Innovation requires a wide array of public and private investments. However, private investment in R&D and innovation may be below a socially optimal level, mainly because returns are uncertain or the innovator cannot appropriate all the benefits. Governments play an important role in fostering investment in R&D and innovation.

Spending on innovation is more than spending on R&D. To develop new products or processes, firms invest in R&D and in other tangible and intangible assets. Governments play a role through programmes that encourage firms to continue investing in innovation-related activities.

Governments perform in-house R&D and also finance R&D in various sectors of the economy. They play many roles in the innovation system, such as providing education, training and skills development, fostering knowledge creation and diffusion, and supporting the R&D efforts of firms.

Most basic research is performed in universities and in public research organisations. Public support for such research remains crucial. It is essential for developing new scientific and technological knowledge and the human capital that can lead to innovation to benefit the economy and society.

Investment in information and communication technology (ICT) is important for a country’s economic growth. At the firm level, it provides an essential platform for changing organisational methods and introducing new products and processes.

Today, high-speed broadband networks support innovation throughout the economy much as electricity and transport networks spurred innovation in the past. Innovations such as smart electrical grids, tele-medicine, intelligent transport networks, interactive learning and cloud computing will require fast communication networks to operate efficiently.

Governments are important actors in the innovation process. Not only can they foster innovative activities by firms, they can also develop their own innovations in order to develop more efficient processes and enhance the quality and availability of public services. Even though internationally agreed concepts and metrics for measuring innovation exist for the private sector, there is not as yet a similar framework for the public sector.

There are major gaps in our understanding of investments to support innovation and related responsibilities at different levels of government and of the mechanisms for managing this shared innovation policy competence. The OECD is working to develop indicators in this area.