ABSTRACT
This chapter analyzes European Union policy and the reorientation required to accelerate the circulation and commercialisation of innovation and knowledge within Europe, taking into account leading-edge policy throughout the global economy. It outlines the fundamental trade-off of research and development policy. Namely that providing incentives to innovate requires the appropriation of the returns from innovation and the diffusion of knowledge concerning the innovation. The wider this diffusion of knowledge however, the less the gains from innovation to each individual concerned. In addition, innovation and diffusion are not totally distinct, and policies for innovation and the diffusion of knowledge cannot be independently defined. Patrizio Bianchi describes the change in emphasis of European industrial policies at the beginning of the 1990s. Instead of directly affecting the actual decisions of agents regarding entrepreneurship or innovation, policies now aim at providing favourable conditions to affect agents' incentives to make the appropriate decisions.
