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Unlocking Policy Innovation for Economic Growth: 5 Actions Governments Can Take
12 December 2025
Accelerating innovation and productivity growth is very high on governments’ priorities, yet the way governments go about it is not very innovative. If we really want to address the multiple challenges that we face, we need governments to innovate.
But anyone who has worked in government knows how difficult this is. Tight budgets, bureaucratic processes, political short-termism and risk aversion all conspire to block change.
We celebrate those occasions in which policymakers have innovated successfully, for instance, with regulatory sandboxes, but we rarely discuss how we can create spaces for more policy innovations to emerge.
So I thought it would be useful to share some ideas on how to unlock policy innovation, and examples of what some of these innovations might look like.
1. Invest in policy R&D
Sounds trivial, I know, but it is surprising how little governments invest in policy R&D. Rather than seeing it as an investment to achieve more with less, it is often perceived as an unnecessary expenditure, a luxury that cannot be afforded in a context of tight budgets. Unfortunately, we know what this leads to: worse outcomes and higher budget deficits.
Europe is a case in point. Decades ago, European governments agreed on a target of at least 3% of GDP for R&D investment. Yet they fail to invest even a tiny fraction of that in policy R&D.
The upcoming EU Competitiveness Fund and Horizon Europe budget exceeds 500 billion euros. Unless plans change, more will likely be spent on administrative and compliance costs to ensure the right paperwork has been submitted than on policy R&D to find the most effective ways to design and deploy this funding.
Wouldn’t it be reasonable to invest 1% of this amount into finding better ways to maximise the impact of the remaining 99%?
2. Repurpose successful policy innovations for other contexts and challenges
Policy innovation doesn’t necessarily mean inventing a new tool. Often, it means getting creative about reusing successful models in different settings. Regulatory sandboxes are a good example. Pioneered a decade ago by the UK financial regulator, this tool was designed to allow FinTech startups to test new offerings under relaxed rules in a controlled environment. Since then, the model has been widely adopted by hundreds of regulators, adapting it for multiple contexts with evolving structures (including more recently cross-regulator and cross-border sandboxes to support companies that require approval from multiple regulators).
But one could repurpose this policy innovation beyond that. For instance, to help startups scale across borders, attract foreign direct investment, or even to overcome bureaucratic barriers to public sector innovation.
European startups face substantial barriers to scale across countries. To tackle this, member states could unilaterally create an FDI sandbox (or startup visa). This system would grant startups from other member states the right to operate locally under their country-of-origin rules for a set period. By reducing market entry frictions, this mechanism would enable startups to test their market fit and scale faster, while creating new jobs in the host country.
Regulatory sandboxes could also be turned inward to unlock public sector innovation. Governments are full of civil servants with new ideas, but these innovators are often hamstrung by old, rigid rules and bureaucratic procedures. A public sector innovation sandbox would grant innovators within the public sector a temporary exemption from certain rules and procedures. This would allow them to develop new products, activities, or ways of working in a controlled setting, effectively repurposing a proven model to overcome bureaucratic inertia and unlock internal innovation
3. Open up to and support policy innovation outside government
The best policy ideas rarely originate within government ministries. Instead, they emerge from those closest to the action – the innovators, entrepreneurs, and the ecosystem organisations that support them (from accelerators to industry bodies). These organisations possess firsthand knowledge of the problems and what support is truly needed.
Governments, by their nature, are not flexible institutions and struggle to test new policy ideas quickly. In contrast, ecosystem organisations are not only closer to the problems they aim to solve, but they can also be significantly more agile in reacting to them, making them an ideal partner to test and deliver new policy programmes. Furthermore, they provide vital public goods that knit together the fabric that sustains successful ecosystems. Unfortunately, these organisations often struggle to access timely funding to respond with agility.
Industrial policy is currently too slow. Needs identified by businesses, such as new testing facilities or training, can take many years for governments to deliver, if at all, due to lengthy lobbying, budgeting, and procurement cycles. This centralised process is out of step with the rapid evolution of industry. This inertia can be overcome through what I call ‘Distributed Industrial Policy‘. Under this model, ecosystem organisations propose initiatives using a crowdfunding platform. Businesses then “vote with their money” by funding these projects directly, with contributions being tax-deductible (so that they are cost-neutral to businesses). This cuts out the bureaucratic middleman, allowing companies to quickly accelerate high-value initiatives based on immediate needs, and creating a space for novel policy programmes to emerge rapidly.
Governments can also launch experimentation funds, as demonstrated by the UK government’s Business Basics Programme. These funds serve a crucial dual purpose: supporting the development of novel interventions while simultaneously generating robust evidence on their impact. Using a bottom-up approach, these funds crowdsource the best programme ideas and finance real-world pilots. Crucially, funding is strictly conditional on robust evaluation. This ensures every pilot generates actionable insights, leading to smarter decisions on which programmes to scale, rethink, or stop.
4. Don’t be afraid of creating new institutions and regulatory frameworks from scratch
Changing entrenched institutions, norms, regulations, and cultures is notoriously difficult. While reforming existing organisations remains necessary, often the most effective strategy is simply to create something entirely new alongside the existing structure. We have already seen this approach adopted with new innovation funding models, such as the creation of funding agencies like ARIA in the UK or SPRIND in Germany, or the development of new organisational models to advance science, including Focused Research Organisations (FROs) and the proposal for new X-Labs to unleash AI-driven breakthroughs. Indeed, a new discipline is emerging that focuses precisely on how to design new institutions to address societal challenges.
This “clean slate” approach could also be applied to regulatory reform. The plans to develop a new unified business regime (a “28th Regime”) to enable European startups to operate frictionlessly across member states offer a unique opportunity to reinvent regulation.
A piecemeal approach to reform—addressing each domain separately—severely limits any radical rethink. With the 28th Regime, we have the crucial opportunity to fundamentally innovate how business activity is regulated, implemented, and enforced, creating a newly designed business regulation stack fit for the digital age. We need an innovative 28th regime, but unfortunately innovation and consensus are rarely compatible. This overhaul will only be feasible if, instead of aiming for the lowest common denominator that 27 member states can all agree on, we allow a small, agile group of member states to take the lead, working with designers and technologists—not just lawyers—to create a novel system from the ground up that others could choose to join later.
5. Build the internal capabilities for innovation
To transform existing organisations, it is crucial to build the capabilities, cultures, structures and mandates necessary to unlock policy innovation from within. This is not done overnight, but there are multiple steps that governments can take towards this transformation.
Creating dedicated innovation units or teams with a specific mission to bring experimentation, data, and evidence to the organisation provides a crucial space for trialling new ideas and evaluating their impact. Prominent examples include the UK government’s Metascience Unit, which tests and improves research funding processes, and the Prime Minister’s Office Experimentation Unit in Finland. Looking ahead, the European Commission’s Heitor report calls for the EU to immediately establish an experimental unit to test new R&I programmes, evaluation procedures and instruments.
Governments can also signal commitment from the top about the importance of policy innovation. For example, Canada’s government mandated a percentage of programme funds be used for experimentation, and it also included it as a core principle in its new innovation agency. Similarly, the UK government has made ‘Test & Learn’ a core component of delivering its missions.
Even without strong buy-in from the top, it is still possible to innovate within governments. While radical shifts may be unlikely, incremental innovation can make a significant difference. This typically happens quietly under-the-radar, driven by internal champions who constantly tweak and iterate programme designs. This pragmatic, incremental experimentation involves constantly testing and learning from small-scale operational changes. To enable this, building internal capabilities remains essential: Capacity-building activities that equip policymakers and programme managers with innovation skills—combining design, experimentation, data, and evidence—are an easy, yet necessary step forward.
Any other ideas?
The OECD is calling for governments to embrace agility and experimentation in their innovation policies. At IGL, we’ve been working with our member governments to turn some of these ideas into action. If you are interested in exploring any of these ideas further, please reach out.
We are currently developing a new series on frontier policy ideas, to collect, curate and disseminate interesting examples of innovative policy ideas related to science, innovation or productivity policies. We are looking for policy innovations that some governments have already implemented, failed attempts to do so, or untested ideas from your imagination or wishlist that you believe they should consider.
Alongside this, we are also developing a global community of policymakers and practitioners interested in exploring novel ideas, learning from each other, and driving change in their organisations.
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