This document discusses challenge driven innovation and its implications for policy approaches. It proposes a 3-step conceptual approach to challenge driven innovation: 1) feasibility assessment, 2) experimentation, and 3) roll-out. While innovation policies still focus on science and market-driven approaches, demand-driven and challenge-driven innovation is emerging. Real systemic challenge-driven innovation policies are still lacking. The document examines experiences with challenge-driven innovation in healthcare, education, and entrepreneurship ecosystems. It concludes that challenge-driven innovation has potential for growth and societal issues but remains untapped due to institutional barriers.

1. Challenge driven innovation
What will the Nordic business environment look like in the future?
5-6 March 2013, Stockholm
Jari Romanainen
5 March 2013
DM 01-2013 Copyright © Tekes

2. Innovation Policy Approaches
 Science / Research driven
 Provide knowledge and skills, ensure level playing field
 Scientific discoveries / research result enable new applications
 Focus on scientific research and industry academia collaboration
 Ensure market competition, empower consumers
 Market / Opportunity driven
 Facilitate innovation, ensure competition
 Providing products and services to fulfil existing customer needs
 Identify and address latent needs of users, creating new markets
 Focus on industrial innovation, collaborative applied
research, competitiveness and competition
 Demand / Challenge / Mission driven
 CDI emerges on policy agenda typically during crises
 Address systems, provide platforms and solutions
 Identify and address demand / challenge / mission
 Focus on societal needs, societies/communities of users, systems
and institutional/structural change DM 01-2013 Copyright © Tekes

3. Implications of Challenge Driven Innovation 1
 Solutions need to be systemic
 Based on a shared (physical, virtual) platform, which enables a large
number of different business models, products and services
 Require large consortia and multidisciplinary/cross-sector approaches
 Require often changes in institutional practices and
structures, sometimes these changes need to be fundamental
 Should aim for transferrable solutions
 Must understand which of the key elements of the solution are context
(society/community) specific and which are not
 Generic platform, adaptable business models, tailored products and
services
 Need to experiment / pilot in real life context / large scale
 Functionalities of systems can only be realised when experimenting
with the full system in real scale
 Solutions are always shaped by user experiences
DM 01-2013 Copyright © Tekes

4. Implications of Challenge Driven Innovation 2
 All potential barriers have to be addressed simultaneously
 Any actor can prevent or seriously hinder systemic change
 Incentives must address all actors:
society/community, individuals, enterprises, political institutions, public
sector, research actors, etc. (appropriate incentive structure)
 Some barriers can be removed quickly, other may take long time
 Weak problem owner means lack of leadership
 Typically public sector, society or user community with very little or no
knowledge, skills and experience in innovation
 Typically no clear longer term vision or strategy
 Fragmented governance system
 Society/community acceptance is vital
 Changes in institutional practices needs to take place both at
individual and at community/society level
 Society/community must be engaged in the process (social shaping)
DM 01-2013 Copyright © Tekes

5. Conceptual 3-step approach to CDI
Step 1 – Feasibility
 Understand the challenge and its underlying reasons
 Understand to what extent the challenge and its underlying
reasons are society specific and to what extent they are generic
 Identify the appropriate system which needs to be addressed and
how it is linked to the outside world
 Understand the existing systems, relevant actors and
activities, key drivers, barriers and on-going and future trends
 Analyse and address lack of innovation capabilities, especially
among problem owners and user community/society
 Engage problem owners, preferably in leading role
 Identify a limited number of potential innovative approaches
DM 01-2013 Copyright © Tekes

6. Conceptual 3-step approach to CDI
Step 2 – Experimentation
 Assign leadership to problem owners (supported by other key
actors)
 Ensure society/community support through participation
 Create interactive platforms for all key actors
 Experiment / test / pilot and further develop / shape the selected
innovative approaches in large scale real life environments with
real societies/communities
 Invite potential adopters to participate in the experimentation
(foster learning-by-doing, enhance innovation capabilities, provide
further insight into potential barriers, social embeddedness and
other aspects of transferability.)
 Validate which of the innovative approaches can lead into
innovative solutions
DM 01-2013 Copyright © Tekes

7. Conceptual 3-step approach to CDI
Step 3 – Roll-out
 Launch several adoption projects in parallel in different social and
systemic contexts
 Facilitates wider adoption of innovative systemic solutions
(opening of larger markets, enhanced demand) and thereby
provides a stronger incentive for enterprises to participate in
experimentation
 Parallel implementation of several adoption projects enhances
mutual learning and innovation capacity
 Adoption in different contexts verifies transferability of the
innovative solution and facilitates access to global markets
DM 01-2013 Copyright © Tekes

8. CDI and Innovation Policies Today
 Innovation policies are still mostly focused on facilitating
innovation (science/research driven, market/opportunity driven)
 Demand driven innovation policies (and CDI) have emerged on
the policy agenda, but remain mainly as part of rhetoric
 Most countries have started to experiment with demand side policy
measures and initiatives (procurement, awards, consortia)
 Real systemic CDI policies are still missing
 Horizon 2020 may provide a new framework CDI in Europe
 The most difficult underlying barriers can be found from the
governance system and from the incentive structures.
o The governance failure can be addressed by strengthening strategic
intelligence to allow the design of more evidence based, longer term
and systemic policies, as well as breaking departmental walls.
o Establishing appropriate and sustainable incentive structures to
enhance the demand for innovations may require quite fundamental
changes in traditions, organisational cultures, etc.
DM 01-2013 Copyright © Tekes

9. Experiences of CDI and systemic policies
Healthcare and education
 Rationale
 Healthcare clearly identified as a challenge (e.g. ageing, costs)
 Education not identified as a challenge (e.g. PISA), but as an
opportunity (potential for exports)
 Many aspects are more or less taboo, i.e. difficult or impossible to
address (tuition fees, public service production, etc.)
 Highly institutionalised structures, incl. many NGOs
 Distributed and fragmented regional and national structures
 Key policy measures
 Joint/collaborative programmes with Ministry of Social Affairs and
Health, and Ministry of Education and Culture
 Shared overall objectives, coordinated calls, consortia projects, etc.
 Tekes funding for enterprises and research, Ministry funding for public
sector partners
 Innovative Public Procurement
DM 01-2013 Copyright © Tekes

10. Experiences of CDI and systemic policies
Growth entrepreneurship ecosystem
 Rationale
 Many large multinational enterprises are relocating their business
activities (especially manufacturing) internationally
 Strong academia industry networking and collaboration
 Low innovative entrepreneurship compared to potential
 Significantly increased interest in entrepreneurship, especially among
students (vibrant communities, e.g. at Aalto university)
 Availability of skilled labour (e.g. restructuring of Nokia and ICT sector)
 Lack of early stage private venture capital, limited exit opportunities,
 Key policy measures
 Funding for young innovative enterprises – money
 Programme for private accelerators (Vigo) – competence
 Market driven funding for research organisations – tap into research
potential and develop more effective commercialisation structures
 Tax incentives for business angels – smart money
 Reform of public venture capital funding – smart money
DM 01-2013 Copyright © Tekes

11. Finnish Ecosystem for Innovative SMEs
Identifying Identifying needs
opportunities Societal challenges
”Product Track”->proactive measures targeting inventors
Ideas ”Growth Track” Lead Markets
Spin-offs from large companies
IKK, TUTL Public procurement
Entrepreneuship
education Demand
Competences Innovative SME Markets
Customers
Vigo
YIE funding Venture capital
Business angels
Public pre-seed (funds, international investors)
and seed equity
Money funding Crowd funding Growth funding
Fiscal incentives Markets for early stage
(investors, companies) investments
Entrepreneuship culture General business environment
(attitudes) (fiscal, regulatory)
DM 11-2009 Copyright © Tekes

12. Concluding remarks
 CDI has significant potential for economic growth and for
addressing societal challenges (incl. environment)
 The potential of CDI remains largely untapped, especially with
respect to societal challenges
 The key barrier for CDI is lock-in in existing traditions, practices
and institutions – not lack of money
 CDI requires new systemic policies and approaches
 Nordic region is potentially an ideal environment for CDI (similar
challenges, context, etc.)
 However, tapping to this potential requires new forms of
collaboration both at political and at practical levels (cross-
border procurement of innovation, smart regulation, etc.)
 Joint CDI initiatives addressing selected common challenges
(e.g. smart cities) could provide a platform for developing the
Nordic region as a globally leading market DM 01-2013 Copyright © Tekes