Innovation isn’t just about labs: It needs reliable buyers too

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. 

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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.

Innovation ecosystems require engineered market mechanisms, not laissez-faire idealism. Hence the government’s role as a market crafter is important. There are several reasons why a government procurement policy can spur investments in R&D and help markets evolve.

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First, well-designed and merit-driven public procurement can transform governments from passive regulators into lead customers. Strategic procurement establishes guaranteed demand for innovative goods and services, enabling firms to invest in R&D with reduced market uncertainty. This is a powerful de-risking mechanism for private investment. In contexts where procurement processes are transparent, competitive and aimed at acquiring cutting-edge solutions at scale, early contracts can validate new technologies, build credibility and unlock follow-on investment. India’s challenge lies not in the idea of procurement itself, but in reforming its execution.

Second, routine participation in public procurement processes helps firms, especially smaller ones, enhance their technological and organizational capabilities through experiential learning. Innovation thrives when businesses operate in learning environments. Merit-based government contracts, with strict performance and quality norms, push firms to upgrade, boosting their absorptive capacity and technological skills.

Third, micro, small and medium enterprises (MSMEs) and startups in high-tech sectors struggle to access initial customers, as markets often favour incumbents. Time-bound preferential procurement would help correct this. Limiting preferences to the initial years or first few procurement cycles can help MSMEs overcome market entry barriers without the government being exposed to any permanent dependency.

Fourth, when the state commits to procuring future technologies, it sends strong market signals that can de-risk and crowd in private R&D investment. The Defense Advanced Research Projects Agency (DARPA) model of the US is a textbook case of a mission-oriented innovation policy. DARPA’s annual budget of about $4 billion supports high-risk, high-reward projects and has yielded over 140 transformative technologies, including GPS, the internet and stealth aircraft.

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As Mariana Mazzucato argues, a mission-driven approach “crowds in" private actors by reducing uncertainty and setting a direction across the ecosystem. Together with public procurement, this approach can push the frontiers of advancement and accelerate what scholars call ‘recombinant innovation,’ where existing knowledge is reassembled in novel ways to solve complex problems. For example, decades-old lipid nanoparticle delivery systems, synthetic mRNA techniques and cloud-based genomic sequencing were combined to develop mRNA vaccines for covid.

This model has gone global. The EU’s Horizon Europe has allocated €95.5 billion over 2021–27, with €5 billion earmarked for five major missions, including cancer treatment and climate-neutral cities. In Germany, Energiewende mobilized over €500 billion in green investment between 2000 and 2020, catalysed by mission-led public finance. China has used advance market contracts across sectors like biopharma, EVs, semiconductors and renewable energy to steer R&D. 

These deals cover guaranteed procurement, production mandates and milestone-based funding tied to national priorities. Vaccine development, EV battery innovation, chip fabrication and solar technologies have all benefitted from state-backed demand.

India’s government is deploying procurement as a strategic instrument to catalyse domestic R&D and innovation, particularly in the defence and aerospace sectors, through its Innovation for Defence Excellence (iDEX) framework. Anchored in the Defence Acquisition Procedure of 2020, iDEX links early-stage R&D directly to procurement pathways by enabling the armed forces to acquire technologies developed by startups, MSMEs and individual innovators under structured innovation projects. 

The scheme, operationalized by the Defence Innovation Organisation and funded with ₹498.78 crore for 2021–26, offers non-dilutive capital through the Support for Prototype and Research Kickstart framework, with grants of up to ₹1.5 crore. Unlike traditional R&D funding, iDEX embeds innovation within the acquisition architecture, effectively reducing ‘valley-of-death’ risks for early-stage technologies. The template is being adopted by the department of science and technology and ministry of electronics and information technology.

Innovations need buyers. When the government shows up not just as a funder but also as a customer, it gives innovation a fighting chance. If the invisible hand of the market won’t do what’s needed, the visible hand of the state must.

The authors are, respectively, co-founder at FAST, India and Change Engine; and a public policy professional