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The grand challenges of the 21st Century – whether transitioning to a greener, more sustainable economy, decreasing inequality or offering better and inclusive public services – require rethinking capitalism and its growth engine, innovation. This requires building new forms of dynamic capabilities and capacities inside public institutions. While in terms of theoretical foundations, methodological soundness and empirical validation there are plenty of studies and courses of how dynamic capacities evolve in the business sector, there is little solid research and discussion on how public organisations develop and sustain dynamic capacities and capabilities. Indeed, Public Choice Theory, and its applications via New Public Management (NPM), has made many policy makers more fearful of government failures than market failures, and in the process reduced the ambition of policy. This has in turn caused public policies to be more about administering contracts (often outsourced) than creating, and in the process reduced the need for investing in policy making capabilities.

In governance and public management, waves of new public management reforms in 1980s and 1990s hollowed out capacity in public organisations through misguided reforms (e.g., massive outsourcing of technical expertise). Subsequent attempts to create alternative conceptual frameworks for public management reforms (e.g., new public governance) have failed to deliver a viable concept of dynamic capacities in public organisations. The module develops a new framework – public sector dynamic capabilities – to show how public organisations can shape markets, create new growth opportunities and help solve grand challenges of the 21st century.