDigital Forensics Trust/ProvenanceEthical Hacking/Insider threats Usable Security/HCI/Interfaces

Also looked at different sectoral and geographic markets Market failures differ across technology types, markets and/or sectors:

implies a need for flexible response

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,,,,,

Targeting cyber security Major failures on the demand-side, with accompanying

symptoms:o limited awareness of importance and need for action, particularly among SMEs

Also, important sector-specific information failures on the supply-side as explanation for:

o issues of trust regarding suppliers’ competency and reliabilityo lack of an accreditation authority and “industry standards”

o supplier linkageso academic-business interaction and collaborationo new market information and entryo factor availability

o people issues

How has it changed the strategic stance?

Now targeting demand and supply side failures Demand side priorities:

o awareness raising – like Y2K though this time it’s for realo subsidised access to engaging specialists: eg “pen testers”o up-skilling staff regarding security issues – short courses

Supply side priorities:o making the connections – B2B, B2A, etco key account management for “stars”o signposting for otherso developing the FDI propositiono informing/better exploiting graduate labour

o accreditation and verification scheme

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