11Introduction

policy should be a matter of removing barriers to growth and renewal instead of handing out targeted support that tends to end up reinforcing vested interests.

Also, it should focus on general conditions for entrepreneurship and innovation rather than speciﬁc efforts targeting certain technologies. Targeting certain technologies or setting up large missions relates to an inherent risk of targeting the wrong technology, resulting in distorted competition and lock-in around the wrong solution. As the right technology cannot be known beforehand, markets provide a cumulative and emergent selection mechanism that results in innovation over time.

4 What Should Governments Do?

Innovation is a complex evolutionary process characterized by failures and unpredictable breakthroughs (Aldrich, 1999). Top-down interventions aiming at directionality suffer from the problems of dispersed knowledge emphasized by Hayek (1945). Perhaps the most unanimous conclusion of the broad theoretical and empirical literature on innovation and innovation policy suggests that good institutions, not attempts by bureaucrats to pick winning ﬁrms, technologies, and industries, are the key to societally valuable innovations (Aghion et al., 2016; Baumol, 2002; North, 1990). For this reason, the best policies to promote innovation are those that promote productive economic activity more generally: property rights protection, open and contestable markets, a stable monetary system, and legal rules that favor competition and entrepreneurship. Policy should promote an institutional environment in which innovation and entrepreneurship can ﬂourish without trying to anticipate the speciﬁc outcomes of those processes—an impossible task in the face of uncertainty, technological change, and a dynamic, knowledge-based economy.

In their recent work synthetizing extant knowledge on central institutional determinants of innovation, Elert et al. (2019) provide a collection of guiding principles for policymaking: neutrality, transparency, moderation, contestability, legality, and justiﬁability. Neutrality means not supporting or helping either side in a conﬂict or disagreement. From this perspective, policymakers should strive toward a level playing ﬁeld between new incumbent organizations and new entrants—including, importantly, potential entrants (Djankov et al., 2002). With the large ﬁnancial and network power among large ﬁrms, the playing ﬁeld is all too often tilted against new entrants.