The Impact of Innovation Inducement Prizes

From the Compendium of Evidence on Innovation Policy/NESTA: “Innovation inducement prizes are one of the oldest types of innovation policy measure.  The popularity of innovation inducement prizes has gradually decreased during the early 20th century. However, innovation inducement prizes have regained some of their popularity since the 1990s with new prizes awarded by the US X Prize Foundation and with the current USA Administration’s efforts to use them in various government departments as an innovation policy instrument. Innovation Prizes are also becoming an important innovation policy instrument in the UK.  A recent report by McKinsey & Company (2009) estimates the value of prizes awarded to be between £600 million and £1.2million. Despite the growing popularity of innovation inducement prizes, the impact of this innovation policy measure is still not understood. This report brings together the existing evidence on the effects of innovation inducement prizes by drawing on a number of ex-ante and ex-post evaluations as well as limited academic literature. This report focuses on ex-ante innovation inducement prizes where the aim is to induce investment or attention to a specific goal or technology. This report does not discuss the impact of ex-post recognition prizes where the prize is given as a recognition after the intended outcome happens (e.g. Nobel Prize).
Innovation inducement prizes have a wide range of rationales and there is no agreed on dominant rationale in the literature. Traditionally, prizes have been seen as an innovation policy instrument that can overcome market failure by creating an incentive for the development of a particular technology or technology application. A second rationale is that the implementation demonstration projects in which not only creation of a specific technology is intended but also demonstration of the feasible application of this technology is targeted. A third rationale is related to the creation of a technology that will later be put in the public domain to attract subsequent research. Prizes are also increasingly organised for community and leadership building. As prizes probably allow more flexibility than most of the other innovation policy instruments, there is a large number of different prize characteristics and thus a vast number of prize typologies based on these characteristics.
Evidence on the effectiveness of prizes is scarce. There are only a few evaluations or academic works that deal with the creation of innovation output and even those which deal with the innovation output only rarely deals with the additionality. Only a very limited number of studies looked at if innovation inducement prizes led to more innovation itself or innovation outputs. As well as developing the particular technology that the innovation inducement prizes produce, they create prestige for both the prize sponsor and entrants. Prizes might also increase the public and sectoral awareness on specific technology issues. A related issue to the prestige gained from the prizes is the motivations of participants as a conditioning factor for innovation performance. Design issues are the main concern of the prizes literature. This reflects the importance of a careful design for the achievement of desired effects (and the limitation of undesired effects). There are a relatively large number of studies that investigated the influence of the design of prize objective on the innovation performance. A number of studies points out that sometimes prizes should be accompanied with or followed by other demand side initiatives to fulfil their objectives, mostly on the basis of ex-ante evaluations. Finally, prizes are also seen as a valuable opportunity for experimentation in innovation policy.
It is evident from the literature we analysed that the evidence on the impact of innovation inducement prizes is scarce. There is also a consensus that innovation inducement prizes are not a substitute for other innovation policy measures but are complementary under certain conditions. Prizes can be effective in creating innovation through more intense competition, engagement of wide variety of actors, distributing risks to many participants and by exploiting more flexible solutions through a less prescriptive nature of the definition of the problem in prizes. They can overcome some of the inherent barriers to other instruments, but if prizes are poorly designed, managed and awarded, they may be ineffective or even harmful.”