Source Ceter for Market Education

KUALA LUMPUR, Malaysia: A new policy paper by the Center for Market Education (CME), in collaboration with Universitas Prasetiya Mulya, argues that innovation policy should move beyond subsidies, rankings, and administrative programmes, and instead focus on the institutional conditions that allow ideas to become marketable products.

The policy paper, The Economic Impact of CME’s Products, Processes and Policies (PPP) Approach to Innovation: The Case for Innovations with Socially Positive Externalities (ISPEs), was authored by Alvin Desfiandi, Alfian Banjaransari, Dr. Carmelo Ferlito, Fati Ramadhanti, and Ashlyn Yap Ee Syen.

The study applies CME’s Products, Processes and Policies (PPP) approach to innovation, a framework developed to explain why some economies successfully transform ideas into commercially viable products while others remain trapped in policy announcements, public spending, and innovation dashboards that do not generate durable results.

According to the paper, innovation becomes economically meaningful only when policies improve the institutional environment in which firms invest, coordinate, learn, disclose, trade, compete, and scale. The PPP framework therefore shifts the focus of innovation policy from inputs to conversion: from money spent to products created, from programmes launched to markets reached, and from administrative activity to entrepreneurial transformation.

The paper is built around four institutional pillars: Physical Property Rights, Trade Openness, Intellectual Property Rights, and Economic Freedom. These pillars support innovation by making investment bankable, trade reliable, knowledge appropriable, and markets contestable.

The authors estimate that weak institutional conditions impose substantial economic costs. Weaknesses in Physical Property Rights may imply an annual growth loss of 0.60 to 0.85 percentage points. Weak Trade Openness may cost 0.12 to 0.14 percentage points of growth per year. Weak Intellectual Property Rights may reduce annual growth by 0.20 to 0.40 percentage points, while constraints on Economic Freedom may cost 0.14 to 0.34 percentage points annually.

The paper also highlights the fiscal cost of poorly designed innovation policy. When governments spend on innovation while institutional systems remain weak, public resources may fail to translate into market-validated outcomes. The study estimates innovation-policy leakage at USD 0.77 million per USD 1 billion of GDP in low-income economies, USD 1.59 million in middle-income economies, and USD 2.73 million in high-income economies. For a USD 200 billion middle-income economy, this could mean approximately USD 318 million lost each year in policy effort that does not become first sales, export survival, licensing, or scalable products.

“The central message of this paper is that innovation policy is not primarily about spending more. It is about fixing the institutional channels through which entrepreneurial ideas become market products,” said Alvin Desfiandi, Chief Economist at CME and lead author of the paper. “When the institutional pipes are leaking, innovation budgets produce activity, but not transformation.”

The paper proposes practical reforms that can be implemented within 12 to 18 months. For Physical Property Rights, it recommends a modern movable-collateral and receivables framework supported by an electronic registry and expedited claims procedures. For Trade Openness, it calls for single-window customs, pre-arrival processing, risk-based inspections, and accredited laboratories with clear service standards. For Intellectual Property Rights, it recommends time-bound post-grant opposition mechanisms and explicit research or experimental-use exemptions. For Economic Freedom, it proposes efficient business entry, commercial court time standards, open contracting, prompt public payment rules, and differential taxation based on relative social harm.

Taken together, these reforms are estimated to generate an indicative annual growth lift of 0.45 percentage points, reduce unemployment by 0.09 percentage points, and avoid USD 0.23 of waste per USD 100 of public innovation spending.

The paper then applies the PPP framework to Innovations with Socially Positive Externalities, or ISPEs. These are market-generated products, processes, or services that satisfy existing human preferences while reducing wider social costs. Examples include cleaner mobility technologies, sugar-free and alcohol-free products, safer nicotine alternatives, and other harm-reducing innovations.

The paper argues that ISPEs show how markets can reduce social costs not by abolishing demand, but by transforming the technological and productive means through which demand is satisfied.

Within the ISPE framework, Economic Freedom is identified as the most important pillar, accounting for 48.9 percent of the weighted overall contribution. This reflects the role of market entry, contestability, consumer choice, regulatory predictability, and harm-proportional fiscal signals. Trade Openness contributes 23.1 percent, Intellectual Property Rights 18.3 percent, and Physical Property Rights 9.7 percent.

The authors find that coherent pro-ISPE policies could produce an indicative annual growth gain of 0.084 percentage points, reduce unemployment by 0.0168 percentage points, and avoid USD 0.05549 of waste per USD 100 spent.

The paper stresses that differential taxation based on relative harm can support socially positive innovation, but only when embedded in a broader institutional framework. Tax differentiation must be accompanied by verifiable eligibility criteria, transparent labelling, product traceability, testing capacity, monitoring systems, intellectual-property clarity, lawful import channels, and competitive market entry.

“When these conditions are present, differential taxation becomes a Schumpeterian signal,” said Dr. Carmelo Ferlito, CEO of CME and co-author of the paper. “It encourages firms to develop products that preserve consumer choice while reducing social costs. But when these conditions are absent, it risks becoming just another distortion or revenue instrument.”

The paper concludes that governments should not attempt to replace markets in the name of innovation. Instead, they should strengthen the institutional conditions under which markets generate superior substitutes, encourage experimentation, and allow socially beneficial innovation to emerge from below.