Innovation Isn't Just About Labs: It Needs Buyers To Rely Upon Too

The government should step in forcefully with its visible hand to generate demand that the market's invisible hand cannot

- Varun Aggarwal & Aditya Sinha

In the early 2000s, when India aimed to indigenize its multi-barrel rocket-launcher capability, the Union ministry of defence broke new ground by awarding procurement-linked development contracts not to public sector units, but to private firms like Tata Power SED and Larsen & Toubro. Appointed as lead system integrators, they invested heavily in research and development (R&D), driven by firm procurement commitments. This success was enabled by the active role played by the government in shaping the market. The 'invisible hand' of the market often fails to efficiently allocate resources for R&D due to several structural challenges. For one, innovation typically involves long gestation periods and entails a high risk of failure. It took decades for AI to evolve from theory to application; the Human Genome Project required 13 years and billions in public funding; autonomous cars have started to show some promise after two decades of work.

R&D also suffers from 'appropriability gaps.' Innovations often generate knowledge spillovers, benefits that others can capture without paying for them. This is why innovation is considered a quasi-public good. For instance, Google's investment in transformer models laid the groundwork for OpenAI's breakthroughs, just as deep learning's foundational work emerged from publicly funded research at institutions like University of Toronto. Thus, private incentives alone are insufficient. This necessitates the visible hand of the state via the creation of complex institutional architectures: outcome-contingent R&D funds, mission-driven procurement systems, co-financed translational research platforms and intellectual property-sharing consortia that align private incentives with long-term public returns.