In the 2006 edition of the EU Commissions Competitiveness Report, a chapter will review the state of debate on lead markets and the role of public policy. ZEW is contributing an input paper to this chapter. Based on a literature survey, the paper explores the concept of Lead Markets as used in management, economics and innovation policy, and discusses some potential conclusions from this concept for EU innovation and competition policy. In particular, the review (a) characterises the main theoretical assumptions and hypotheses of the concept, (b) discusses the case for policy intervention in favour of establishing/promoting lead markets, (c) explores the link between a countrys research and technology base and the existence/development of lead markets, and (d) tries to demarcate the role of the public sector in supporting the emergence of lead markets through public demand (such as public procurement) and regulation (such as setting of standards).

The background for taking up the concept of Lead Markets in the 2006 EU Competitiveness Report is a recent upswing in attention towards demand factors for successful innovation. In this context, the notion of lead markets has been increasingly used in innovation policy both at the EU level (see e.g. the Aho report) and in some member states, including Germany. In the policy context, the concept of lead markets is typically used rather generally, stressing the role of innovative demand for the diffusion of new technologies, and pointing in particular to the role of the public sector in actively stimulating innovative demand. However, up to now, the concept of lead markets is used differently in academic literature, regarding a lead market as being the market where an innovation is first widely used that later becomes successful internationally regardless of where that innovation was invented. There are three major strands of literature which are reviewed in the paper:

1. the traditional diffusion literature in (international) marketing,
2. an interaction model of the local development of technology and early local adoption of technology derived from innovation economics, and
3. an approach rooted in competitive strategy and multinational business that focus on demand-side conditions in countries that enhance the chances for the international success of innovations of firms.

Based on these strands of literature, the paper discusses the potential role of public policy in the development of lead markets, stressing four issues in particular:

• The relationship between the failure to become a lead market in a particular product market (i.e. being either a lag market or a market that generates idiosyncratic innovations) on the one hand and traditional market failure arguments to justify policy intervention on the other.
• The set of instruments which may be used by public policies aiming at promoting the emergence of a lead market for a particular new technology or new product; these are often closely inter-linked with demand oriented innovation policies.
• The likely problems arising from such policies, putting emphasis on the role of regulation and standards, public procurement, and the promotion of private demand.
• Some generic conclusions that may be drawn from the literature on lead markets for the design of public policies to leverage existing lead market potentials.