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Governance And Innovation in the Public Sector

Abstract and Keywords

This article evaluates the application of the governance and New Public Management strategies in promoting the innovation capacity of the public sector, arguing that these strategies, which are often seen as alternatives, should rather be seen as complementary. It points out that recent strands of public administration theory establish a positive correlation between interactive forms of governance and public sector innovation, and shows how a combination of the two strategies can be the most promising path to take in advancing the innovative capacities of the public sector.

Keywords: governance, New Public Management, public sector, public administration, innovation capacity

Today, the pressure on public sectors to be innovative is as large as ever. The aim of this chapter is to show that public administration research offers two relatively distinct strategies for promoting the innovation capacity of the public sector, and to argue that these strategies, which are often seen as alternatives, should rather be seen as complementary. Both strategies take their departure in the assumption that the public sector's innovation capacity has been seriously hampered by the strict regulatory regimes imposed by bureaucratic forms of government that neither provide space for nor encourage entrepreneurial behavior. In addition, the two strategies share the view that public sector innovation is enhanced by institutional conditions that spur ongoing interaction between relatively autonomous public and private actors. The main difference between them is that they propose different institutional designs for structuring and driving this interaction. The New Public Management (NPM) strategy calls for an institutionalization of competition-based forms of interaction that motivate individual as well as collective actors to develop, implement, and disseminate new policies and services. In contrast, the governance strategy builds on the assumption that public sector innovation is best achieved through the institutionalization of collaboration among interdependent stakeholders. The chapter sets out to show that both of these strategies offer important insights about how to strengthen the innovation capacity of the public sector, and that much can be achieved by recognizing the innovative drivers and barriers of competition as well as of collaboration.

The chapter is structured as follows. First, I analyze how and why innovation in the public sector has risen to the top of the agenda in debates about how to govern advanced liberal democracies. Next, I point out how recent strands of public administration theory establish a positive correlation between interactive forms of governance and public (p. 216) sector innovation and show how this correlation finds support in new economic innovation theories. Then follows an outline and critical assessment of the NPM and governance strategies for enhancing the public sector innovation proposed by public administration researchers. Finally, I show how a combination of the two strategies appears to be the most promising path to take in advancing the innovative capacities of the public sector.

Innovation in the public sector: an emerging agenda

Up until the 1980s there was limited interest in public sector innovation. Innovation was something that took place in the private sector, and the role of the public sector was to provide the best possible conditions for private sector innovation, for example, the protection of private ownership of new innovations and the provision of well-educated and skillful innovators (Edquist and Hommen 1999). As a result of the governability crisis of the late 1970s (Mayntz 1991) public sector innovation entered the policy agendas all over the Western world in the shape of a massive call for public sector reforms. The manifest outcome has been a persistent stream of reforms of the regulatory framework in which public governance is exercised (Levi-Faur 2011). These reforms waged war against the inflexibility and inefficiency of traditional rule-based, compartmentalized, and top-down structured forms of bureaucratic government, which leave little room for agency, problem-driven creativity, and decentered entrepreneurship (Hood 1991; Osborne and Gaebler 1993).

Although the call for a more innovative public sector is not new, the global financial crisis in 2008 has brought public innovation to the top of the policy agenda in many welfare states. Hence, the crisis has left them with a huge gap between the demand for public services and the resources available to meet these demands. While the first wave of public sector reforms in the 1980s and 1990s aimed to make the public sector work harder, recent reforms aim, in addition, to make the public sector work smarter in innovative ways that would make it possible to do more with less (Armstrong and Ford 2000). Hence, public sector innovation understood as the development, implementation, and dissemination of new policies and services is seen as exceeding the available resources.

Given these expectations and high hopes it is no wonder that public authorities all over the world are embracing the new public innovation agenda. The result is a mushrooming of all sorts of government-initiated programmes and funding schemes that encourage public sector innovation, and research in public sector innovation. The task placed on the shoulders of those involved in these programmes is to find ways for the public sector to work smarter. As we shall see, public administration theory has something to offer in this respect.

(p. 217) The interactive turn in public administration theory

Public administration theory is increasingly occupied by the question of how to increase the ability of public organizations to change. Early twentieth-century public administration theory was primarily interested in identifying modes of governance and organizational principles that could create stable and legitimate rule, predictable decisions, efficient implementation procedures, and top-down control. Max Weber's ideal-typical model of bureaucracy delivers on all counts due to its legal–rational foundation, rule-governed practices, horizontal division of labor, and hierarchical decision-making structure (Weber 1976). Whereas Weber perceived stability as a positive contribution to public governance, Anthony Downs (1967) conceived the high degree of stability in public bureaucracies as a problem, because it prevents a dynamic adaptation of the public sector to societal changes and conditions. He argued that public bureaucracies tend to become more and more ossified as they grow bigger and use more and more energy and resources on internal coordination and external boundary wars. This reduces their ability to change as a response to changes in the environment.

Efforts to make the public sector more dynamic have brought interaction between public and private actors to the center of attention as a driver of public governance (Hood 1991; Kooiman 1993; Osborne and Gaebler 1993; Rhodes 1997; Mitchell and Shortell 2000; Feiock 2002; Agranoff and McGuire 2003; Kettle 2003; Pollitt and Bouckaert2004; Greve 2008). Hence, interactive forms of governance such as quasi-markets, partnerships, and networks are increasingly seen as a means to enhance governance efficiency and effectiveness through a dismantling of the traditional bureaucratic, compartmentalized, and supply-side driven forms of regulation and coordination. The strength of interactive forms of governance is that they can be applied in flexible ways and that they empower and encourage decentered actors to perform well, as measured not only in terms of top-down imposed standards but also with reference to bottom-up demand-side criteria.

The mobilization of the self-governing capacity of decentered actors is particularly important for dealing efficiently and effectively with what has been known as wicked problems, that is, governance tasks where there is uncertainty about the cause of the problem, ambiguities related to its definition, disagreements concerning how to address it, and/or difficulties in evaluating governance outcomes (Rittel and Webber 1973; Rhodes 2000; Klijn and Koppenjan 2004). Among the wicked problems that currently range high on the governance agenda are finance, health issues, migration, security, and climate change. Interactive forms of governance provide a way to involve relevant actors in reaching a better understanding of the nature of these problems, in spurring and exploiting their commitment to finding and implementing viable solutions, and in evaluating the quality of governance outcomes.

(p. 218) While the main focus of attention among recent public administration researchers has been on how interactive forms of governance can enhance the efficiency and effectiveness of public governance, some have pointed to the positive impact that interactive forms of governance might also have on public innovation (Osborne and Gaebler 1993; O’Toole 1997; Newman, Raine, and Skelcher 2001; Borins 1998; Hess and Adams 2007; Nambisan 2008; Eggers and Singh 2009; Moore and Hartley 2008). The thrust of the argument made by these researchers is that institutional arrangements that push for decentered agency and self-governance provide spaces in which a plurality of competent actors are able to use their knowledge, creativity, entrepreneurship, and resources to find new and better ways of getting things done.

However, the construction of self-governing spaces for individual as well as for collective actors is not perceived as sufficient to promote innovation. As pointed out by many, self-governing spaces can sometimes be both inefficient and ineffective, and can hamper innovation (Scharpf 1994; Greve 2008; Kenis and Provan 2009). A realization of the potential benefits of interactive forms of governance calls for a particular type of innovation management that is exercised through the construction of institutional designs that reward entrepreneurial behavior (Hartley 2005). The concept of meta-governance offers itself as a conceptual frame for categorizing this kind of innovation management, which aims to enhance the innovation capacity of self-governing actors though a strategic framing of different patterns of interaction (Jessop 1998; Gray and Lowery 2000; Sørensen 2007; Meuleman 2008). The increasing interest among public administration researchers in mapping the potential role that interactive forms of governance and meta-governance might have for enhancing public innovation finds resonance in the huge and well-established body of innovation theory that focuses on private sector innovation.

Interaction as a driver of private sector innovation

The assumption is that interaction between decentered and institutionally motivated actors with relevant competencies and capacities finds support in state-of-the-art economic innovation theory. The theoretical development within this strand of theory can be described as a gradual development from a single-actor and supply-side driven innovation model to a systemic multi-actor perspective. This new theoretical framework views private sector innovation as a result of complex chains of interactions within and between firms, with numerous feedback loops that take into account the new and emerging demands of the customers (Godin 2006; Edquist and Hommen 1999), the day-to-day experiences of the employees (Coyne, Clifford, and Dye 2007), and skillful interventions of innovation managers that shape spaces and processes in which innovation are to take place (den Hertog and de Jong 2007; Westland 2008). As such, there are (p. 219) many parallels between the interactive approach to public innovation and recent theories of private sector innovation: Innovation is seen as driven by institutionally structured interactions between multiple actors with different resources, competencies, and perspectives, and the task of innovation managers is to design institutional conditions that promote and give direction to this interaction.

Since economic innovation theory is a well-established research field with a long history, efforts to understand and promote public innovation can gain important insights from these theories about how different institutional designs can contribute to enhancing public innovation. In the early stages of theory development, economic innovation theory viewed competition as the main driver of innovation: Market-based competition motivates individual entrepreneurs, as well as firms, to develop new products and production processes. However, over time, collaboration within firms, between firms, between firms and their consumers, and between firms and public authorities has been brought into focus as an important driver of private sector innovation (Braczyk, Cooke, and Heidenreich 1998).

The fact that both competition and collaboration can trigger innovation raises a series of interesting questions for meta-governors about when to motivate self-governing actors to compete and when to push them to collaborate. This debate is currently intense among economic innovation researchers (Jorde and Teece 1992; Teece 1992; Raco 1999). As we shall see, public administration theorists are engaged in similar considerations: Some theories lay the ground for a competition-driven innovation strategy while others speak in favor of collaboration as a main driver of innovation. The relationship between the first and the second group of researchers is rather polarized, to the effect that few recognize that both might actually have something to contribute within enhancing public sector innovation. Hence, it is possible to identify two competing strategies for promoting public sector innovation. The NPM strategy that views competition as the main driving force for enhancing public innovation, and the governance strategy that argues for the potential benefits of collaborative forms of governance for promoting public innovation.

The NPM strategy

The NPM strategy's critique of traditional bureaucratic ways of governing is inspired by the Public Choice theory (Niskanen 1987), which views public institutions as an incentive structure framing battles for power and resources among self-interested individuals with pre-given preferences. Accordingly, the exercise of public management is understood in terms of a principal–agent relationship that makes traditional forms of rule and command obsolete (Moe 1984). Since the principals (politicians and high-ranking public managers) do not have sufficient knowledge and resources to control the agents (the public employees), they must govern them through a skillful modeling of the incentives structures that motivate the agents to act in ways desired by the principal.

(p. 220) Informed by this theoretical perspective, the NPM strategy advocates for the institutionalization of market-based incentives structures and management forms that motivate utility, maximizing employees and agencies to constantly engage themselves in developing new and innovative production processes and services. Competition between providers of public services, increased consumer choice, performance-based budgeting and salaries, and so on are some of the means to promote public sector innovation (Hood 1991). As evidenced by the big wave of NPM reforms that saw the light of the day in the late 1980s and 1990s, the impact of the NPM strategy has been considerable (Pollitt and Bouckaert 2004).

There is little doubt that the many NPM reforms have increased the public sectors’ ability to adapt to contextual changes and its capacity to develop and pursue new ideas and practices. The public sector is not quite as ossified as it once was. This is among other things due to the disaggregation of large bureaucracies into many partly self-governing agencies, the increased space for the exercise of strategic management, the performance-based budget and career systems, and the introduction of consumer choice.

However, at the same time, NPM has unwittingly produced new barriers to change and innovation in the public sector. First, the one-sided focus on competition as a driver of innovation disregards and even diminishes the prospects for enhancing innovation though knowledge-sharing. Individuals as well as institutions that are placed in a competitive relationship with each other have little incentive to share their ideas, knowledge, and experiences. On the contrary, it will be in their interest to hold their cards close to their chest. This is problematic as it is widely recognized that knowledge-sharing is an important driver of innovation (Tsai 2001; Spencer 2003). Second, the NPM strategy builds on the assumption that the goals that the governance process aims to reach do not need to be innovated—or that self-governing, decentered actors have nothing to offer in this respect. Principals are seen as innovation heroes who are fully capable of formulating and innovating the goals by themselves, and the innovative capacities of self-governing, decentered actors is merely regarded as relevant in relation to the implementation process. As such, the NPM strategy might in fact hamper the innovation of the goals that give the overall direction to public governance processes. Third, innovation can be hampered by too many and too detailed top-down-initiated performance measurement exercises. The problem is that such measurements encourage the self-governing actors to do what is measured rather than to experiment and search for new context-dependent and flexible ways of understanding and solving governance tasks (Ridgway 1956).

The governance strategy

The governance strategy that emerged in the wake of the many NPM reforms was inspired by the new governance theories, which were consolidated as a strong new research field in the 1990s (Kenis and Schneider 1991; Rhodes and Marsh 1992; Kooiman 1993; O’Toole 1997; Scharpf 1994; Jessop 1998). These theories view collaborative forms (p. 221) of interaction as an important driver of innovation because they bring together interdependent actors with different kinds of relevant knowledge in a jointly negotiated effort to perform concrete governance tasks. The differences in knowledge, views, and interests between the participants is seen as a means to destabilize sedimented world views, problematize routinized practices, and reevaluate the functionality and relevance of traditional role perceptions and patterns of interaction. As such, collaboration fertilizes the ground for the development of new perspectives, ideas, and practices. The governance strategy underlines the fact that bringing together actors with different knowledge, interests, and perspectives does not necessarily lead to collaboration. The willingness of the involved actors to collaborate and use the differences between them constructively rather than as sources of conflict and contestations presupposes that the relationship between them is founded on the presence of interdependency: they collaborate and innovate because each of the actors cannot do what they want to do on their own.

Seen from this theoretical perspective, public innovation can be enhanced through the construction of self-governing arenas in which public and private actors are motivated to collaborate in formulating and implementing new creative policies and services through the construction of strong interdependencies between them. Much of the debate among governance theorists about how this can be done has evolved around the question of how to meta-govern governance networks (Hartley 2005; Nambisan 2005; Goldsmith and Eggers 2004; Sørensen and Torfing 2007). Meta-governance of governance networks, defined as interactive arenas in which interdependent but operationally autonomous actors formulate and pursue negotiated goals, can be exercised hands-off through the framing of autonomous spaces in which self-governance can take place, the design of decision-making and implementation arenas composed of different groups of stakeholders, and the evaluation procedures and incentives structures that reward collaborative arenas that succeed in defining and pursuing shared goals. However, meta-governance can also be exercised hands-on through direct dialogue and interaction between the meta-governors and decentered self-governing collaborative arenas, where the meta-governor takes on the role of facilitator and/or participant in governance networks (Sørensen 2007).

The governance strategy avoids the three innovation barriers caused by the NPM strategy. First, collaborative forms of governance promote knowledge-sharing between interdependent actors. Second, policy goals are not placed outside the innovation process. The close and ongoing dialogue between a meta-governor and the decentered self-governing actors establishes feedback loops between goal-innovation and implementation innovations. Finally, the governance strategy subscribes to bottom-up forms of self-evaluation rather than to top-down performance assessments, to the effect that post-bureaucratic-standard following that blocks innovation endeavors can be avoided.

The governance strategy, however, contains its own innovation barriers. First, negotiated decision-making tends to favor solutions that are close to the status quo and thus block more radical innovation alternatives. Second, entrepreneurs are often bad at making compromises. They are passionate and visionary and unwilling to follow the complex rules and norms that govern negotiated decision-making. Consequently, they (p. 222) might end up either being excluded or exclude themselves from the collaboration process. Finally, interactive network arenas that exist outside the “ordinary” rule and command hierarchy might prove to be innovative, but the consequence of the secluded position of these arenas might be that it is difficult to get the innovation accepted by and disseminated to the larger system. The interactive governance arenas become isolated innovation islands with limited impact (Burt 1992).

Advancing the governance approach to public innovation

The NPM strategy has taken a big step forward in advancing a viable strategy for enhancing public innovation, and the governance strategy has come even further. However, the overly critical stance that many governance theorists take toward NPM means that the important insights that the NPM strategy brings to the fore have not been sufficiently recognized and incorporated in the governance strategy. By bringing important insights from the NPM strategy and the governance strategy together we achieve a better understanding of the drivers and barriers of public innovation, and thus develop an innovation strategy for the public sector that does not produce new innovation barriers, be they those imposed by the NPM strategy or those brought about by the governance strategy.

Efforts to develop a joint innovation strategy should recognize: 1) that competition and collaboration are equally important and interrelated innovation drivers; and 2) that public innovation is equally dependent on top-down and bottom-up forms of management. With regard to the first point, neither the NPM strategy nor the governance strategy has fully recognized the close ties and linkages between competition and collaboration.

The NPM strategy has overlooked the fact that while competition is essential for motivating actors to take the risks and trouble related to innovative endeavors and to invest in uncertain outcomes, it does not necessarily provide actors with the resources they need to be able to carry out the actual innovation. Likewise, competitive games do not necessarily install processes that accommodate innovation. Innovation does not only thrive on motivation. It also calls for destabilizations of sedimented patterns of thought and behavior, resource-pooling, and knowledge-exchange. Collaboration produces this innovation fuel. Just as economic innovation theories increasingly recognize the importance of collaboration as a supplement to competition, traces of the same recognition can be found in the NPM strategy when it advocates for the formation of public–private partnerships and the formulation of relational contracts that set up rules and procedures for an ongoing dialogue between public and private contract parties (Greve 2008; Milward and Provan 2000; Bertelli and Smith 2009; Ferlie et al. 1996; Ferlie, Musselin, and Andresani 2008; Norton and Blanco 2009). These institutionalized forms of collaboration are not only regarded as necessary for coordinating governance (p. 223) initiatives taken by meta-governors and service-providing public and private agencies but also as a way of sharing the burdens and risks of developing new policies and services.

The governance strategy, on its side, has not taken fully into account that collaborative governance arenas, in order to be innovative, must be subject to competition from other collaborative arenas. If not they will often be content with avoiding conflicts, sticking to the status quo, and reaching for the lowest common denominator. Competition provides the external pressures needed for the collaboration partners to overcome the troubles and conflicts that are often associated with making more radical and path-breaking negotiated decisions. For collaboration to result in innovations the participants must share a feeling that if they are unable to reach convincing outcomes others will and all will be lost. To put it differently, competition produces that feeling of shared destiny and “we-identity” that drives collaborative innovation processes. As was the case with the NPM strategy, the governance strategy has indirectly realized this connection between collaboration and competition. This connection is expressed in the claim that interdependency is a core driver of collaborative forms of governance. When it comes to the heart of the matter, this interdependency is founded in a group's competitive relationship to other external actors (Anghel et al. 2004; Franke and Piller 2003). Without the presence of external contestants, the need to collaborate is diminished and so is the participants’ willingness to pay the price that it takes to develop and implement new innovative ideas.

Summing up the argument made above, it can be said that competition and cooperation should be seen as interrelated innovation drivers. This has already indirectly been recognized by the NPM and governance strategies. However, an advancement of a strategy for public innovation calls for a more direct and outspoken reflection on and exploitation of this connection between competition and collaboration.

In advancing our understanding of public innovation, it should also be recognized that the objective is not to choose between top-down and bottom-up forms of governance. An enhancement of public innovation calls for both. As pointed out in both strategies, innovation relies on the presence of autonomous spaces in which decentered entrepreneurs can develop and pursue innovative ideas. However, in order to be effective this bottom-up interaction is in need of skillful top-down meta-governance that frames the interaction in ways that motivate the involved actors to innovate through the strategic institutional design of incentive structures that balance competitive and collaborative patterns of action. This firm meta-governance helps to activate the knowledge, ideas, commitment, and energies of street-level bureaucrats, users of public services, employees, and private stakeholders in formulating, implementing, and disseminating new, innovative ideas. Proactive top-down meta-governance is crucial because it nurtures and gives direction to these interactions.

The strength of the NPM strategy is that it insists that public authorities send clear signals to self-governing actors about what is expected of them, in the shape of the overall goal they are expected to achieve. Furthermore, it points to the necessity of sketching out the conditions of the autonomy available to self-governing actors. Thereby the NPM strategy triggers (p. 224) the interesting question of how to strike the right balance between over-regulation and under-regulation in the exercise of meta-governance. Over-regulation of self-governing actors diminishes their motivation for engaging in governance processes because they lose the feeling of ownership that comes with influence. Under-regulation means a lack of pressure on self-governing actors to engage in radical innovations, and/or the production of innovations that target goals different from those set by central public authorities.

The governance strategy, on its side, makes it clear that meta-governance and decentered self-governance should not be institutionalized as separate processes. Fruitful public innovation calls for institutional conditions that install continuous two-way communication and feedback loops between meta-governors and self-governing actors. This is necessary to avoid decoupling between policy innovation and implementation of innovations.


Although public innovation has been on the research agenda of those studying public administration and public governance for some time now, questions about how innovative the public sector is, what the main barriers and drivers of public innovation are, and what can be done to enhance public innovation have not gained a prominent position on the research agenda until recently. The aim of this chapter has been to show that it is possible to identify two strategies for enhancing public sector innovation, and to argue that much can be gained from merging the insights from these two strategies rather than choosing one over the other.

Although a lot of energy has been put into stipulating the differences between the NPM strategy and the governance strategy, the similarities between them are striking. Both criticize traditional bureaucratic forms of governance for being inflexible, for favoring stability over change and flexibility, and for celebrating rule-following over entrepreneurship. In addition, both view interaction between public and private actors as an important driver of public innovation, and view a balance between top-down meta-governance and decentered self-governance to be decisive for enhancing public innovation.

There are admittedly also important differences between the two strategies: one celebrates competition and directional top-down management while the other speaks in favor of collaboration and two-way dialogue between meta-governors and self-governing actors. A closer scrutiny of the strategies shows, however, that both of them do in fact indirectly recognize that both competition and collaboration are crucial for innovation, although they weigh the importance of the two drivers of innovation radically differently.

An important difference between the two strategies is that the NPM strategy offers an understanding of meta-governance, which is more in line with traditional top-down understanding of public rule, while the governance strategy proposes an interactive (p. 225) understanding of the relationship between meta-governance and self-governance. By doing so, each strategy gives its particular contribution to understanding how self-governing actors can be meta-governed in ways that promote public innovation.

In conclusion, NPM strategy and the governance strategy provide a good starting point for future endeavors to advance our theoretical understanding and develop strategies for enhancing public innovation. It is important, however, to direct the focus of attention toward creating a better understanding of the interconnectedness between competition and collaboration, and between meta-governance and self-governance, and to use this better understanding to illuminate how to design public governance processes in a way that promotes innovation.


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