The Public Sector in Innovation

Systems

Module1 – Conceptual Framework

Markus M. Bugge, Johan Hauknes,

Carter Bloch, Stig Slipersæter

The paper is part of the output from the joint Nordic research project
‘Measuring innovation in the public sector in the Nordic countries:
Toward a common statistical approach’ (“Copenhagen Manual”). This
project is supported by the Danish Agency for Science, Technology and
Innovation, the Nordic Innovation Centre, Innovation Norway, the
Research Council of Norway, VINNOVA, the Swedish Association of Local
Authorities and Regions, and the Finnish Ministry of Employment and the
Economy.

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 The Public Sector in Innovation Systems

Output from the joint Nordic research project ‘Measuring Public Innovation in Nordic Countries:
Toward a common statistical approach’: Module 1: Examining the heterogeneity of public sector

Markus M. Bugge§, Johan Hauknes§, Carter Bloch*, Stig Slipersæter§

§ NIFU STEP Norwegian Institute for Studies in Innovation, Research and Education,
Wergelandsveien 7, N-0167 Oslo, Norway

* The Danish Centre for Studies in Research and Research Policy, Aarhus University,
Finlandsgade 4, 8200 Aarhus N, Denmark

Abstract

Public sector innovation is increasingly regarded as a central factor to sustain a high level of
public services for both citizens and businesses. As the public sector plays an important role in
most developed economies, it should not be excluded from our understanding of how the
economy evolves. The main objective of this paper is to discuss how innovation in a public sector
context may be perceived and conceptualized, and to reflect upon the role that the public sector
is often assigned in theorizing on innovation systems. Various motivations for the public sector
to be innovative are presented, as well as rationales for measuring innovation in the public
sector. The paper argues that the public sector should not be treated as a static framework for
innovation in the private sector, but rather as a co-evolving actor along innovation in the private
sector. Furthermore, parallel to innovation in the private sector, innovation in the public sector
should neither be seen independent from the underlying incentive structures that structure
behaviour, nor from their wider systemic context. Although possessing distinct features in
relation to the private sector, there seems to be common ground as to which concepts from
studies of private sector innovation may also be applied on the public sector, but that these
should be further developed and refined, taking into account the heterogeneous and specific
characteristics of the public sector.

Key words: public sector, heterogeneity, learning, innovation systems

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Introduction

A range of studies of the development of new products, production processes and behaviour in
private, market-based companies have greatly improved our understanding of the processes
underlying innovation and social and economic change in modern economies. However,
theorizing on innovation and learning has often had its prime focus on innovation in the private
sector. But as the public sector plays an important role in most developed economies, it should
not be excluded from our understanding of how the economy evolves. Public sector innovation is
increasingly regarded as a central factor to sustain a high level of public services for both
citizens and businesses, as well as addressing social challenges and improving welfare. However,
the lack of quantitative evidence limits the ability to understand and promote public sector
innovation. There is still a tendency to consider the public sector as something radically
different than the private sector in terms of innovation. The vast literature on innovation
systems has largely tended to ignore the role the public sector plays in processes of innovation.
Making a sharp distinction between the private and public sector often implies perceiving the
public sector as a regulatory framework for innovation in the private sector, and as a passive
recipient of innovations from the private sector. Public sector institutions are often seen as
conservative and bureaucratic, and the changes in the public sector are often understood as
consequences of innovations outside the public sector (Windrum 2008).

Why should public organizations innovate, when they are neither challenged by competition in
the market nor confronted by a need to expand in order to survive in the market? At first glance
it may seem odd to be concerned with the level of innovation in the public sector. As the tasks
and services of the public sector in many ways are based on incentives and rationales different
from services operating on the private market, it may be difficult to see why public services
should innovate. However, public services may have considerable effect not only on the
effectiveness of the carrying out of public services itself, it may also influence the ability for the
private sector to innovate and improve the relation between the public sector services and its
citizens. The public sector has a great impact on people’s lives, and the public sector is in many
ways the basis of society and facilitates the framework in which it develops. Due to its
importance, it is paramount that public sector improves and innovates along with the rest of
society. In more detail, there may both be economic, industrial, political, relational and personal
motivations for innovation in the public sector:

First, there are economic motivations for stimulating a cost-effective and productive
administration and management of the civil service, such as financial management, health
services, collection of taxes and educational offer. To the degree that there is a demand for
higher quality in public services and at the same time a common belief that public expenditures
and taxation should not increase, the answer lies in innovation in the public sector.

Second, many activities in the public sector will be devoted to affect the innovative performance
of the private sector or in other parts of the public sector. An innovative public sector is
important to innovation in the private sector, due to the close interactions between the private
and the public sector in many domains, and due to the role of the public sector as a facilitator of
infrastructure for the private sector (e.g. knowledge development through education and
research, communications such as roads, railways or ICT, and industrial policy instruments).
Public procurement practices can nonetheless also represent important incentives that may
have a major impact on innovation in private sector.

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Third, an innovative public sector that offers services of good quality (new service or new
aspects, ease of use, access, timeliness) may ensure an effective handling of the relations
between the public sector and citizens, such as through informing the public, through taxation,
education or in health care. The efficiency of a country's public sector and a delivery of public
services of good quality are vital to achieve transparent operations, which may improve the
understanding and legitimacy of how the public sector works. A modern and effective public
sector with increased accountability to the public may result in public satisfaction with the
services offered, which may improve the trust of the public sector (Vigoda-Gadot et al. 2008).

Fourth, innovation in the public sector may be motivated by political reasons. The public sector
does not as a whole face the test of competitive markets, but politicians and political parties in
Western democracies face the test of competitive electoral politics. Political support and votes
are gained through being seen to perform better than opposing political actors, and the
provision, delivery, and cost of public services is an important domain for competition between
claims of effective (potential) performance.

Finally, innovation in the public sector may also be motivated by personal reasons. Public sector
policy makers, managers and professional workers may gain personal satisfaction, motivation
and status among their professional community and society at large from improving public
services and the users experience with these. As such by proposing innovations they may boost
their own careers.

In order to be able to improve our knowledge and understanding of the rate and degree of
innovation in the public sector, as well as about its incentives, processes and impact, there is
now an increasing awareness of the need for more systematic and comparable data on
innovation in the public sector (Koch and Hauknes 2005). Against this background this paper
aims to discuss a set of conceptual issues relevant to innovation in the public sector.

The paper discusses how innovation in a public sector context may be perceived and
conceptualized, and problematizes the role that the public sector is often assigned in theorizing
on innovation systems. The paper does not aim to present or discuss in detail how innovation
takes place in different parts of the public sector, nor will it go into lengthy elaborations on
specific indicators for measuring innovation in the public sector (See Bloch 2010 for a detailed
discussion of this). Rather, the paper seeks to present some generic and analytical tools that are
central to our understanding of innovation in the public sector, as well as in the preparations for
how to go about measuring it. In this way the paper seeks to improve our understanding of how
work with developing indicators for measuring innovation in the public sector should be
organised. In practice this work should be seen in close interrelation with the next revision of
the Oslo manual.

The paper is part of the output from the joint Nordic research project ‘Measuring innovation in
the public sector in the Nordic countries: Toward a common statistical approach’ in which a
questionnaire will be developed to collect data on innovation in the public sector. The objective
of the project is to develop a measurement framework for collecting internationally comparable
data on innovation in the public sector, which will contribute to our understanding what public
sector innovation is and how public sector organisations innovate and will develop metrics for

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use in promoting public sector innovation. The work of the first stage of this project is
documented through, in all, six papers1:

 The public sector in innovation systems (Markus M. Bugge, Johan Hauknes, Carter Bloch
and Stig Slipersæter)
 Towards a conceptual framework for measuring public sector innovation (Carter Bloch)
 Survey methodology for measuring public innovation (Peter S. Mortensen)
 Mapping user needs (Lydia L. Jørgensen)
 Feasibility study of public sector organizations (Per Annerstedt and Roger Björkbacka)
 Nordic survey on public innovation 2009 – draft pilot questionnaire

In addition the paper builds upon the insights generated in the Publin project (Koch and
Hauknes 2005; Koch et al. 2006) and in particular on work conducted by Johan Hauknes at NIFU
STEP.

The discussion is structured along three themes. First, some reflection is given to delimiting the
public sector, as well as to its objectives and outputs. Second, the paper discusses how
innovation and learning should be conceptualised in a public sector context and how the public
sector should be perceived as an active co-evolving partner of wider innovation systems. This
section also discusses how innovation can be conceptualized in any organisation, and how this
form of organisational learning is affected by incentive structures. The third section bridges the
discussions on innovation in the public sector with a focus on heterogeneity in the public sector;
how the public sector consists of heterogeneous interfaces within and across the public sector;
between the public and the private sector, between the public sector and all citizens (and users
of specific services), and the interfaces across government. As part of this it is also discussed
how the boundaries between the private and public sector have become increasingly blurred.

Defining and delimiting the public sector

How do we define the public sector, and what are public services? In order to form a better
understanding of public sector innovation, it is first necessary to examine key characteristics of
public services and of the public sector on the whole. This section presents a brief discussion of
the delimitation of the public sector, main characteristics of public services, as well as their
objectives, values and outputs.

A normal way of perceiving the public sector is associated with the supply of public services,
such as education, health care, public administration, research, public transport, welfare
schemes, infrastructure, police and defence. However, delimiting the public sector and
identifying the boundaries of its activities towards the private sector can be a difficult exercise
as many services and activities in the public sector are often closely integrated with private
sector activities and vice versa. Several actors in the public sector have various degrees of
autonomy compared to the private sector, where all actors are in principle autonomous. Also, in
response to demands for improvement in general welfare growth and societal development,
many public sector activities and the organisation of these are under continuous change. Some

1In addition to this, some countries have published national results of their feasibility studies. See
www.mepin.eu.

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of the types of organisations that contribute to such a blurred picture are intermediaries
between the public and private sector, such as non-governmental organisations (NGOs),
research and technology organisations (RTOs) or Technology Transfer Offices (TTOs). Within
R&D statistics it is common to define public sector as the governmental sector and publicly
owned institutions (Mortensen 2010). Without departing on a lengthy elaboration on
categorisations and delimitation of the public sector it can be noted that there are various
approaches to delimiting the public sector. Examples of different approaches include using
function of government, kind of activities, product types or a selection of establishments or legal
units (Mortensen 2010).

Objectives and value creation

One of the most important differences between the public and the private sector is differences in
objectives. Businesses may have a number of secondary goals, but the main overreaching goal
for all businesses is to give return on investments and to increase shareholder value. Goals are
much less clear for the public sector. Objectives may be much more diffuse and multifaceted and
consequently they may be more difficult to measure. A policy initiative can e.g. be directed at
both regional development and innovation, or environmentally sustainable industrial
development.
Although the public sector in many ways has approached the private sector in terms of
outsourcing, privatization and contracting, there are differences between the public and the
private sector. On the surface the public sector appears to be more homogeneous than the
private sector. Instead of pursuing profits large and bureaucratic organisations appear to be
more or less monopolistic suppliers of services to society (Røste and Miles 2005). However,
whereas the private sector is primarily targeted and oriented towards its existing and future
customers the public sector both relates to all citizens on one hand and users of specific services
on the other. The users of public services correspond to the customer in the private sector, but
the considerations towards all citizens are something that is unique to the public sector. In many
countries the public sector offers universal, democratic services (e.g. health services, education)
that are commonly available to all types of citizens in the entire country. Whereas the customers
in the private sector possess power in the sense that they may choose not to purchase a given
product from a supplier or a company, the citizens have the power to overthrow the
Government. The complexity of objectives is also assumed to be greater in the public sector than
in the private sector. The public sector may have parallel and co-existing objectives and
mandates, whereas the private sector is more one-dimensional and is commonly measured in
terms of its pecuniary characteristics and performance.

How objectives are defined and formalised by public sector institutions will impact public sector
innovation and value creation. Kelly et al. (2002) identify three forms of value creation in the
public sector: services, social outcomes and trust.
Value creation in services may take place through increased efficiency, improved quality, user
satisfaction, increased usage of services, greater equity (fairness) in service provision or greater
choice or variety. Social outcomes such as social cohesion, equality, reduced crime, poverty
reduction, better educated population or improved health, represent central aims of public
services. For many of these services there are no well functioning markets to provide services
for those that need them. In this sense public activities can be seen as compensations for
shortcomings in market economies.

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Trust and legitimacy are also identified as important public objectives, as they will influence on
user satisfaction with public services and the public sector’s ability to achieve broader societal
goals. Among the objectives here are improved public perceptions of public service institutions,
accountability of public service institutions in meeting public needs, and beliefs that public
sector activities are aligned with stated societal objectives.
In addition to potential conflicts between objectives within an organisation, innovation can also
have various forms of both positive and negative outputs. E.g. surveillance cameras everywhere
in public places may be able to reduce crime, but it can at the same time undermine the
legitimacy and trust of the public sector. This illustrates how objectives, value creation and
outcomes in the public sector are complex and multifaceted. Another implication of this is that
measuring one kind of output should often be seen in relation to other forms of output in order
to reflect how the various aspects are often integrated and woven together.

The nature of public services

Innovation in the public sector and how innovation is perceived depends to a great extent on the
nature of public services. There is also a great degree of heterogeneity in public services, where
the differences among public units, both in terms of size, focus, objectives and outputs, are
arguably even greater than for the business sector. For example, there are institutions providing
services to individual users (which perhaps are those that most closely resemble business
services), institutions providing collective services to all citizens, and administrative institutions
providing services to other governmental organisations (which would reflect business to
business services). The services offered at all citizens are unique to the public sector in contrast
to the private sector. As most production in the public sector is associated with service
production a number of characteristics of services in general also applies to public service
providers:
 Intangibility. Services are not objects, they are activities, e.g. consulting. Typically, they
can’t be stored and customers are unable to see them beforehand.
 Simultaneity. For many services, production and consumption are continuous, e.g. a
concert. This may attach an additional element of importance to client interaction, and
may give a larger role to the customer as a ‘co-producer’ of service innovations (e.g.
Ramirez, 1999; Skjølsvik et al., 2007). It also implies in many cases that development of
new services will be hard to separate from ‘production’, with the result that much
service innovation will be incremental in nature.
 Customization. Some services are customized to the individual client or user, e.g.
advertising. The degree of standardization may influence how service firms innovate.
This is arguably also a dimension that is growing in importance for the public sector, as
many public services are increasingly tailored to individual users.
 The human factor. While this varies greatly from sector to sector, in general, the human
factor will be more important for (the production, delivery and development) of services
than for product development, e.g. health care services. This will tend to place greater
emphasis on worker competences and client interaction.
Although one may operate with common characteristics that apply to many services, there are
various ways in which services may be categorised. A number of typologies of services have
been proposed in the literature, and which might have relevance for innovation in the public
sector. An example is Howells and Tether (2004), who identify four service ‘sectors’:

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  Physical services – services engaged in the physical transformation, particularly of
goods, i.e. services that act on goods, such as road transport, handling and storage,
logistics.
 Information processing services – services engaged in the transformation of information,
such as data processing services.
 Knowledge creating services – provision of knowledge based services, such as consulting
or research.
 People-oriented services – services which are aimed at the transformation of people, i.e.
services which act on people, providing physical and/or mental/emotional changes

Not all public services fit into this business-oriented classification, but many of them are
relevant, especially people-oriented services, but also physical (e.g. urban redevelopment) and
information processing services. A particular service from the public sector that must be added
is regulation and policymaking. Coordination and administration could also be included as
separate categories.

Defining output from the public sector

What is the output of the public sector? Atkinson (2005) argues that the principles for
measuring output from the public sector should be the same as for private sector and that as far
as possible the output from the public sector should take into account the quality of the service
in question.

Much of the activities taking place in the public sector are services. In innovation studies from
the private sector it is held that the knowledge generation in services is closely associated with
the proximity to clients and users (Skjølsvik et al. 2007). However, as we have seen, some of the
governmental levels in the public sector (i.e. the policy level and the administrative level) do not
always provide services directly to the private sector nor to the citizens, rather they provide the
political and regulatory frameworks and the implementation of these into the various types of
public services. For the business sector, we have standard output measures (sales, value added)
that go across all sectors. This does not exist for the public sector, as many actors in the public
sector provide services to third parties in both the public and private sector. However, some
fairly standard output measures exist for specific sectors. Then, finally, this discussion might
lead into an examination of whether these output measures could be used to create output
indicators for eventual sector specific modules in our measurement framework, or towards an
eventual linking of public innovation data to data on these output measures.

This represents a challenge to the wish of using the same principles for measuring innovation in
both private and public sector. Another associated challenge relates to the fact that part of the
mandate of some public and semi-public institutions, e.g. directorates and institutes, is to
support and nurture productivity and innovation in the private sector. In these instances the
public sector becomes an intermediary between the public and the private sphere, and which
may blur the lines between the ones that have facilitated an innovation and the ones that have
implemented it. Who is to be credited for the innovation? Is there a risk that the same innovation
is being reported several times?

The heterogeneous fields of the public sector suggest that one may take various perspectives to
defining output from the public sector, depending on the governmental level, sectoral activities

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and the degree of proximity to the end user. In terms of proximity to the end user and to which
degree one should focus on production or consumption Atkinson (2005) uses the example of
postal services, where one may either measure output in terms of letters processed (production
perspective) or letters successfully received (user perspective). Another example that illustrates
the same is education, which could either be measured in terms of number of hours spent on
teaching (production perspective) or the actual skills and knowledge acquired by the student
(user perspective). These examples illustrate that taking into account the user perspective
implies integrating quality into the output measure from the public sector which ultimately
would be more in line with the overall objective of the public sector in terms of providing better
welfare to its citizens.

Innovation in the public sector

What is innovation in the public sector? What is the difference between business as usual and
innovation in the public sector? And how does innovation in the public sector differ from
innovation in the private sector? Innovation in the public sector shares some commonalities and
common ground with innovation in the private sector, but in other ways it differs from
innovation in the private sector. This section discusses some ways to perceive these similarities
and differences.

The Oslo Manual (OECD/Eurostat 2005) defines innovation as “the implementation of a new or
significantly improved product (good or service) or process, a new marketing method, or a new
organisational method in business practices, workplace organisation or external relations”. This
definition sees innovation as the successful introduction of something new and useful. In this
definition, the notions of “new” and “useful” should be interpreted as context-specific,
organisation specific, rather than universal or market-wide.

It should be noted that in this context we do not count “radical” innovations only – i.e.
innovations that are new to society – but also practices and the use of technology that is new to a
specific organisation. As innovation may either be radical or incremental, it can sometimes be
hard to distinguish between innovation and reform. According to Windrum (2008) there has
been a type of disciplinary myopia between innovation studies and political science. Whereas
innovation studies have tended to focus upon innovation in private sector, political science often
perceives change in the public sector as policy change or reform, but fails to address innovation.

OECD/Eurostat’s definition of innovation (2005) may work well for some parts of the public
sector, but certain aspects of the definition may be more problematic for other parts. The notion
of “newness” in the OECD/Eurostat definition of innovation may work well for several areas of
the public sector. However, the notion of “improvement” may turn out to be more elusive in
public sector contexts, as the evaluation of “improvement” may be contextual and depend on the
perspective of the respective stakeholders. Whereas companies in the private sector operate
with a single objective public organisations count on a multiplicity of objectives, e.g. increase
quality, equity and efficiency. As a result, improvements in e.g. education can be perceived
differently based on the respondent. The consequence of this is that the answers provided will
be highly subjective, and referring to radically different objectives, which again will complicate
comparability between the answers and thus a threat to the validity of the information gathered.

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When discussing what innovation in the public sector might be it can be appropriate to
distinguish between narrow and broad innovation policy. Narrow innovation policy deals with
policy measures to support innovation in the private sector. Broad innovation policy on the
other hand covers all sectors of society; i.e. how a variety of aspects influence the dynamics and
productivity of the business sector, such as infrastructure, legislation, tolerance, trust, diversity
or cultural vibrancy; e.g. how new environmental regulation may enhance innovation in
materials or in building construction. The broad innovation policy perspective requires taking a
holistic or integrated approach to understanding how to unleash the innovative potential of
society.

Given that the overall objective for public sector activities is increased welfare and a better
quality of life for its citizens, it makes sense to focus on all behavioural changes that contribute
to achieving these goals. Hence innovation may be understood as deliberate changes in
behaviour with a specific objective in mind.

In the same way as studies of innovation in private services first used tools and concepts initially
generated and based upon studies in private manufacturing, it is natural when studying and
measuring innovation in the public sector that one starts out with theories and concepts
developed in private sector innovation studies (Windrum 2008). Such a reappraisal of
innovation theories and concepts onto new territories may add to our understanding of the
dynamics of innovation in large.

The public sector in innovation systems

As many activities in the public sector are largely intertwined with services and activities in the
private sector innovation in the public sector cannot be seen independent from its wider societal
and systemic context. Public sector uses private services and private actors depend upon public
input factors in their innovative activities such as infrastructure, research and education. Also,
public support leading to private sector innovations might become useful or profitable for the
public sector at a later stage. So when trying to understand how innovation takes place in the
public sector this should not be done without seeing this in relation to the wider innovation
system in which it is part.

Innovation systems theory is based upon the assumption that the actors involved in innovation
may be identified and that the processes leading to innovation may be characterised. It is also
acknowledged that innovation does not occur in isolation, but depends upon the interplay
between many different types of actors that take part in and play various roles in an innovation
process; such as industry partners, collaborators, subcontractors and competitors, as well as
educational institutions and governmental bodies.

There are many different approaches to this field of study. The systems of innovation literature
was first formulated in terms of national systems of innovation (NSI) (Freeman 1987; Porter
1990; Lundvall 1992; Nelson 1993), in which universities and research institutes at the national
level are seen to play a central role in the provision of knowledge to the private sector. Other
parts of this literature have termed the interplay between universities, public policy and
industry function as a triple helix (Etzkowitz and Leydesdorff 2000). The national systems of
innovations literature has been accompanied by a focus on technological innovation systems (TIS)
(Carlsson 1995) and sectoral innovation systems (SIS) (Breschi and Malerba 1997) and

10
subsequently by regional innovation systems (RIS) (Cooke 1992; Cooke, Uranga, and Etxebarria
1997; Asheim and Isaksen 2002; Cooke, Heidenreich, and Braczyk 2004 (1998)) and clusters
(Porter 1998). The focus on localized clusters within the RIS approach adds a more articulated
spatial perspective to the analysis and understanding of innovation processes. Within studies of
systems of innovation there seems to be an increasing attention to how innovation is often
demand driven or user driven (e.g. von Hippel 2005; Grabher, Ibert, and Flohr 2008). Common to
all these approaches to innovation systems is that they apply a systemic understanding of
industrial development and economic growth.

However, although many of these approaches have included public sector into the analysis of the
innovation processes in the private sector, they have tended to leave out the innovation
dynamics within the public sector itself. Applied onto the public sector an innovation systems
approach would typically see the behavioural changes of a public organisation in relation to the
interaction with its users (e.g. citizens or companies), its subcontractors (e.g. suppliers of ICT
infrastructure or technical equipment), its collaboration partners (public or private), its political
and institutional set-up as well as its management and intra-organisational dynamics, learning
and absorptive capacity.

Management and incentive structures

The decision making and organisational structure that public sector organisations operate
within are central in defining the conditions for innovation. Such conditions may differ greatly
from private businesses, and also vary across the public sector. Organisations are typically part
of a complex organisational structure that impacts, both directly and indirectly, how
organisations operate and innovate. This also includes rules and regulations that influence and
in some cases dictate how organisations function. Individual organisations typically do not have
full autonomy over many decisions, overall objectives, budgets and incentive structures. The
implication is that external actors (in particular policy and other public organisations) will play
a larger role in enabling innovation in individual public sector organisations than for a business.
From a policy point of view, it also reflects a greater role for policy compared to the promotion
of business innovation. Policy has a much larger potential to influence on public sector
organisations’ innovation activities and enabling condition for innovation than for the business
sector.
An aspect of this is incentive structures, both for individuals and the organisation itself. A
number of elements may act to shape incentive structures for staff and management, such as
financial and non-financial rewards, explicitly identifying innovation as a goal of their work,
allocation of time and resources to innovation, support from top management, and others. Many
of these elements are also relevant for the organisation as a whole. Probably the most often
mentioned disincentives for public sector organisations to innovate relates to budgetary
conditions; i.e. organisations don’t have an incentive to innovate because improvements in
efficiency would result in a loss of funds.
In order to understand why innovation occurs in the private or public sector and its driving
forces and barriers, there is thus a need to understand the underlying incentive structures, i.e.
the rewards and penalties in the system that make these actors and agents change their
behaviour. Such an incentive structure can consist of formal and informal elements and be of
political, economic, cultural or social character. The incentive structure can have effect at a
systemic level or at an individual or personal level. The aim should be to increase the rewards

11
and to decrease the penalties – for themselves, for their organisation, for the system and the
culture they partake in. The role and importance of incentive structures is valid for both private
and public sector. However, one may question the degree to which this has been realized in the
ambitions and efforts to increase efficiency and productivity and innovation in the public sector.

The incentive structure shaping the innovation strategies of organizations may be seen in two
ways: First, the objective incentive structure providing the actual selection mechanism of
innovations. Second, the subjective and local interpretation based on the context provided by the
objective incentive structures, which shapes the selections of strategies in the respective
organizations. Any organization gets input on “do what” and “do why” partly based on external
inputs. This could be seen as a form of mapping of possible types of behaviour. On the basis of
such external inputs the organisation selects its own “do how” strategy internally, which is based
on the unique and subjective capabilities and needs within the organisational context.

In this way incentive structures play a vital role in shaping innovation and the introduction of
new modes of behaviour in any organisation. Based on Koch and Hauknes (2005) the way the
learning circuit of any innovating organization is affected by the underlying incentive structure
can be illustrated as follows:

Organisational learning circuit

Extra-organisational

2 1. Identification of potential behaviour

3 2. Internal, subjective selection
1
3. Implementation of selected behaviour
Intra-organisational 4. Observation of performance
44 5. Assessment of local strategies

5 Incentive structure

The figure seeks to capture the learning circuit in any innovative organisation. The incentive
structure facing the innovating organization is a key to understanding this learning circle, and
thus to the basis of any “theory of the innovating organization” at the micro-level. The first
phase, i.e. the identification of potential new modes of behaviour and innovations, takes place
outside the organisation and consists of orienting oneself among all kinds of existing knowledge
and impulses, impulses that may stem from existing knowledge internally or externally,
collaboration, R&D or search. The second phase, i.e. the internal deliberate selection of
behaviour based on the identification of possible strategies, takes place inside the organisation
and is context specific to internal capabilities and characteristics. The second phase then leads to

12
the third phase of the learning circuit, which refers to the implementation of the selected
behaviour and also takes place internally in the organisation. The altered behaviour selected
upon and implemented in the organisation is then being assessed and readjusted in phase 4,
which examines and compares the performance of the organisation in relation to external
indicators and contexts. The evaluation of the fourth phase is then followed by an assessment of
the strategies selected locally in the organisation, which subsequently leads to a new round in
the learning circuit. The incentive structure is likely to affect the learning circle at various
phases, and in particular on three junctures:

 In phase 2 the incentive structure will affect the local and subjective selection process
internally
 In phase 4 the performance of the organisation is observed according to measures along
current indicators
 In phase 5 the internal assessment of the chosen behaviour is likely to be evaluated
according to the degree of success on current indicators

The incentive structure affecting the learning circuit at various stages may take different forms,
such as pecuniary rewards, subjective motivations, political success, self realization or social
status. The learning circuit can imply either incremental or radical change. Incremental change
is normally referred to as single-loop learning which takes place inside a given conceptual action
framework. Radical change on the other hand is associated with introduction of new conceptual
action frameworks or rationalities which may be termed double-loop learning (Argyris 1976). In
addition to the focus on the actual behavioural changes and innovations carried out, it is also
important to have a surrounding system that stimulates creativity and learning and that
promotes and diffuses the innovations.

Since the late 1980’s, the call for the public sector to become more innovative has been a central
part of new public management (NPM) (Parsons 2005). As part of the NPM doctrine there has
been a need for explicit standards and measures of performance and goals as well as indicators
for these, preferably expressed in quantitative terms (Hood 1991). However, in the development
of the indicators for measuring public sector performance the indicators were not only used to
indicate the performance, but they were also used as management tools. In this way the
development of the indicators came to interfere with the incentive structure and thus potentially
affect behaviour in new directions.

In the wake of the implementation of new public management it has been debated (Gjørup et al.
2007; Nissen 2007) how the implementation of new indicators and measurement tools in the
public sector as part of new public management did not foresee how such an introduction of
new indicators and their impact on funding and resource allocation contributed to change the
incentive structure surrounding the actors employed in the public sector. If such an impact on
the incentive structure and change in behaviour has not been taken into account when
formulating new policies, the new indicators and measurement tools may cause an altered
behaviour that is not intended, and that may even be counterproductive to the overall objectives
of the public sector. In this sense it is vital that when developing indicators for measuring
innovation in the public sector one should avoid using indicators that may serve as incentives
for the public sector to work on a short-term basis focusing upon the innovation in itself rather
than on achieving broader end-objectives.

13
As such the indicators meant to spur innovation and productivity instead may cause a behaviour
that tends to respond to the indicators themselves and not the deeper aims that they represent.
In this sense implementation of new indicators may well lead to change, but not necessarily the
type of change that reflects the ultimate goals for a given organisation. Another related aspect to
this discussion is that the data collection as part of the wish to improve our knowledge about
innovation in the public sector will further increase the current pressure on public
administrative bodies and organisations regarding annual reporting and surveying. It has been
demonstrated how the public sector finds itself in an ‘evaluatory trap’ (Olson, Humphrey, and
Guthrie 2001). In this sense there is a danger that the wish to generate knowledge about
innovation in the public sector may in itself be counterproductive.

When trying to understand innovation in the public sector this should be seen in close
connection to the surrounding incentive structure that impact public sector. Both public and
private organisations are being affected by their respective incentive structures, but the
incentive structures among them differ. Whereas the private sector may have one-dimensional
incentives to increase revenues and returns on investments, the objectives of public
organisations may be more complex and multifaceted.

Public and private sector innovation compared

How different is innovation in the public sector and the private sector? Can innovation in the
two sectors be measured in the same or in a similar way? There are a number of issues related to
these questions.

The management incentives may serve as an example of how the private and the public sector
may differ, as public sector may differ from the private sector in terms of being less risk seeking
than the private sector. Public managers are in general more likely to receive lower and less
performance based benefits, which may influence their willingness to take risk. It may also be
that the public sector – on an aggregate level – recruits fewer risk-taking entrepreneurs than the
private sector relatively speaking, due to the expectations of rewards or penalties of
entrepreneurial activity. Risk aversion in the public sector may also be connected to limited
budgets and responsibility towards taxpayers.

The question of how different innovation is in the public and the private sector not only requires
looking at how the public sector innovates, but also revisiting views of how innovation takes
place in the private sector. This issue was examined in detail in the Publin project (Koch and
Hauknes 2005; Røste and Miles 2005). A key difference that can be identified is that public
sector organizations do not operate in a market based framework and are thus not driven by
profit-seeking motives. While this is for the most part true, this can on the one hand be argued to
reflect too simplistic a view of businesses – that their incentive structures are shaped by much
more than profit maximization – and on the other hand that while public sector organizations
may not maximize profits, they are goal-oriented with negative consequences if these goals are
not achieved. Koch and Hauknes (2005) write:

“…it is really not a question of organizations being ‘goal-directed’ – or reward-maximizers, to use a

somewhat more neutral term than profit-maximizers. Though responding – reactively and
proactively – to incentives, we should never see incentives structures as complete and beyond any
difference of opinions in how they are understood and interpreted. Furthermore, global incentives

14
are supplemented both by local and intra-organizational incentives, where the latter are crucial
parts of the incentives facing the individuals comprising the organization [….] It is more than likely
that private company employees find their motivation from a large number of reasons, the urge for
profit being only one of many. As in the public sector, private sector workers may be motivated by
idealism, the joy of creating something new, an intense interest in the topic at hand, friendship and
a sense of belonging, career ambitions, etc. In the Publin case studies we have found that idealism
and the urge to develop a better society is an important driving force for public innovation.“

Miles and Røste (2005) similarly argue that differences between private and public sector
innovation are less distinct and more nuanced than simplistic views would imply. This is of
course very relevant for measurement of the two sectors and the question whether completely
different tools are required. The table below (from Miles and Røste, 2005) outlines main
differences between the private and public sector that may be relevant for innovation.

Archetypal Features of Private and Public Sectors and their possible relations to the Propensity
and Direction of Innovation
Private Sector Public Sector

Pursuit of Profit, of Stability or of Growth of Revenues. Enactment of Public Policies.

Organising
Principles
– Changing market conditions may require innovations - New and Changing Policies may require Innovations of many
to enhance perceived value for money or generate new kinds Often the problems with which these policies are meant
products. Market as a selection process for to contend are highly complex, not always well-understood, and
innovations. policies may thus have contradictory effects.

Organizational Firms of many sizes, with options for new entrants.

Complex system of organizations with various (and to some
Structures
extent conflicting) tasks

Performance Return on Investment Multiple performance indicators and targets

Metrics

Management Some managers have considerable autonomy, others While there are efforts to emulate private sector management
Issues constrained by shareholders, corporate governance, or practice, mangers are typically under high levels of political
financial stringency. Successful managers liable to be scrutiny. Successful managers likely to receive lower material
rewarded with substantial material benefits and benefits than comparable private sector managers.
promotion.
– Major innovations are likely to require approval of political
– Variation among firms in ability to innovate and take masters – or even to be demanded and/or specified by them.
risks in general. Managers liable to pursue innovations The role of championing an innovation may be thrust upon a
that they believe will be successful in meeting manager – though proactive managers can also promote major
company objectives – and thus in furthering their own innovations to their political superiors, and may be able to
careers. proceed with less visible innovations with little interference.

Relations Markets may be consumer or industrial ones, and firms End-users are the general public, traditionally seen as citizens,
with: vary in the intimacy of their links with the end-users of though recently there have been efforts to introduce market-
their products, but typically market feedback provides type principles and move to see them as customers or
~ End-Users the verdict on innovation. consumers.

– Innovation often motivated by need to maintain or – “Customer relations” have often been underdeveloped, with
increase market share, and one of the most an assumption that public servants know best about what
substantiated results in the innovation literature relates services are required, and thus about relevant innovations. The
success in innovation to understanding of end user customer side on the relationship is somewhat different from in
requirements. private sector.

~ Supply Most firms are parts of one or more supply chains, with Public sector is typically dependent on private suppliers for
Chains larger firms tending to organise these chains. much of its equipment, and is important market for many firms.

- Smaller firms may find their innovation trajectories – Scope for public procurement to impose standards and other
features on suppliers; scope for suppliers to introduce

15
 shaped by large players in supply chains. innovations into the public sector (e.g. new computer
equipment, pharmaceuticals).

~ Employees Nature of workforce varies considerably, and relations Public sector employees are typically highly unionized
between employees and management range from (economists and social scientists in the central administration
fractious to harmonious. Efforts are made in some and health- and social professionals as nurses, social workers,
firms to instill company loyalty and/or a customer- child-care workers, teachers etc in the public services). Many
centric approach, but employee motivations are often are also professional workers organised through professional
mainly economic ones of securing a reasonable associations. While usual concerns about status and salary are
income experienced, many workers enter public service with idealistic
motivations.

~ Sources of Companies have considerable flexibility in sourcing

Despite large resources, parts of the public sector may be
Knowledge innovation-related information from consultants, trade
constrained from using private sources of knowledge (other
associations, and public sector researchers, but many
than those of suppliers). Public sector sources of knowledge
smaller firms have limited resources to do so.
(e.g. Universities) may be highly oriented to other parts of the
public sector
Time Horizon Short-term in many sectors, though utilities and
Often long-term (this means that responsible decision-makers
infrastructural services may have very long horizons
may have moved on by the time that results are achieved)
though many decisions do have shorter horizons.
Source: Miles and Røste (2005)

When looking at the question of how to relate measures of public sector innovation to that in the
private sector, it may also be instructive to look at similar discussions for manufacturing and
services. Three approaches to treating service innovation can be found in the literature:
assimilation, demarcation and synthesis2. Assimilation reflects an (older) passive view of service
firms as technology adopters and not sources of new knowledge and technology. Service firms
were essentially examined with the same glasses as for manufacturing firms, and with a
predominant focus on technological innovation.

Demarcation instead argues that a distinct approach is needed for services. Technological
innovation is only a small part of service firms’ innovation activities; the service innovation
concept needs to include a variety of forms of non-technological innovation. Drejer (2004)
argues however, that non-technological innovation is also important for manufacturing firms, so
while a broadening of coverage may be needed, this is the case for both sectors. This leads to the
synthesis approach: while services and manufacturing firms may differ in how they innovate, we
can utilize the same ‘toolbox’ of concepts and methods to analyse innovation in both sectors. The
third edition of the Oslo Manual (OECD/Eurostat 2005) can be viewed as a synthesis approach
to measuring innovation in manufacturing and services, though the basic framework is arguably
still based upon manufacturing.

A key practical issue in comparing manufacturing and services is that it is increasingly difficult, if
not impossible, to separate the two sectors. The public sector can be better isolated from the
private sector; though this depends on how the public sector is conceived. For example, the
government sector is to a large extent distinct from the business sector3, while many types of
public services will include both companies and publicly owned organizations (see Mortensen
2010).

2 See e.g. Drejer (2004), Djellal and Gallouj (2000), Coombs and Miles (2000) and Bloch et al. (2008)
3 Though some publicly owned organizations are included in business R&D or innovation surveys.

16
The interfaces of the public sector

The public sector is a large and multifaceted sector that comprises several activity areas. This
section goes into depth on the heterogeneous nature of the public sector and discusses how this
may influence innovation. Part of the multifaceted and heterogeneous nature of the public sector
is the outcome of its many interfaces; 1) its interface to the private sector; 2) the interface
between the public sector and the citizens; and 3) internal interfaces in the public sector, e.g.
across various governmental levels and across activity areas.

The interfaces of the public sector

Policy
formulation

Private Public Citizens

sector administration / users

Service
production

Local
Regional
National

The above illustration may be understood as representing primarily five types of interfaces; i.e.
1) the interface between the public sector and the private sector; 2) the interface between the
public sector and the citizens; and 3) the various interfaces between the internal governmental
levels within the public sector (i.e. a. policy formulation, b. public administration/policy
implementation and c) service production), 4) between the different geographical levels of the
public sector and 5) between the different public sectors, (e.g. health, education and defence).
Together the various interfaces indicate some of the heterogeneity of the public sector which
may be helpful when trying to decipher the logics of innovation in the public sector and how the
public sector innovation system looks like. In particular, the form the interfaces take and which
are most important may have a large impact on innovation processes in public sector
organisations.

One may operate with two notions of heterogeneity in the public sector; vertical and horizontal
heterogeneity respectively. Vertical heterogeneity refers to the various internal governmental
levels including the policy level, the managerial level and the service provision level. Horizontal
heterogeneity refers to the variety across different activity areas within public sector. Mirroring
industrial and sectoral groupings in the private sector the public sector is equally divided into
various public sectors, such as e.g. health care, education, public administration or defence.

17
The interface between the three governmental levels within the public sector deserves a closer
explanation: First, the politicians constitute the top level that holds the responsibility for public
services and their total costs towards the population. Second, the managers represent an
intermediate level between the policy level and the professional practitioners. Third, the
professionals such as teachers, doctors or nurses, and who work in their respective practical
domains and who represent the production of public services towards the users and the citizens.
Public administration and service production together constitute what we normally term civil
service. The challenge is to make these three cultures integrated and coherent, and to implement
top-down policy initiatives in the fields of the practitioners via the intermediate management.
Conversely, it is a challenge to create absorptive capacity in terms of being able to put the user in
focus and incorporate bottom-up impulses from the users and from the professional
practitioners to the higher levels of public administration.

The interface between the public and the private sector

The interface between the public sector and the private sector is partly characterized by a wish
in the public sector to regulate and support the activities in the private sector. Regulation may
take place through taxation and legislation, whereas support may be through education,
infrastructure, tax reliefs, and various kinds of support schemes. In this way the public sector
also acts as a service provider to the business sector. Public sector also takes part in
partnerships between the public and private sector. Here the public sector acts as an active
innovator that both can use private sector inputs in their in-house work, and engage in active
two-way cooperation with businesses. To the degree that the lines between public and private
sector are increasingly blurred this typically takes place at the service level.

Due to a belief that private sector is more innovative or effective than the public sector there has
been a trend towards ‘privatization’ of the public sector. A major reason for this is that
governments believe that this will encourage public service providers to innovate and produce
cheaper and more effective services. This claim may be substantiated by different structural
changes within the public sector, such as:

a) Replacing hierarchical contracts with market contracts (public services buy and sell
services between themselves)
b) Using private and third sector service providers to carry out work financed and
controlled by the public sector – i.e. by exposing public services to competition. In this
case, the delivery of services remains a public responsibility, but the public may pay
public, private or third sector organizations to provide these services.
c) Introducing new systems for measuring production and efficiency and through linking
funding to performance (New Public Management)
d) Giving public institutions more autonomy and responsibility (the extreme version is
turning them into publicly owned companies)
e) Substitution of public provision with private provision, i.e. the public sector leaves these
services to the private market (e.g. outsourcing, state support of private institutions or
privatization of state owned companies)

These tendencies together suggest that the boundaries between private and public sector are
blurring and that in many regards public sector acquires many of the characteristics once
associated with private sector. Moreover, these structural changes also signal that the term

18
‘privatization’ has different meanings, and that a great deal of the recent changes within e.g.
Scandinavian welfare systems are not pure forms of privatization, but rather a process of
establishing new contractual relationships, and of increased differentiation and interaction
among the various parts of the public sector and private sector, and within the public sector
itself. A great proportion of the instruments of institutional innovation in the public sector
relates to the development of new forms of short- and long-term contracting (Bogen and Nyen
1998; Klausen and Ståhlberg 1998).

This process of privatization has resulted in a very heterogeneous public sector, both in terms of
actors and activities. In addition to public bodies that are 100 % publicly owned, the public
sector also often comprises actors such as Non-Profit Organisations (NGOs) or PNP (Private,
Non-Profit) actors, often described as ‘the third sector’, consisting of voluntary organizations,
foundations etc. operating as private actors although not having a profit-motive for their supply
of services. Their operation may be organized within or outside a market framework.

Privatization or the exposure to competition of formerly public activities has created a need for
new regulations and new organizations to enforce them. It also calls for reformed regulation
following the deregulation of certain financial processes, for instance with the increased level of
establishment of public-owned corporations. There is an overall need to develop the appropriate
combination of economic instruments and regulation to meet the development of an expanded
and integrated economic system. A great proportion of the instruments of institutional
innovation in the public sector relates to the development of different kinds of contracting, both
short- and long-term.

The various forms of privatization are both types of public innovation and vehicles for
stimulating innovative activities in the public sector. They do tend to blur the lines between the
public and the private sector, both as regards incentive structures and governance models. One
should however keep in mind that large sections of the public sector are not market driven in
any normal sense of the word. Moreover, even if companies, NGOs and public institutions may
compete for government contracts, the public buyer itself, being this a ministry, an agency or a
public institution, is not part of an open market.

On the other hand political actors may have some of the same personal qualities as are
attributed to entrepreneurs, as they may try to realise a particular vision of how society should
work. Politicians are often highly committed to improving social welfare or achieving particular
outcomes from public services. They may thus seek innovative solutions, consulting with various
sources for policy advice. Some politicians promote very radical changes in public services, since
they can see a chance to make their mark on society and the risk may be low as they will
probably have moved on to other fields if the particular innovation proves to be a failure (Koch
and Hauknes 2005). The ability to convince other strategic actors is central for political actors as
it is for economic entrepreneurs. In the innovation systems literature there has been much focus
on the actor networks and socio-technical constituencies required to develop and push through
major innovations (Edquist 2005; Lundvall 1992; Porter 1990). The same mechanisms also
seem to be valid for politicians.

19
The interface between the public sector and its citizens
The public and private sectors differ in terms of the interaction with their end user, whether
these are defined as “customers”, “clients”, “users” or “citizens”. Private companies will normally
interact with their customers on a daily basis, and unless the company is too large, the
information gained by this interaction will find its way to the managers quickly. Ultimately, a
company that fails to relate to its customers will be in dire straits; “If they don’t buy, you die”
This is also why companies often spend considerable resources on market research. They need
additional information on what the customers demand today and what they will request in the
future. In the public sector things are not so clear cut. There may indeed be a direct interaction
between the service provider’s front office and the user of these services, but there is not
necessarily a good feedback loop to the local management, or – which is even more important –
leading public officials higher up in the hierarchy. This may represent a threat to the learning
process of the public sector. Such a lack of receptiveness to signals and input from the citizens,
clients or consumers similarly resembles a traditional way of perceiving the public sector as a
regulatory framework for innovation in private sector, and as a passive recipient of innovations
from private sector. Hierarchical structures and top-down communication has not ensured a
climate for capturing ideas generated from service workers. Public employees have not been
expected to come up with good ideas of how to change the public services, but rather to deliver
the public services framed by the political actors. This especially applies to civil servants found
in the system below the ministries.

The New Public Management philosophy (NPM) is part of the tendency towards privatization of
the public sector and has transformed its role in many sectors and countries. The replacement of
the term ‘citizens’ with the term ‘customers’ to describe the users of public services exemplifies
this movement towards characterizing the public sector in terms of market mechanisms. The
term ‘customer’ indicates freedom of choice in buying services in a market and intends effective
market relationships between buyer and seller. Adopting the “customer” perspective in public
administration might cause a re-thinking about the foundations of the public sector’s role. The
shift towards a practice of treating the citizen as a customer may lead to a real change in the
relationship between the citizen and the public sector. The traditional relationship or social
contract between the citizen and the state is based on reciprocal rights and responsibilities. The
individual has responsibilities towards the community. A customer has, on the other hand, no
responsibility towards the company providing services, except one: to pay the bill. Hence people
considering themselves to be customers may lose the sense of solidarity or communality that
has been included in the traditional social democratic and social liberal ideologies. There is thus
a challenge to develop a system that includes innovation and accountability, but at the same time
retains the role of the public sector as a vehicle for a sense of community, equal rights and
solidarity.

The privatization of the public sector or the exposure of former public sector activities to
competition has created a need for new and reformed regulations and new organizations to
enforce these. There is an overall need to develop an appropriate combination of economic
instruments and regulation to meet the development of an expanded and integrated economic
system.

20
The interfaces across government
In addition to the interface between the public and the private sector, the public sector also
comprises the interface between elected politicians and employees of the public administration
and those involved in public service provision. As between the private and public sector, the
relationship between the political apparatus and the administration may also be multifaceted.
Although the politically elected representatives are meant to have the power to change and
improve society (public sector included), due to its size and experience the public
administration also possesses power which may influence on this relation. In contradiction to
Weber’s ideal bureaucracy, with a clear-cut dividing line between the subordinated civil
servants and the political leadership, the civil servants may play important roles in the public
decision-making processes and in the improvement of public services.

In ministries, civil servants are engaged in policy development work. Hence both politicians and
civil servants can be considered policy makers. This group of policy oriented civil servants
extends to various policy agencies, councils and directorates that often have as an explicit role to
give advice to politicians. These are often politically interested persons with a drive towards
policy development and reform. Policy change is also a form of innovation, and they can thus be
called innovators or even entrepreneurs. Given the size and the heterogeneity of the public
sector, no politician is able to obtain deep insight into all policy areas. Politicians often specialise
in one or a few policy areas, but are seldom able to gain the professionalism of the bureaucrats.
Civil servants have professional education and qualifications, are full-time employed and have
also often lifetime careers within their specialized fields of the bureaucratic system. Based on
their long experience and knowledge, civil servants possess valuable insights into how the
system works, and may come up with new ideas on how to develop and reorganise the same
system. Politicians do not necessarily have the same background, or the opportunities to explore
policy areas in such depth.

In this sense civil servants might both be a source of innovation or a barrier for innovation. Their
professional background and insight into the policy area in question might give them quite other
views than the ones held by the government in power. Civil servants might argue that the new
policy will not work, based on their own gained experience of the system, and might actively try
to influence on the political decision making process.

Their views may also be based on certain belief systems, world views, schools of thought or even
ideologies. If these views conflict with the ones of the ruling politicians, they may – consciously
or unconsciously – do their best to stop the new policies from being implemented. Sometimes
the ministerial staff or civil servants may even struggle with the policy makers in other
ministries. The value systems in the ministry of culture or ministry of the environment may
differ a lot from the ones in the ministry of industry or in the Foreign Offices. It should be noted,
though, that such differences may also lead to innovation, as the interaction between different
organisational cultures may lead to the dissemination of new ideas, and hence innovation.

But the differences within the various levels of the public sector may not always be an asset.
Sometimes the parallel objectives and foci within the public sector can cause conflicting
objectives at different governmental levels. Windrum (2008) exemplifies how political
entrepreneurs may seek efficiency gains, whereas service level staff may seek to improve service
quality.

21
Other ways in which the public sector may represent heterogeneity is through different
governmental practices, both in terms of geographical and sectoral organisation of public sector
institutions and practice. Examples of this may be the size of public institutions, such as
municipalities.

The preceding discussion has shown how public sector is heterogeneous in many ways, and that
when attempting to understand how innovation in the public sector takes place and how it may
be supported there is reason to take into account that:

 The many ways in which the boundaries between public and private sector are becoming
increasingly blurred
 There seems to be a higher complexity of objectives in the public sector than in the
private sector, such as parallel or contradicting objectives:
o between various public organisations, or
o within these: between policy makers (policy formulation), civil servants (public
administration) and service level staff (service production)
o Policy makers are often generalists whereas civil servants and service level staff
are often specialists in their respective fields
 Flows of ideas across various public organisations with different cultures may ignite
innovation
 Public sector innovation resembles the private sector in comprising both top-down or
bottom-up generated innovations
 There is various regional and national practices regarding organisation of the public
sector

Heterogeneous sources and barriers for public sector innovation

Depending on how the public sector is delineated and defined, as well as on the increasing
privatization of the public sector, there can be many different sources and barriers to innovation
in the public sector. Mirroring the terminology from private sector innovation studies one may
distinguish between top-down innovation and bottom-up innovation (Windrum 2008). Some
innovations may be national or generic top-down efforts initiated by generalists in the form of
politicians or managers and then implemented at the local level in the respective service
providing organisations. Other types of innovations may be bottom-up initiatives from a range of
different and often specialized civil servants. Due to many public organisations being large, and
due to the bureaucratic and formal organisational principles and cultures often following these,
one could be inclined to believe that bottom-up initiatives are disfavoured in the public sector.

Reflecting how the learning circuit in any organisation is influenced by the prevailing incentive
structure at particular junctures, drivers and barriers for innovation in the public sector should
be seen as closely interlinked with the reward and penalties that may take place at the level of
the individual, the organisation or the system.

In addition to the shift from a notion of the citizen to the notion of the customer there is also
more attention on output and the results of public sector activity, accompanied by new
indicators for measuring efficiency and expenditure. The individual public organizations are
often held responsible and accountable for the achievement of certain targets. The state
budgetary system acts as a controlling and rewarding mechanism of public sector activities

22
through established performance measures. This performance based money transfer system is
intended to act as strategic and operational planning guidelines.

Risk management has received much attention in the discussion of public sector innovations.
This includes on the one hand ensuring that decisions take account of risks and developing
techniques to manage and reduce risk in government activities. On the other hand, it also
includes developing a culture that recognizes and accepts that innovation activities are no
always successful.
Risk aversion or the fear of failure has often been pointed out as a key barrier to innovation in
the public sector. This is also arguably one of the largest contrasts between the public and
private sector in terms of innovation (Koch et al. 2006; Koch and Hauknes 2005), both in terms
of rewards to successful innovation and the potential adverse consequences of not innovating
(both of which may be much larger for businesses). ReD Associates (2005), in an analysis of 9
innovative public organisations in Denmark found that all had a high degree of willingness to
take on risk. And, in all cases, risk aversion at the political (or higher organisational) level was
identified as one of the largest barriers to public sector innovation.
Mulgan and Albury (2003) (see also Kelly, Mulgan, and Muers 2002) argue that a key factor here
is that in many cases the risks of public innovation are often greater than for businesses (e.g.
health care), as may be public scrutiny of new ideas. Other factors pointed out by Koch and
Hauknes (2005; 2006) are performance measures that provide disincentives to develop and
introduce changes; lack of incentives for organisations and individuals to innovate; and
resistance to change from users and management.

Concluding remarks
The paper has discussed some of the characteristics of the public sector, and how these have
implications for innovation in a public sector context. Emphasis has been put on challenges of
delimiting the public sector and approaches to address public services and output. The paper
has also presented various motivations for focusing on innovations in the public sector. It has
been discussed how the public sector is multifaceted and heterogeneous, not only in terms of
different governmental levels, sectors and interfaces to the private sector, citizens and users, but
also in terms of objectives. Some of these characteristics of the public sector, such as parallel and
sometimes opposing objectives and incentives, as well as an abundance of interfaces, make it
different from the private sector. Reflecting such differences there may be a need to refine and
develop new concepts and tools in order to grasp the distinctive features of public sector.

But despite being different from the private sector in many ways, the paper has also shown that
in terms of how innovation processes take place the public sector shares many characteristics
with the private sector. Also, in terms of understanding how underlying incentive structures
impact behaviour and innovation, public and private sector share common ground. The paper
argues that innovation in the public sector should not be seen independent from the underlying
incentive structures that structure behaviour, nor from their wider systemic context. It follows
from the discussions that although possessing distinct features in relation to the private sector,
there seems to be common ground as to which concepts and tools from studies of private sector
innovation may also be applied on the public sector, but that these should be further developed
and refined.

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Therefore, maintaining the division between the private and the public sector may therefore
imply a risk of ignoring the innovative activities that take place within the public sector and thus
central determinants of change in modern economies. Although the public sector at first glance
may seem homogenous and rigid, it comprises several dynamic dimensions internally and
continuously changing interfaces to the surrounding society. Much the same way as innovation
in the private sector is not a one size fits all exercise, innovative behaviour in the public sector is
also highly multifaceted. Rather than constituting a static structural or institutional and
regulatory framework for innovation in the private sector, the various parts of public sector
should be perceived as dynamic and co-evolving actors and organisations.

The focus on innovation in a public sector context may also improve our overall understanding
of innovation irrespective of sectoral foundation. In the same way as studies of innovation in
services have brought about a focus on non-technological innovations, which later have also
been applied to the manufacturing sector, an expansion of innovation studies to also comprise
the public sector can perhaps help shed new light on innovation in the private sector.

But in addition to potentials for learning and generating new knowledge, the focus on innovation
in the public sector also holds some potential pitfalls. It is vital that when formulating
framework conditions for innovation in the public sector, actors in policy formulation and public
administration are aware that their actions do not contradict the mandate and overall objective
for the public sector. In the case of new public management the policy and administrative
innovation of creating measures were used as management tools. In this particular case it has
been debated (Gjørup et al. 2007; Nissen 2007) whether ensuring an effective operation of
public services is in line with the overall objectives of the public sector. This example may serve
as a reminder that the focus and interest on innovation in the public sector should not lead to
making innovation in the public sector a management tool. Instead innovation in the public
sector should be seen as means to live up to its overall objective, i.e. to provide increased welfare
and a better quality of life for its citizens.

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