Lead markets: Creating demand for new technologies

This article is taken from the new Science|Business report, “Innovation – The Demand Side”

The latest buzzword among Brussels technocrats is “lead markets”. And it’s going to be put into action, on an experimental basis, in 2007.

The phrase comes from a report, chaired by former Finnish Prime Minister Esko Aho, to the European Commission. The idea is simple. Aho believes Europe keeps up with the US in creating knowledge; but it lags in nurturing early markets for the products of this knowledge. An example: the pharmaceutical industry, where the European market is fragmented by borders and rules.

Not long ago about half of pharmaceutical R&D was carried out in Europe; now the figure is below a third, with the prospect that more and more research will shift to the US and Asia. The reason isn’t lack of knowledge; it’s in the differences between the US and European pharmaceutical markets.

But it needn’t be this way. In fact, Europe has in the past beaten the US at market-creation: its GSM standard for interoperability of mobile phone networks, established first at home in the 1980s, has spread across most of the world – and in its wake, Europe’s mobile-phone industry has thrived.

The lead market concept would apply many of the old GSM tricks to new fields. These include coordinating common technical “architectures” or standards, removing unnecessary regulatory barriers to expansion, using government procurement to jump-start the market, and fostering a consumer culture that more highly prizes new technologies and ideas.

How do you choose?

It’s an attractive idea, but there are many questions still to be answered. How will the lead markets projects be selected? How do you avoid specifying a particular, and possibly wrong, technology? How do you maintain market freedom, and diversity? On the last point, the problem isn’t just allowing free access for very small companies – though that’s important, too.

There’s a vast middle ground. “Most of the growth happens beyond SMEs,” says Martin Schoeller, chairman of German engineering firm Schoeller Industries and president of Europe’s 500, a growth-company organisation. “The young entrepreneur who is multiplying his own concept is the real job creator.”

“Is the lead market something we want to be doing?” asks Soumitra Dutta, dean of external relations at French business school INSEAD. “The history of governments picking winners is not really something to be proud of.” He suggests what you might call a “lite” version: “It might be better to think of lead markets as areas where we think we can be globally competitive, and can make life easier for current players in industry by removing obstacles.”